HMS Networks AB (publ)

your meeting thank you operator a good morning everybody and welcome to this beautiful beginning of Easter morning here so it's a pleasure to present our quarter one report as normal I will start with a summary and introduction of a business short business update but I know you will be waiting for Joakim's updates on the numbers so you will take the financial results at the end so let's quickly make a review of q1 and I must say that we are pretty happy with the situation despite the component shortage and the challenge we have there. Order intake continues to be very strong, but keep in mind that part of the strong order intake is not only market demand, it's also a compensation for long lead times. So also our customers are building up the inventory and we try to be very transparent about the boost order and Joaquin will dive into this later. But also net sales growth of 14% in considering the ship shortage is good. We've been fighting a lot for reaching this number. We are very satisfied that we are keeping growing despite the challenges we see on the component side. So this is fine. And EBIT, note that we have an event here where we have a balance sheet change, a revaluation. And Joaquin will talk more about this. Take a look on the adjusted EBIT and adjusted EPS. But we are maintaining a good, strong EBIT, adjusted EBIT margin, 21.7 over our target. We are happy with that. Cash flow is good, but not as good as it used to be. Reason why is that we are building up more inventory. But trust us, we are very happy that we are building up some inventory as well because this will help us going forward. So all in all, positive quarter one. And I think we can skip the rolling 12 and move into our business updates. Some of you know our business very well. Some of you are new. But just a summary, HMS is hardware meets software. We make sure that industrial machines and devices can communicate both with each other and different IT systems. We have the integrated offer of our four brands of Anybus, E-Warn, Indusys and Ixat. And this is integrated and uses the same go-to-market channel around the world. We made a couple of acquisitions, smaller acquisition last year. A German web factory, a software company. We started with 75%. We now own 100%. Procentech, a Dutch company working with network diagnostics. Very interesting. We started almost two years ago with 70%. And early this week, we acquired the remaining minorities. We own now 100%. And the small but very interesting Spanish, Obasis, working with communication solutions for mobile machines, where we own 60%. So when we look on our business, if we move to the next slide, we have two major customer groups. We have the makers of industrial equipment, companies such as Atlas Copco, ABB, and Mitsubishi Electric. But we also have users of automation systems. These are companies that use automation systems such as BASF or Volkswagen or this kind of pulp and paper kind of companies. And if you look on our go-to-market on the next page, this is quite important because on the maker side, we have two typical customers, either device manufacturers making different devices, drives, robotics, these kinds of machines. This is 75% of our revenue. Sorry, 43% of our revenue. And there we have a business model that is very sticky. We are working with DesignWinds. They integrate our technology inside their devices. But we also see that the flip side of that good sticky design wind model is that we also have a very, we need to have a lot of sales initially before we get revenue. So it's a long sales process, but it also remains a design for seven to up to 10 years. Secondly is our machine builder business. This is today or last year, 35% of revenue. Then we try to be part of their building material. Of course, we always dream about becoming the standard part of bill of material. In most cases, we are more an option. So when this machine needs a remote access or when this machine needs to connect to a certain manufacturing line or something like that, then they add an HMS product to that bill of material. We go to market through direct sales with large customers and distribution sales with many, many small machine builders around the world. And finally, we have our end users and system integrators. It is a smaller part of revenue, but we also see good growth here. Here we either work with system integrators to help them in a large project where we help them specify the right communication technology and the right products from us to solve their big projects. But we also have like a traditional product sales. We advertise our products on our websites and marketing channels. And they just find that our product fits very good to the requirements they have there. So we work here with traditional distributors and a quite good growing e-commerce distribution as well towards this market of end users. So let's take a look at our vision and our targets going forward. We have a vision to become the world's greatest industrial ICT company. We believe that the way to go there is to follow our mission. And our mission is to enable valuable data and insights, allowing our customers to increase productivity and sustainability. And this is a good market to be at because a lot of our customers, they realize that there's a hidden information inside their machines. And if we can liberate this data and connect this to their other system, it can help them with their productivity, but also for their sustainability in energy saving and doing things smarter. Our group objectives for 2025 is environmental. We want to become a company that is net positive in our CO2 emissions. We do things here internally, but we also work a lot with our customers where we see a big impact using our products, which is helping our customers to do a major savings in their CO2 emissions going forward. We also believe that if we can have happy and high-performing employees, they will generate loyal customers, and we really like loyal customers. So we focus a lot on net promoter scores with our employees and also with our customers, and we rate well beyond our target at the moment. We are very happy about that. And we also keep on being a growing company with good profitability. So financially, we would like to be beyond 3 pi billion in 2025 in our revenue, combination of organic growth and some acquisitions, and maintain an EBIT margin well over 20%. So this is our target. And how is it going? Well, if I start with a short business update from quarter one, It's very similar to the previous quarter. We see a strong demand across all geographies we work in. Drivers are increased automation, digitalization, energy monitoring, remote access, and now also more and more sustainability and also electrification. And we see a super strong growth on all markets. Part of this, as I mentioned before, it's a market where we and our customers and other suppliers have problems to find electronic components. and we have long lead times, our customers have long lead times, and this is also building up boost effects in the order book. So we are estimating that part of this good order intake is also a boosting effect, orders that are placed earlier than normal, and we estimate this to be 250 million in quarter one. We expect this situation to continue for the remainder of the year, but we are expecting that the situation will be better from second half of the 2022 here. So we are seeing some light in the tunnel when it comes to component availability. And as I mentioned, we acquired the remaining minorities of Dutch Procentec earlier this week. So we now own 100%. And we are super happy with this company. And we believe that as 100% owner, we think we can accelerate the commercial success, especially in North America, in Asia, where Procentec themselves have been not focused enough and they didn't have the local organization. We have that and we can now scale this business up. So all in all, a good business quarter for quarter one and we are, as you hear, quite positive about the future.

So Joakim, let's talk about some numbers. Thank you, Staffan. I will do that and I will start with our order intake. which is extraordinary, 857 million, as you already know. And looking at the graph in the top left corner, you see that this is continuing on the very good trend from 2021, also reaching now new record levels. So we did 41% organic growth. We were, of course, quite satisfied. And then, as Staffan said, we have this boost effect of 250 million, which is a large part of that. But the underlying market is also quite strong, and we see a lift from previous quarters also here. If we do the adjustment for this boost effect and also taking away currency effects, we see underlying organic growth of 14% in orders compared to the already strong Q1 2021. And looking at the book-to-bill, this is significantly better than our sales level. And the book-to-bill of 1.66, which is of course, extraordinary for us and not a sustainable level to be at going forward. And we think what we will see going forward, when we hope that the supply chain will stabilize somewhat, we think that the order rate intake will come down. This boost effect will go down and disappear towards maybe towards the end of the year or so. And then our sales levels will also increase when component availability becomes better. So that should be normalizing. All brands are growing. That's good to know. The driver here is our Anybus business with 60% organic growth. And the main reason why this is driving growth is because we see this design business where customers have our devices as a part of their bill of material. They are very afraid that they're going to go dry on our stuff. So that's why we see this order placement far out in the future. And we already have many of our large customers that have placed a full demand for 2022 already now. And the expansion and this boost effect is really that more and more customers are realizing that this uncertainty in the supply chain will continue for a bit, and they want to make sure to have as much as they can in their own hands. So that's the main reason for this situation. Going over, talking about sales, also a quite okay quarter with $517 million and 5% organic growth. We see that for the first time we have rolling 12-month sales over 2 billion, so that is a bit of a milestone for us, good to see. And we knew that we wouldn't be able to match the Q4 for numbers. We also talked about that when we released the Q4 report. We caught a bit of a break on the component side, and to be honest, right now it's really component availability that is deciding our delivery levels. And Stefan talked about it a bit already. We know that Q2 is still looking quite challenging, We hope, at least the picture that we see now, is that Q3 and Q4 will be better. Difficult to say how much better, but we think that we'll be able to reach somewhat higher levels towards the end of the year on this side. Also worth mentioning on the building automation side, that's been, I'm not going to say bad, but it's been a bit more hesitant than the industrial automation part of our business the last two years. Here we're now seeing a good growth of 32% within the Intesys brand. So that's also a new record quarter for Intesys. And we think that now when the lockdowns have released, we'll be able to have a decent market also for the building automation business, even if it's a rather small share for us, about 10% of the overall group. I wanted to show you, I think you maybe already made the analysis yourselves, but the order intake or the boost effect of order intake in relation to the total order intake. Here you see what we've been communicating over the last five quarters. You also then note that Q1 2022 is the highest level of this boost effect. It's also by far the highest level in total, but we see that the underlying demand has bumped up a bit from levels around 500 million to now beyond 600 million, so the underlying market is strong. We're quite happy with stuff that's been through the drivers, but still we have this high boost effect. And how that plays out to our backlog, you'll see on this slide when you see that our backlog has increased more than 300 million from Q4. So we are now at about 1.2 billion in order backlog, which is very high for us. We're quite unused to this high level. we also see that we have about 50% of our orders for delivery more than three months out in time. And then there's still a bunch of orders that we haven't confirmed. So the real number should probably be more than 60%, since there will be only a small share of unconfirmed orders that will be confirmed within the coming three months. So it's an unusual situation for us. And we believe that even if now the supply chain will be stabilizing, We don't expect this to fully normalize to the levels between maybe 15% to 20% out of orders for delivery more than three months out. We think that customers will have adjusted to a different way. The just-in-time thinking might not be back as we've seen before, at least not in the midterm. Sales per region looks like it normally does. We have about 60% in Europe. 20 in Americas and 20 in APEX, but this is pretty much the picture that we see for Q1 as well, so nothing strange there. Let's then also take a look at our profitability. As you've seen, we reported $139 million, but the adjusted number, which is more relevant, is $112 million and 21.7% margin. The difference of this $27 million is related to revaluation of option-related debt for Procentec. And as you understood, we acquired remaining shares two days ago, and we already knew the purchase price. That was pre-agreed. And we knew that when we went out on March, so we could determine this purchase price perfectly already under March. And the difference then is 27 million. That is a positive EBIT effect, only one time effect that we have now in Q1. No cash flow impact, but it's still there. So the relevant comparison is then 112 million. And I must say we're quite happy with being able to deliver 21.7% margin in this climate as we have at the moment. And gross margins of 61.8%. We're also okay with that, even if it's a drop from the 64% we had in Q1 2021. We see negative effect from price increases of a bit more than three percentage points. So, I mean, this is something that we've had impact from also second half of 2021, but it's escalating. So we see even higher effects now, and the same will be for Q2. I mean, going forward, the price increases on the components will be there. The difference is that we have now pushed another round of price increases that's been implemented just recently, and that will also start to show effects a little bit from Q2, but the main part from the second half of 22, a stepwise improvement on that side. So we hope the gross margin should be able to improve during the second half of the year. This is basically what we're saying here. Also worth mentioning, OPEC's increase of 11% organically, pretty much related to sales and marketing initiatives, where now everything is opening up again. We can do more activities. We think this is good investments to do for the long run, and we're happy that we managed to get some good new colleagues to drive new sales in actually many of our markets. Going over to earnings per share, 2.41, but maybe more relevant to look at the adjusted 1.84, so basically in line with the last couple of quarters. Nothing strange to comment on here. It's good to see that we are on these levels. Let's have a look on the cash flow as well. So here we have a pretty big drop compared to the previous quarters as well. And Staffa mentioned it already, we have a 50 million build-up of working capital, out of which about 30 million is related to inventory build-up, which this sounds strange to say, but we're quite happy that we've managed to do that. It's not easy these times, and what we're trying to do is improve our odds to deliver when we get those key components that we hopefully will be able to get. more of in the second half of the year. So this is in line with our plans at the moment. We are not optimizing our inventory too much. We feel like we have the money we need, but we need to have the delivery capacity. It feels like a given thing to do. Working capital all in all is still on very good level, 6.6% of sales. And this will move north a little bit. We still think this will remain below 10%. So all in all in control. Final slide before we let you ask questions, looking at the balance sheet. And here we have a net debt of 299 million. The main difference compared to last time is this revaluation of this option-related debt of 27 million. Other than that, we've been expanding the cash a little bit, but a small decline from 347 in Q4. So looking at the metrics, next step to EBITDA, 0.52 in good shape, and we feel that we have the firing power we need in relation to our M&A pipeline, so that feels good going forward. And with that, I'd like to hand over to the operator and see if we have any questions on the line.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find it's answered before it's returned 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 very much. Good morning, Staffan and Joachim. So, starting off, can we please talk a bit about... I mean, in light of the stellar organic growth, thank you for being so helpful with describing what is actually your perception of underlying organic growth. In the order backlog and what's driving that, can you talk about the inventory levels that you're seeing in the channels at your various customer groups? If you can divide that into device manufacturers, machine builders, etc., And perhaps what of these customer segments are actually driving growth where we stand now?

I think if I start with that and Joakim can fill in, if you look on this picture I showed here with device manufacturers and machine builders and end users, we feel that most of the device manufacturers, they fill up their inventories, they place orders much longer. than they used to do in the past. So the majority of the boost effect is coming from here. And as Joakim mentioned, we have a lot of the Anybus business in this group. When it comes to the machine building end users, we feel when we talk to our distributors that they have real demand behind each order. At least when we talk to them, sometimes we get a feeling that this is the story they give us just to be able, so we don't prioritize other orders. But I think that the major build-up is on the left side of this picture. And on the right side, we have very little inventory that is access inventory. What we have there is sold by the distributors very quickly.

Understood. And can you say anything about what certain end verticals, if it's general manufacturing or if the process industries, etc., that is really... I mean, standing out in terms of pockets of growth?

I will say that it's very broad. In some markets, like in Japan, we've seen especially good development in automotive, electronic manufacturing, of course, but the traditional industries, manufacturing in general, process industries, food and beverage, pulp and paper, we see that there's good demands in almost all segments. Semiconductor, so I think it's broad-based both in geography but also in verticals.

Thank you. And how should we think about, historically we've seen this trend where when you're showing this positive trend in the books to build that has obviously a boost effect on the margin trajectory in HMS. So how should we now balance in that we are seeing book-to-bill at very high levels? You expect this to be real demand, and all as equal, it would be fair to assume that, okay, we'll see a declining trend in the book-to-bill as you deliver on this order book. Balancing in that, okay, gross margin is obviously also higher in HMS at this stage. Would it be fair to assume that for this year and perhaps the next, based on what you see in the order book, there shouldn't necessarily have to be a margin decline from current levels in HMS? Or is there anything that is different this time around?

I understand the question and it's difficult. It's a good question. We work with this on a weekly basis here. we were expecting the the boost orders to go down and this is what we see in 41 so we were obviously we were wrong so it's difficult to say i i think a lot of our customers uh are feeling that let's play some extra orders it wouldn't hurt they have good demands and everybody's positive um so i think this boost we expect the boost orders to uh level off uh later in the year But it will probably take longer time than we think. That's our feeling right now. Secondly, with margins, we see a quite dramatic price increase on electronic components. On some components, we see 10 times or 20 times higher prices than regular. So we are fighting this quite much, but working on the spot market, then the price is high. So we're trying to mitigate this with price increases to our customers and balance this. Our ambition is to maintain our margins through this, but it will be some changes per quarter based on product mix and how successful we are, but also the timing effect. Some of the price changes we do take a longer time to get impact on when we have this big order book. I understand I don't give you a clear answer because we simply don't know. We are following this very careful, but it's very difficult to estimate. Joakim, do you have anything more to say? Do you need one here?

Yeah, no, maybe yes. I think right now, maybe it doesn't matter so much when we get the orders. That's not going to make a big difference from when our sales come. What we think is that the underlying demand is strong and it's growing. So we believe that sales will, as long as we manage the source components, sales will have a solid journey for the coming quarters. And with that, yeah, well, I don't see why we shouldn't be able to maintain decent margins as well.

Perfect. And a more broader top level question. Can you say anything about, I mean, what your current priorities are from an R&D standpoint?

I think right now, unfortunately, I must say, we put a lot of effort on redesign of existing products just to be able to ship them. So unfortunately, we need to allocate R&D resources on things to maintain our business rather than developing it. So I would say that maybe half of our R&D resources today is allocated into projects to maintain our current business. If you look at them on technology, we haven't talked so much in this report about new things such as 5G. We are continuing that journey, but we've seen some success there. But as we've been saying for quite some time, these new technologies take time to get success in industrial automation. But we keep on seeing some good success in mining and special applications, but it doesn't really move the needle from a total top line at the moment. But I think R&D on new things is related to 5G, IoT. We spend quite much time now on battery energy systems storage and stuff like that. So that's a new area there in R&D.

Thank you very much. That's it for me. Thank you.

Thank you. And currently we have one further question in the queue. So just as a reminder to participants, if you wish to ask a question, please dial 01 now. And that next question comes from the line of Victor Högberg of Danske Bank. Please go ahead, your line is open.

Yeah, good morning. So just a couple of questions on your current visibility on delivery capacity and what to expect, because you're quite clear there is a daily challenge in terms of sourcing components. What to expect in the near term? Will you be able to maintain this level in terms of deliveries for Q2 as you saw in Q1? Or do you expect it to be gradually better Q2 and then materially better in Q3 and Q4? Could you help us along the way there?

Q2 is very difficult. I think if you look at Q1, we had a week January and February better than expected in March. So it's a little bit the timing effects on deliveries and components. We are quite concerned about the short term, like Q2, and after that we are expecting a gradual improvement, but very, very difficult to say what will land in revenue in Q2. We don't have that visibility today. It's too much uncertainty.

Would you dare to say a range of possible outcomes?

Not me, but Joakim, do you have the guts to do that? I can give you a wide range now, but I think honestly, I think we know that Q2 will not be great. It could be plus minus 10% from where we are today and probably more likely on the minus side. We think what we hear is that Q3 and Q4 should be better, but it's still only promises from suppliers that's been changing many times before. So we don't know, but we think that it looks better from what we hear. And there I do not want to give a range because it's way too uncertain.

I get that. Given the order intake now and a half of it with deliveries further out than three months, how much of that is for deliveries in 2023? Because I assume there are some orders for 2023 as well in the order backlog. Just thinking about what to expect in terms of delivery, the mismatch in delivery capacity and the And the orders customers might want it in H2, but will you be able to fulfill all of this, the order backlog, given the current situation?

That we think we will be able to. And about 10% of the current backlog is for 2023. The problem there is that on the pricing side, it's still quite uncertain what the component pricing will be. So it's a bit difficult to agree on a price with the customers for 2023. But we think we'll be able to, we're quite convinced that we'll be able to get out the backlog for 2022. And that would predominantly be, I'm sorry.

Yeah. There are also actually, I would say a portion of our order book is not even fixed in delivery dates from HMS yet. So we are still struggling with some of these things. So it's a high uncertainty on some of these orders. And if it comes in quarter four or quarter one next year for delivery, I just want to flag for this uncertainty that we don't really know that.

Yeah, no, I get it. So the order intake level here seems to be on an underlying level, some 600 million. Previous levels have been around 500. And you're quite clear that you see strong demand here. all over the place, geographies and products and verticals. Do you think you've taken another step here in terms of underlying demand or is there something special now in Q1?

I think the drivers we are seeing longer term is really supporting our business and I talked about these drivers. Even if there are uncertainties in the world around us, we still believe that these things are strong when it comes to improvement in automation and digitalization in our industries. We think this will continue. If the 600 is a new level, maybe. We would like to grow quarter by quarter, so the 600 is not surprising to us, but if it comes in this quarter, next quarter, it's difficult to say. But of course, having a revenue on that level is our ambition for the future, of course.

In terms of price increases, you said you pushed another round now to your customers. Can you help us with what kind of magnitude are we talking about?

Here we're talking about single digit, high single digit. We did this at the starting of the year. We do another round of a high single digit increase across the line. We are also doing a smaller single-digit adjustment on the order book. And we are having good discussions with customers. Of course, they are not happy with prices, but quite many of our customers say, okay, you as well. So a lot of suppliers are raising prices. We don't feel that we are sticking out with our increased prices. So I think we are following what I was almost about to say, the norm in our industry with these price increases. So I think we are getting away with it. The question is always that what is the conversion? Do we get 100% to convert to new pricing or 80% or 60%? So there will always be customers with pushback and that we need to deal with in some ways. But we are happy to see how successful we've been on price increases. Beginning of the year, but also this new thing we did for first of April has been quite successful, I would say.

Do you think these, in a situation sometime down the line when sourcing on a global level normalizes customers or not everyone scrambling to get the same stuff at the same time, do you think there's potential for prices to come down again? Or will these price levels stick? I'm thinking about your prices and the prices your suppliers say that You will have to say, what are you thinking about the price level in the normal market again? When that will be?

I think that today, this is just guessing, but I think today we are on a high level. I don't think it will go back to what it was a couple of years ago. Competition is still there, but commodities, energy and everything, transportation is changing. And until this goes back to 2018 levels or something like that, I think we remain on higher pricing. We also see that in some summer application, the pricing on our product has been less of an issue than we thought. Now we see that some customers, they say we are still only a few percent of their machine cost. So we don't feel that we get super high pressure on the price. So I think in some applications, we believe that this high price will remain. In some, it will go back. But I don't think it will go back to what it used to be. But our cost is also increasing. Our ambition here is to maintain margins. That's our ultimate goal here.

And margins, you're speaking about EBIT margins then? Then I speak of gross margins. Okay. Because you're trading at an elevated level compared to your targets. which were set before this situation really accelerated. Your growth considerably above organically, considerably above the target level or the target implied level and the margins considerably above as well. Do you see a need to revise those targets or do you think they're still valid on a longer term horizon that we're just in a very special situation last and this year?

I think we look on what we said here when we started the journey towards 2025. We said that we would like to be over 5 billion Swedish, 3.14. And we said that would be a combination of M&A and organic growth. So far, during this two years, our organic growth has been way much better than we expected back in 2020. But we've also been a bit slower on the M&A side. So right now, we have no plans of changing the targets in short term. But maybe this is something for, I don't know, 2023 to revisit. But right now we feel that we still have work to do to reach the pi billion. But let's see how that develops. I think we feel very comfortable about the targets. And then maybe that's a good indicator that they should be changed going forward. But we are not there yet. Okay. Thank you very much.

Thank you.

thank you and there seems to be no further questions from the phones at this time so i'll hand the floor back to our speakers thank you very much joachim any additional comments from your side no i'm happy with this all right great so then it's up to me to say thank you very much thanks for following hms thanks for joining this call and i wish you all a happy easter and some days off And then we are back on work to keep on fighting for components and increased revenue for the coming quarters here. Have a nice Easter and thank you.