HMS Networks AB reported its first quarter results for 2022.
Net sales for the first quarter reached SEK 517 M, corresponding to an increase of 14%. Currency translations had a positive effect of SEK 22 M on net sales; order intake was SEK 857 M, corresponding to an increase of 52%; operating profit reached SEK 139 M, equal to a 26.9% operating margin; adjusted operating profit reached SEK 112 M, equal to a 21.7% adjusted operating margin; profit after taxes totaled SEK 112 M and earnings per share was SEK 2.41; adjusted profit after taxes totaled SEK 86 m and adjusted earnings per share was SEK 1.84; and cash flow from operating activities amounted to SEK 80 M.
For the last 12 months, net sales reached SEK 2,034 M, corresponding to a 30% increase; order intake was SEK 2,830 M, corresponding to an increase of 76%; operating profit reached SEK 471 M, equal to a 23.1% operating margin; adjusted operating profit reached SEK 444 M, equal to a 21.8% adjusted operating margin; profit after taxes totaled SEK 381 m (266) and earnings per share was SEK 8.09 (5.70); adjusted profit after taxes totaled SEK 354 M and adjusted earnings per share was SEK 7.52; and cash flow from operating activities amounted to SEK 456 M.
During this time, HMS completed the acquisition of the remaining 30% of the shares in Procentec B.V.
Comment from the CEO Staffan Dahlström
Strong demand but continued component shortage
The strong demand and order intake from recent quarters continued during the first quarter of 2022. Order intake increased by 52% and amounted to the new record level SEK 857 M. However, the global shortage of electronic components continues to be challenging for HMS as well as many other companies. Despite this challenge, the company's efforts have resulted in increased invoicing for the first quarter, which increased sales by 14% compared to the corresponding quarter 2021 and amounted to SEK 517 M.
During the quarter, HMS was affected by, and further notified of, increased costs for electronic components. It has also increased its component purchases via the “spot market” to maintain delivery capacity. With price increases to customers and increased internal efficiency, we succeed in reaching a gross margin of 61.8% (64.0%) during the quarter, which is a decrease compared to Q1, 2021 but an improvement compared with the fourth quarter 2021. Given the challenging sourcing situation, Dahlström said the company is satisfied that it continues to achieve a relatively good gross margin.
The strong market situation in combination with longer lead times and challenges in component supply means that customers continue to place orders for delivery further out in the future than normal. HMS continues to build order book that now amounts to SEK 1,194 M, strengthened by approximately SEK 250 M from stocking orders in the first quarter.
Good performance in all markets
Order intake continues to be strong in all markets and HMS sees that customers tackle the uncertainty in the global supply chain, in a similar way. They continue to place orders to increase their safety stock, which contributes to a 30% increase in order intake on all markets – this is in addition to normal demand.
Europe, the company's largest market, continues to develop well and customers continue to show a high willingness to invest. The increase in sales is greatest in Asia, and especially in Japan, where the company sees high demand from its large customers delivering to the automotive and electronics industries.
HMS can also see that its offering for building automation under the Intesis brand, which primarily works towards air conditioning, shows a solid growth of 32% and thus new record levels.
Acquisition of the remaining 30% of the shares in Procentec
After the end of the quarter, HMS reached an agreement to acquire the remaining 30% in Procentec. Since acquiring 70% of the company during the fourth quarter of 2020, the business has developed very well. As owners of the entire company, HMS sees further synergies, especially in expanding in North America and Asia via its sales organization. The acquisition gives HMS a positive non-recurring effect on our operating profit of SEK 27 M from revaluation of the option liability related to Procentec.
Profit and cash flow
HMS Networks delivered an operating profit of SEK 139 M, including above mentioned non-recurring effect of SEK 27 M. Adjusted operating profit amounts to SEK 112 M, which is in line with the corresponding quarter in 2021. However, the conditions are different compared to last year — the market is stronger, and the company sees major cost increases on components. It has increased investments in sales and marketing after the pandemic when activity was lower. This also means that it has 17% higher operating costs compared to the corresponding period last year. Despite this, HMS managed to reach an adjusted operating margin of 21.7%, which exceeds its long-term target of a 20% operating margin.
Cash flow from operations amounted to SEK 80 M, after an increase in working capital of SEK 50 M.
Positive HMS sustainability efforts
The company recently published the HMS Annual Report 2021, which includes a sustainability report. HMS Networks reports it has continued to work to map and reduce its carbon dioxide emissions, with the ambition of becoming CO2 net positive by 2025. For 2021, HMS reports it achieved a reduction of -21% for its own emissions in relation to sales. In Scopes 1 and 2, emission totals were relatively low, 285 tons for 2021, something it is working on to further reduce. Additionally, it reports that HMS products have helped its customers to save more than 1 million tons of CO2 in 2021, through reduced energy consumption and reduced service trips.
The war in Ukraine
Russia and Belarus accounted for less than half a percent of HMS Networks' sales in 2021. All business has been made through distributors and the company does not have its own staff in these countries. The company has stopped and cancelled all existing orders to Russia and Belarus and will not take up any business in these markets until sanctions against Russia have ended. HMS Networks says it supports the Ukrainian people through donations to the Red Cross and works actively at its units in Sweden and Romania to offer help and work to Ukrainian refugees.
Positive future outlook – despite an uncertain macro situation
Dahlström said the company foresees continued challenges when it comes to supply of electronics components for a few more quarters, but it believes in a gradual improvement in the second half of the year. Lockdowns in China due to the coronavirus and major political uncertainties make the market difficult to assess in the short term. At present, HMS sees continued investments in increased automation and digitalization, partly driven by companies in Europe and North America who are moving their production closer to their main markets. The company also sees that high energy prices are accelerating electrification, the conversion to renewable energy and energy storage, areas where it is gaining more and more customers.
In the long term, HMS Networks continues to believe that the market for Industrial ICT (Information & Communication Technology) will be an interesting area, both in terms of organic growth and acquisitions.
