HMS : Q3 Report 2021

Third quarter

• Net sales for the third quarter reached SEK 472 m (345), corresponding to an in- crease of 37%. Currency translations had a negative effect of SEK 7 m on net sales
• Order intake was SEK 669 m (336), corresponding to an increase of 99%
• Operating profit reached SEK 101 m (77), equal to a 21.5% (22.3) operating margin
• Profit after taxes totalled SEK 84 m (61) and earnings per share was SEK 1.81 (1.33)
• Cash flow from operating activities amounted to SEK 148 m (116)
• HMS acquired 60% of the shares in Owasys Advanced Wireless Devices S.L.

Interim report 2021 January - September

First nine months

• Net sales for the first nine months reached SEK 1,401 m (1,061), corre- sponding to a 32% increase. Currency translations had a negative effect of SEK 69 m on net sales
• Order intake was SEK 1,839 m (1,039), corresponding to an increase of 77%
• Operating profit was SEK 336 m (213), equal to a 24.0% (20.0) operating margin
• Profit after taxes totalled SEK 276 m (163) and earnings per share was SEK 5.75 (3.58)
• Cash flow from operating activities amounted to SEK 405 m (286)

This is a translation of the Swedish language original. In the event of any differences between this translation and the Swedish original, the latter shall prevail.

"Our order intake reaches record levels again and despite challenges in component supply, we succeed in keeping deliveries at the same level as during the second quarter of the year.

Staffan Dahlström, CEO,

HMS Networks AB

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Comment from the CEO

The trend continues - order intake at new record levels

We continue to see a strong demand in our markets driven by increasing investments in automation, digitalization, energy efficiency and remote monitoring of industrial machinery. Order intake reaches a new record level and amounts to SEK 669 million, corresponding to a growth of 99% compared to the previous year, 80% of this growth is organic. For the first nine months, the corresponding figures are 77% and 66% respectively. As in previous quarters during the year, order intake is boosted by the fact that customers place orders for delivery longer time ahead than usual. This is due to longer lead times related to component shortage. We estimate this temporary positive effect in the order intake to amount to approximately SEK 140 million during the quarter.

The component shortage has also impacted our delivery capacity negatively. Our customers have a good understanding of the current component shortage situation and our assessment is that we do not lose customer orders to any greater extent due to longer delivery times. Despite the challenging situation sourcing components, we achieved net sales of SEK 472 million during the quarter, corresponding to a growth of 37%, of which 18% was organic compared to the previous year. For the first nine months, the corresponding figures are 32% and 22% respectively.

We estimate that the delivery situation has had a negative impact on our sales of approximately SEK 50 million during the quarter as the current component shortage has affected the ability to deliver certain products. The Ewon and Intesis brands in particular experienced delivery disruptions during the quarter.

The effect of the strong order intake and delivery challenges leads to a large build-up of the order book and we now have an order book of approximately SEK 750 million, which is approximately three times higher compared to the corresponding quarter previous year. We assess that the risk of order cancellations is low.

Our geographic markets

In our most important geographical market, Europe, we once again reached an all-time high order intake. The main driving forces are a continued very strong machine-builder market together with increased demand for remote solutions. The positive development has also continued in Asia, with good development both in China and Japan. Our organic order intake more than doubled, primarily driven by a strong industrial market in China. Also in the US, we have noted new record levels in order intake as the market for industrial automa- tion, and the economy in general, continues to be very strong.

The lack of components results in short-term gross margin pressure

The global component shortage is now also affecting costs, and during the quarter we have seen prices of components multiply for some components, which has a negative effect on our manufacturing costs and leads to temporarily lower gross margin of 61.4%. To compensate for these cost increases, we are now implementing price increase for new orders. We expect to see the full effect of the price adjustments in the middle of next year, which means that the gross margin can be expected to be around current, somewhat lower, levels until mid 2022.

Our operating expenditures are increasing according to plan, in line with higher activities and new investments for growth. The increase in operating expenditures in combination with the temporarily lower gross margin mean that profitability is somewhat lower than the two previous quarters in 2021, even though we reach an operating profit of SEK 101 million, corresponding to 22% operating margin. This is still better than our long-term goal. It is also worth noting that cash

flow from operations amounts to a record level of SEK 148 million.

The new family members deliver

Our latest acquisitions, Procentec and Owasys deliver. Procentec continues on a winning streak and has during the year shown an organic doubled net sales. Owasys' business is developing as planned, although there are some challenges related to component supply.

Since we see it as probable that the existing put/call options will be exercised to increase HMS ownership to one hundred percent in these two companies we will, in accordance with IFRS, not report any minority. Thus, a liability is also reported that corresponds to the expected payment for the remaining shares in the two companies. In total, the assessment of these options affects our net debt of SEK 390 million.

Sustainability and staff

With more and more people fully vaccinated, the world is starting to open up again. Our employees now work from our offices to an increasing extent and we can meet more and more customers in per- son. Trade shows are also re-starting, albeit on a small scale. We have learned a lot about how we can conduct business more efficiently during the pandemic and we benefit from that. Still, we should not underestimate the importance of real-life meetings when it comes to maintaining relationships and creating new business.

Our sustainability work continues towards our goals for 2025 both when it comes to the environment, our employees, customers and responsible business. As part of the sustainability work, we have also signed the UN Global Compact initiative, which feels like a natural commitment for HMS.

Positive outlook but delivery challenges during the fourth quarter

Demand is expected to continue at a high level and most of our customers have strong underlying business. This is expected to continue in the coming quarters. The Group's sales is now highly affected by the availability of components, and we estimate that our delivery capacity will remain at current levels for the remainder of the year and then gradually improve during next year. The situation on the component market is still uncertain and temporary setbacks cannot be ruled out. We have good relations with our customers, who understand the situation that has affected the entire industry and we see the risk of lost business as low.

We continue to work with a focus on long-term growth based on a balanced view of our costs. In the long term, we continue to believe that the market for Industrial ICT (Information & Communication Technology) will be an interesting area, both in terms of organic growth and acquisitions.

+99%	+37%	22%
Order intake	Net sales	Operating margin
Q3	Q3	Q3

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Order intake, net sales and earnings

Third quarter

Order intake increased during the third quarter by 99% to SEK 669 m (336), of which currency translations affected by SEK -16 m (-10). Procentec B.V., acquired in the fourth quarter of 2020 and Owasys S.L., acquired in the third quarter of 2021, have contributed to order intake with SEK 78 m. The organic increase in order intake was 80%.

Net sales increased by 37% to SEK 472 m (345), of which currency translation effects were SEK -7 m (-10). The acquired companies have contributed to net sales by SEK 71 m. The organic increase in net sales were 18%.

Gross profit reached SEK 290 m (213), corresponding to a gross margin of 61.4% (61.9). Operating expenses amounted to SEK 189 m (137), whereof SEK 21 m corresponds to the acquired companies. The organic increase in operating expenses was 25%, corresponding to SEK 33 m.

Operating profit before depreciation/amortization and write-downsamounted to SEK 126 m (102), corresponding to a margin of 26.6% (29.5). Depreciations/amortizations and write-downsamounted to SEK 24 m (25). Operating profit amounted to SEK 101 m (77), corresponding to a margin of 21.5% (22.3). Currency translations affected the Group's operating profit by SEK -2 m (-6). The acquired companies have contributed to the operating profit for the quarter by SEK 18 m, including acquisition costs and amortization of over- value.

Net financials was SEK 1 m (-4),which gave a profit before tax of SEK 102 m (73).

Profit after tax amounted to SEK 84 m (61) and earnings per share before and after dilution was SEK 1.81 (1.33) and SEK 1.80 (1.32) respectively.

First nine months

Order intake increased during the first nine months by 77% to SEK 1,839 m (1,039), of which currency translations affected by SEK -90 m (0). Procentec B.V. and Owasys S.L., have contributed to order intake with SEK 201 m. The organic increase in order intake was 66%.

Net sales increased by 32% to SEK 1,401 m (1,061), of which currency translation effects were SEK -69 m (-9). The acquired companies have contributed to net sales by SEK 177 m. The organic increase in net sales was 22%.

Gross profit reached SEK 883 m (659), corresponding to a gross margin of 63.1% (62.1). Operating expenses amounted to SEK 549 m (458), whereof SEK 51 m corresponds to the acquired companies. The organic increase in operating expenses was 12%, corresponding to SEK 57 m.

Operating profit before depreciation/amortization and write-downsamounted to SEK 414 m (302), corresponding to a margin of 29.6% (28.5). Depreciations/amortizations and write-downsamounted to SEK 78 m (90). Operating profit amounted to SEK 336 m (213), corresponding to a margin of 24.0% (20.0). Currency translations affected the Group's operating profit by SEK -27 m (-2). The acquired companies have contributed to the operating profit by SEK 51 m, including acquisition costs and amortization of overvalue.

Net financials was SEK -2m (-9),which gave a profit before tax of SEK 334 m (204).

Profit after tax amounted to SEK 276 m (163) and earnings per share before and after dilution was SEK 5.75 (3.58) and SEK 5.73 (3.57) respectively.

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MSEK	Net sales	MSEK
500		1 900
		1 800
450		1 700
400		1 600
		1 500
350		1 400
300		1 300
		1 200
250		1 100
2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3

Net sales per quarter		Net sales rolling 12 m

The graph shows turnover per quarter on the bars referring to the scale on the left axis. The line shows turnover for the latest 12 month period referring to the scale on the axis to the right.

MSEK			Operating profit EBIT			MSEK450
130
120
110								400
100								350
90
80								300
70
60								250
50
40								200
2019 Q3	2019 Q4	2020 Q1	2020 Q2	2020 Q3	2020 Q4	2021 Q1	2021 Q2	2021 Q3

EBIT per quarter		EBIT rolling 12 m

The graph shows operating result EBIT per quarter. The bars refer to the scale on the left axis. The line shows operating result for the last 12 month period referring to the scale on the axis to the right.

	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
Quarterly data	2021	2021	2021	2020	2020	2020	2020	2019
Order intake (SEK m)	669	606	565	408	336	302	401	337
Net sales (SEK m)	472	474	455	405	345	355	361	346
Gross margin (%)	61.4	63.7	64.0	61.6	61.9	62.0	62.4	61.2
EBITDA (SEK m)	126	147	141	99	102	111	90	78
EBITDA (%)	26.6	31.1	31.0	24.3	29.4	31.2	25.0	22.6
EBIT (SEK m)	101	121	114	75	77	69	67	55
EBIT (%)	21.5	25.5	25.0	18.5	22.3	19.4	18.5	15.9
Cash flow from operating activities per share (SEK)	3.16	2.69	2.83	1.79	2.49	2.47	1.18	1.30
Earnings per share before dilution (SEK)¹	1.81	2.02	1.93	1.21	1.33	1.24	1.01	1.46
Earnings per share after dilution (SEK)¹	1.80	2.01	1.92	1.20	1.32	1.24	1.01	1.46
Equity per share (SEK)	25.67	27.98	27.08	25.75	24.62	23.60	22.49	21.06

¹ Attributed to parent company shareholders.

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