Enea AB (publ)

I would like to say good morning. My name is Anders Lidberg and I'm the new CEO of INEA. The new acting CEO of INEA and some of you might remember I had this role in eight years or during eight years from 2011 to 2019. And since then I've been the chairman of the board. My last interim report before this one was Q1 2019. We called it a new year, new records. And we had 240 some million Swedish in revenues. We had operating margins north of 25%. We had 41% non-organic growth. And we had operating cash flow in the quarter of 100 million Swedish, or to be precise, 93 million Swedish. So it was a great quarter to end with. And when the new management team was off to a great start with a good Q2 2019, and closing a deal with a large key account in Europe valued up to 2 million euros, it felt good to be in the chairman position. And during the last four years, the company has also developed well from a strategic perspective. We have established ourselves in the cybersecurity market, and our footprint there is significantly stronger than it was in 2019. And if you compare Enea to the Enea I started with back in 2011, the changes are dramatic. It's a completely different company, and the things that remain the same is the name and the headquarters. And those changes I will come back to later during the presentation. But today the numbers are very different and it is with mixed feelings that I'm sitting here in this role. So I am proud and I feel good about the changes that we've done with Enea during the last 10 years. Without these changes no one would be dialing in to this call. It's questionable if we would have had this call at all if the changes wouldn't have happened. But I don't feel good with the lackluster performance of the company during the last period. We're not happy with that at all. And I feel very bad for the shareholders that have supported us down to this point. But I also feel a bit sad about the changes that the board was forced to do at the beginning of Q3. But more so, I feel a huge responsibility and that's the responsibility I share, we're feeling I share with the rest of the board to start taking steps to put Enea back on track again. And to be frank, I actually feel enthused to start doing that as soon as possible. And with that, I would like to walk you through some of the key events during the second quarter. And we were off to a rough start in Q2. That project that we closed third quarter, beginning of third quarter 29, we got the information from the customer beginning of the second quarter that they would wanted to discontinue that project. It came as a big surprise to us in the beginning of this quarter. It's, of course, in these economic environments, not huge. You know, it's not unheard of that things are discontinued. And this is part of doing global business with innovative software. So things happen. But this had quite some dramatic effect on Enea and on our numbers in Q2. First of all, we had to take a reservation of already booked revenues of 41 million that hurt the quarter. And with that also, with the discontinuation of the project, we lost some expected revenues in Q2 and going forward. And the expected revenues in Q2 from this project was around 30 million. I'm talking Swedish now. And so with this news, it was clear that the business case for this product line was changed. But before just taking a few days to change the business case that would have impact on the operation, we wanted to do a thorough strategic review of our telecom operations. And we started that early Q2, and we informed the market about this when we informed about the fact that we would take this reservation. This strategic review focused on the market opportunities and the outlook within this space of our portfolio. We focused on our own product development, our own roadmap, as well as our go-to-market capabilities within this space. And we knew we had to do an impairment test on the intangible assets and capitalized R&D we kept on the balance sheet for this product. We did this together with the management team, or the management team did this, and we spoke obviously with our accountants, and it became clear to us that we also needed to increase WAC due to the increased interest rate. So the business case, whatever the business case would be, would have to carry an increased WAC, and the WAC we're using in the case now is 11.5% for the impairment test. The new long-term business case we did and pretty quickly it became clear or evident to us that the only thing we changed in the business case that's supporting the goodwill we have is this one product. One product. All the rest is unchanged and this one product The only thing we've done is to sharpen the focus of this product to go after the handful of customers and prospects we have in mid-term that would like to buy this 5G product we call the NDL or network data layer. So it's a huge change from a numbers perspective, but it is one product. of the portfolio of roughly 10 products that we have in our business at this very point in time. This product or the portfolio, the Telkom portfolio is developed in many different R&D sites with the leading sites being Belfast and one in Croatia. And before this change, we also had the site in India. We have two sites in India. The one is for our security products and for our security services. That's untouched. But the R&D site developing this product, we have closed during the first half year. And we're now you know, we might have to change some locks and give away some keys, but all in all the change has happened. And the reason for that is that we actually started this late last year as a initiative to improve profitability and margins in the company based on the fact that we were not pleased with the results of 2022. So that was something we already started. The changes we've done, the changes we already planned and the changes related to the fact that this project is discontinued will impact some 70 positions within the company. Around 50 of our own employees and 20 consultants have been forced to leave the company. But these changes have happened in good order. At the beginning of Q3 we also changed the CEO of INEA. The financial impact of these changes are, as I said, significant. In Q2, we have taken 65 million Swedish in reservations. That's the 41 I discussed on the last slide. And also a 24 million Swedish reservation for bad debt. It's actually not related to the discontinuation of the product. it's related to a deal we've done with a customer in Northern Africa, and we have difficulties to get dollar out of that country. So to be conservative, we've made a reservation of 24 million of that. That doesn't mean we're not going to try to get the money and we're still carrying some of it on the balance sheet but again good order and in discussions with the accountants we have agreed to do that so 65 million in reservations in the quarter we've also added 20 million in non-recurring costs for these changes in the quarter and we have said that we will take another 10 million in Q3 to facilitate the programs that I've discussed The impairment based on the nude business case is a huge amount. It's 522 million Swedish, of which 450 million is Goodwill and 107 million is CapEx. But let's also be clear that this is non-cash items. So none of the above is impacting cash. What is more so you can argue impacting cash going forward is that this project, we expected more business from this project. So Q3 is hurt from expected new business that didn't come through with approximately 13 million. So this has the program has actually a 60 million positive cash flow full year starting 2024. We will see some positive cash flow effects already in 2023 but the 60 million is the full year number that we expect from 2024. But very important note here is that While this program has a 60 million positive cash flow effect, it actually has a 13 million negative effect OPEX in Q2. And the reason for that is that we've taken down our own employees with 50 people and consultants with 20 people. So in total, 70 people we're not anymore paying salaries for. But some of the people we are still having on this, and we do have some 100 plus people working on our telecom portfolio going forward, are now in the OPEX. Some of them were actually before in CAPEX. So 30 million increase of OPEX due to the fact that we have lowered capitalization of warranty. So it's good news from a cash perspective, and it won't show on the EBITDA results going forward, but it will show on the EBITDA. going forward. So with that I would like to introduce another new person to you. It's our new acting CFO Ulf Stigberg. I would like to say a few things here also before I give you the word. So Ulf is not new to Enea. Ulf has been with Enea now for some four years. He was the former CFO of one of the acquisitions we've done, and that is a pattern that's very prevailing within Enea. We don't do acquisition and get rid of the management team from the acquisitions. We get rid, we do the acquisitions, and we try to slowly integrate the acquisitions while priority number one, taking care of the revenues that these experts are generating within their own company. And then gradually we're integrating and taking the best talents from these acquisitions and making them part of our management team. So just You know, in the management team today, we now have Ulf from one of the acquisitions. We have Roland Steiner running R&D. He's from another acquisition. We have Jean-Pierre Curie running another piece of our organization. He's been 10 years with the company coming from an acquisition. And then we've mixed that with some new talent. So it's not, you know, complete changes in the management team. It's an evolution of people that really know the business well. So with that, Ulf, I would like to hand over to you.

Let's get into the financial figures.

Net sales for the quarter was 208 million compared to 217 last year. The six months net sales was 456 compared to 427 last year, a slight increase over the six months. If we look at the currency adjusted growth, it was negative 10% for the quarter and for the six first months it was positive 1%. Between the network solution and OS we see a decrease of minus eight versus minus 18% for the period. Okay, next slide. EBITDA margin in quarter two was 24% compared to 33% last year. This was affected mainly by non-recurring cost items in Q2 that amounted 84.6 million related to restructuring costs and allowance for the adopts for debt that Anders described earlier. As a result of lower share software we also see a lower gross margin of 3% in the quarter. Operating margin operating expenses increased mainly due to less capitalization and impacts of foreign currency changes but the real spend has decreased with 9 million for the quarter, which is important to point out. Can jump to the next slide, please. So, 1% adjusted EBIT margin in Q2 compared to 13% last year, and the impacts of the Six hundred and seven million item included the goodwill and the capex white towns affecting this figure greatly. The earnings per share was negative twenty eight point seven for the quarter, which is, of course, a very, very low figure, but explained greatly by by this non-recurring items for quarter two. Next slide, please. Looking at the growth in the network solution category, we can see a great support and maintenance growth. This shows the underlying customer base. We are increasing the support and maintenance value year after year. And this shows a very stable customer base for these network solutions. Important for the company going forward. And also we can see on the license, it shows the importance of having a new larger customer project in the period.