HMS Networks AB (publ)

thank you and good morning everybody thanks for joining this call and welcome to at least here in sunny halmstad at the southwest beach of sweden we have a beautiful morning i hope you have it as well so i will start with a couple of slides updating us on the business and then joaquin will take the second part with more details into the financial numbers so we're following the standard procedures as we normally do but let's move directly into the quarter two numbers and we are happy to present another good and solid quarter uh actually on net sales a little bit better than we expected ourselves because we saw good delivery deliveries out in the end of the quarter in june because we got some a little bit better components than we um thought from beginning so i think we uh will land a q2 that was good and better than we expected due to component availability plus 27 percent growth but of course we also have support from a favorable currency mix with the depreciation of the Swedish crowns we continue to see a very good order intake as you know for the last I think six quarters we talked also about a boost effect where we see that our customers are concerned about long lead times component availability so they also tend to place their orders in ahead of time from their normal behavior so this is giving us a continued boost somewhat lower than the previous quarter but still significant for us joaquin will dive more into these details but uh 35 growth is of course very good for us we continue continue to deliver good results 143 swedish on ebit a combination of uh slightly improved quarter by quarter on margins, stable OPEX, well stable, we are increasing OPEX quite much, but of course with net sales growth of 27% and fairly stable gross margins, we're also leaving room for some good profitability. I think what is maybe the weak point of the report is our cash flow that is lower than normal and this joaquin will go into the details but in general one big effect is that we are building up more inventory we have a fantastic order book so we want to make sure we can deliver this we are seeing some easing on the component market so we're trying to get quite much inventory in here but as you know many of our products maybe consists of 100 different components. If we have 99 of them in inventory, it doesn't really help. We need 100 in inventory. So this is also giving some build-up of inventory and planning challenges. I think you've already seen Quarter 1, so I skipped the year-to-date numbers. It's very solid, and Quarter 1 and Quarter 2 follow the same lines. Let's take a moment just to look at this boilerplate for our business. HMS is hardware meets software. We make communication products where we allow our customers to interconnect machines on the factory floor to communicate with each other, also communicate between machines and devices up to IT systems wirelessly or wired. You see on the products, it's a combination of hardware products, but of course, a lot of software content inside these products. The four main brands, Anybus, E1, Intesys, Nixot, is doing different, solves different problems for our customers. And the three was recently acquired business, last couple of years, WebFactory, Percentage, Ovasys, is more completing our offers in some verticals. We work with two different customer groups. We have the makers of industrial equipment and we have the users. The makers are companies like Atlas, Copco or Bosch and these companies that use our technology building into their machines or their devices and then deliver that as part of their package. The users are normally larger and users could be Volkswagen, BASF and these kind of companies that use automation technologies to integrate different systems in their facilities. And if you look on the go to market on the left side with the makers, we have two major businesses. We work with device manufacturers, but we sell our embedded technology into their applications. So we are part of their designs. This is today 43% of our revenues. Here we make a design win and we have a very strong portfolio of design wins, which makes us successful when customers sell a lot of products. So right now we have a lot of customers with Good tailwind, and this is also seen in our orders. But here we work with direct sales. We have salespeople, well, direct salespeople that are subsidiaries now in 17 countries focusing on these device manufacturers. We also have makers of machines. We call them machine builders. This is 35% revenue. Our ambition here is that our technologies, our products should be part of their bill of material when they build all their machines. In most cases, we are more an option. So if a machine is sold and this buyer of this machine wants, for example, remote access or want to interconnect this machine to the previous machine or the other machine in line here, we are then specified to be an option to solve this problem. Here we work with a combination of direct sales to large customers and distribution sales. And again here, this is also driven out of the machine builders selling more machines so this is also related to investments and capex investments at machine builders customers and the smallest part of our business is end users system integrators this is 22 percent of our revenue but also growing and quite interesting within this with acquisition of proseltech where we do more and more business here it's either project sales where our system integrators are working with a larger project where you work with the end user who build a new factory or refurbish an existing factory, make some integration or improvements. And there we work with the participations in this project and help the system integrators. But we also work with, we call it product sales, where we advertise our product. We talk about its greatness and the specifications and simply we get customers who just want to buy it because it fits their specification. And this is done either through traditional distributors but to a larger and growing extent also new e-commerce distributors that focus on e-commerce for factory automation and building automation. We are in the almost middle of our five-year plan here, and we have the humble vision of becoming the world's greatest industrial ICT company, where ICT is information and communication technology. and we're taking steps in that direction we're following our mission by enabling valuable data and insights allowing our customers to increase their productivity and their sustainability so this is really important for customers and we have a lot of strategic discussions with our large customers about productivity and sustainability for 2025 our goals are Three of them are environmental, to become net positive in our CO2 emissions, where we do good steps in that direction. We believe that happy and high performing employees generate loyal customers. So we focus a lot on having good net promoter scores for employees and also customers. We see good results there. And financially, we believe that we would like to continue doing and combine this with a good profitability. So our ambition for 2025 is to have a revenue greater than 5 billion Swedish crowns and maintain an EBIT margin of 20%. No changes there. If we jump into some business updates before the numbers, I want to show two slides here. First, from a market point of view, all markets are growing. We see actually quite stable and strong business despite difficult macro situation. COVID in China, lockdowns, war in Ukraine, logistics problems and component situations. But underneath there, we also see good support from mega trends, increased automation, partly also the trend that more and more customers are reconsidering manufacturing in Asia, moving production closer to the European markets or American markets. We see a lot of new investments in Eastern Europe and Mexico for building new production capacity. But this is a market where labor costs may be higher than on some Asian markets. This means that people also invest, our customers invest more in automation, more in digitalization. But we also see good support from trends such as energy monitoring, remote access of machine is a very hot topic here post-COVID, when more and more customers want to have remote access to their machines because availability of machines has been a challenge. but also sustainability and green energy is becoming a factor for many of our customers. We talked about the component shortage. It continues. I already mentioned that the customers continue to place orders earlier than normal. We estimate a boost effect of 150 million Swedish in the second quarter, slightly smaller than quarter one, but still substantial. we feel we have improvement on the sourcing during the quarter but it's not going from good to bad it's going from sorry it's not going from bad to good it's going from bad to less bad i would say we still have a lot of challenges and this will continue for some quarters we believe but there are some still there are some lights in the tunnel we think that from acquisitions point of view as we reported in quarter one report we acquired the remaining uh shares of prosentec in April and we now are busy with the integration, especially in Asia and North America, where we see good opportunities. We also announced that we acquired our long-term main distributor in Australia, Global M2M. It's a small business, it's a four-man operation, 20 million Swedish in revenue, and they were spending 90% of their revenue was really reselling our products. It's a good fit. The reason we do this is that we believe that this part of the The world is interesting for us. We are under-penetrated there, and we see Australia, New Zealand, and Australia as a growth market for long-term. So this is interesting, and with this acquisition, we quickly get a bridgehead to expand in this part of the world. We'll also be busy with R&D. We're now presenting and releasing our next-generation product for remote access, the E1 COSI+, where we have a lot of new functionality for cybersecurity. which is a hot topic with many customers that they want to secure the assets. And here we have a world leading solution, not only for remote access, but also remote access where we use the latest technology for encryption and other security features. At Procentec, we also released our new AI-based software, Snap Analytics, where we use this tool to help our customers to improve their network uptime in a new way. Very exciting product. And we talked about our slightly bad cash flow. This is based on component inventory build up. We see that this impact our cash flow, but we believe it's the right strategy to build more inventory. We have a fantastic order book of 1.4 billion. So we want to just be prepared for keep on delivering this for the coming quarters. So we feel that this strategy is the right one. All right, Joakim.

Financial results. Yes, thank you, Stefan. So let's start as we normally do with talking about the order intake. I think Stefan has already done a good job explaining the boost effect and that we reached this 850 million. So we believe that we're quite satisfied with that result and the market is still strong all over across the brands and across the regions. That's good to see. We're now meeting for every quarter, we're meeting tougher and tougher comps and also the comps are inflated with this boosted order effect. Just to elaborate a bit more on that, so the 150 million on the boost side that we see in Q2 is 100 million less than we had in Q1, and we see that this is declining throughout the quarter. So we expect that to continue and that this boost effect will probably wear off during the second half of the year, meaning that the comps will become more challenging to face then. uh in terms of i also wanted to comment on on the fx side since we have a major impact much larger than we normally see so the growth of of this 35 percent in the quarter we have 14 percent out of that from from the fx side until 35 million that is building up on the fx side uh 50 out of those comes from revaluation of the the already existing order book so As you know, we will look at the closing ethics rate and the closing order book, which is determining the order intake in a sense. And the fact that the Swedish crown, with everything going on in the macro environment, nobody seems to be wanting to hold Swedish crowns. And that is, of course, very good for us in this case here. And as you, I think I've said it before, we have about 60% of our sales in euros, 25% of our sales in US dollars. So obviously, this is giving us a good help when the macro situation is as it is today. and still a good book to build once at 1.36 in Q2. Something that we believe will come down closer to one throughout the rest of the year with hopefully continued slowly improvements on the sales side and then this boost effect wearing off. Just try to give you a view on basically the underlying demand. We have this graph that we've been working on for a couple of quarters. What I did this time was also adding in this FX revaluation on top of the boost effect to show you that this effect is of course there in all quarters. It's normally quite small, but since it was so big this quarter, I wanted to show it clearly. So basically what we're saying is that the underlying market, the underlying demand is slightly better than Q1. As we said in Q1, we felt that we definitely saw sort of a tick up from these levels around 500 million that we had throughout 2021. And now we're more around the 600 million. So small improvement since Q1, still solid market, but maybe not as fantastic as it looks when you have a look at these 815 million. Okay, let's go over to the sales side. And Staffan already commented, we were better than we expected. I think I said in the Q1 call that we found it difficult to be more than 10% better than Q1. And we had a fantastic June where we got in some components that we didn't expect and managed to get out a nice chunk of the backlog. And so close in the quarter, 601 million, meaning 27% growth or 17% organic growth. Also year to date, I think we have a strong stock with 20% growth at which 11% is organic. And I think it's quite unusual. We posted record quarter for all our brands, which I think also shows that the market is strong on a wide level since we have some different types of customers and also some different types of channels for different brands. That's quite good to see. I think Staffan has already been talking about component availability and maybe has to comment on that briefly. We think that we'll have this gradual improvement, but there will be bumps on the road. We see already now that the visibility is not great. And just going on what we can see, we can't say that we're going to have a super Q3, but we hope that we'll solve some things on the way as we did in Q2. okay let's um let's continue looking at the backlog and um here we have a build up of about 200 million more so 1.4 in backlog obviously quite good and um we're not sure that we're going to continue to build this given that we we see this booster page wearing off also on the right hand side you see this graph with orders for delivery longer out in time than a quarter and i guess what we can say is that this is stabilizing you see that it was trending up a lot throughout 2021 And now it seems to be stabilizing. And I think that tells us two things. One is that our delivery performance is getting a bit better in the customer's eyes. And I think also that the customers are becoming done with building up their safety stock. They are on the levels that they want to be at for the most part. And I think this works together to keep this rather stable. Sales per region, we normally have about 60% in Europe and 20% in the U.S. and 20% in APEC, and it's about the same situation, so no big changes. It fluctuates a little bit throughout the quarters, but as I said before, all in all, all the regions are performing well. We see all-time high numbers in all regions, maybe not in the Americas since we had a very good quarter a few quarters ago there, but it's solid across. Then maybe let's talk about the profitability, which is maybe the most tricky part this time to explain. And again, record result, 143 million, 23.7% margin. Of course, always nice to see. The gross margin is a tricky number to understand. We're quite happy with the results reaching 62.2%. and seeing the continued improvement since Q3 last year, when we started to see the main impact from cost-increase components. We still have a huge cost-inflation component side, I think Q2 is the worst hit quarter of all the quarks we've seen. But now we're starting to see results in the price increases. So we've been discussing this before, that we made some price increases first at year end and then also end of Q2, sorry, Q1. And that is really starting to give results now and as we expected to see. But you also want to see the results from those measures. and and we also get some help from from the fact that the swedish crown is is weak and and it will have some volume that is helping the utilization on the on the manufacturing overhead costs so all in all i think that that improvement is is helping and as we said before we think this is going to continue to trend trend upwards and we're going to going to reach the 63 plus percent that we're pretty convinced with the measures that we've taken On the OPEX side, we've been continuing to invest, and maybe the numbers look high with 21% organic growth of OPEX. But you should also remember that during 2021, we were very thin on marketing sales activities. It was still tough with the COVID situation. So I think we've been working to strengthen the sales finishes and to build up better teams, stronger teams that can focus also on some verticals. So that's been working out quite well. And then we're now doing pairs and trade shows and various customer events again. And it's good to see the activities picking up. I think we need it for the lead generation to be competitive going forward as well. And then, of course, as everyone else, we also see a bit of salary inflation, especially in the U.S. and in some parts in Europe. We're just getting to very high single-digit numbers. And this is, of course, also impacting the cost side. So earnings per share, I'm not going to spend too much time on this. 2.33 Swedish crowns. Good. We had the adjustment in Q1. Otherwise, this would also be a record EPS. Not too much standing out there. So let's just continue to maybe the more interesting part with the cash flow. And you see this graph is, of course, not how you want to see it developed. We knew, and I think we also commented on this in the Q1 call, that we were going to continue to build inventory. And now when we see some releases on the component side, we definitely do not want to miss out since we do not have the simple components as is available or that something would happen there. So we're taking the hit and building this up with 50 million in the quarter. And then given the very strong end of the quarter, super strong June, this builds receivables quite a bit. So I think this is something that we're off when sales normalizes out. But right now it's building up a bit and that also impacts with 60 million. All in all, we believe that We're okay on the working capital side, even if it's a bit higher than what we've seen before. We don't expect this high build-up to continue. There might be a little bit on the inventory side, difficult to know exactly the timing. But I think all in all, it's under control. And year-to-date, you have roughly the same numbers with the receivables. But the inventory side, we have built 80 million from year-end. So that's quite a bit. But as we said, we think it's for a good cause, and we want to make sure that we can deliver during the second half. So finally, looking at the debt situation, starting to look maybe a bit more normal, given that we had this acquisition of the 30 extra percent of Procentec. We removed some of this option-related debt, and now it's normal interest-bearing debt instead. And I think 0.69 in net debt to EBITDA Of course, we're very happy with that level, not a big problem. And we still think we have plenty of room to continue with the M&A agenda, looking for interesting companies. And we have some firepower to do what we need there. I think that was basically it from us. And let's see if there are any questions. So I hand over to operator.

Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, you can do so by pressing star and then two. At this time, we will just pause momentarily to assemble the roster of questioners. Thank you. Your first question comes from Joachim Gunell from D&B Markets. Please go ahead.