HMS Networks AB (publ)

Thank you. Good morning, everybody. Welcome to this Q1 update. I'm Staffan Dahlström. Greetings from sunny Stockholm and Joakim is sitting down south, south part of Sweden. I hope we also have a sunshine, at least we have sunshine in the reports. And the agenda for today is that I will start with a short summary for you who are new here and a small business update. And then Joakim will make a deep dive into the financial results of this quarter. But let's start with a few highlights. We are really happy to note that we have a record level of net sales up 49 percent from Q1 last year and also a little bit better than the strong Q4 we had here in the ending of last year. A weaker point, but expected is more moderate order intake. We see a decline after really, really strong levels 2022. And we will discuss this in detail a bit later. Profit wise, very good development, record level 211 million SEK and EBIT margins looks good, cash flow okay. Joakim will also go back into these details here and a good solid EPS. So we're really happy with this quarter and let's move into just a short business update before we go into more numbers. For you who are new on the call, HMS, we work with industrial ICT, information and communication technology. We're quite well established after 30 years in this specialized niche of industrial automation and communication. We have soon 10 million devices connected in our customer system. We have over 400,000 machines connected to our cloud solutions for remote access and IoT. We are a technology company focusing quite much on new technology right now. We're busy with 5G, smart grid, AI, IoT and these things. But most of our customers are traditional manufacturing companies who love to talk about technology, but really like to have established technologies. So we stand with the one foot in new technology, the one foot in the existing and also legacy technology that is very important for customers. And we're headquartered in the beautiful city of Halmstad, Sweden, on the Swedish southwest coast. But most of our business, I guess 97%, is outside Sweden. As a company, we are a little bit more than 750 employees around the world, operating in 17 countries with subsidiaries and over 50 countries with partners and distributors. Last year was good, 2.5 billion in revenue. And we are on an important journey until 2025 with our top three goals. Goal one is to become a net positive in our own CO2 emissions, not because we are a big emitter of CO2, but we want to show the customers and our industry that it's possible to have aggressive goals here and we can do much more. But we also work a lot with our customers to help them reduce their CO2 emissions as part of their automation and energy saving ambitions. Secondly, we believe that happy and high-performing employees generate loyal customers, and we love loyal customers. So let's start focusing on having great teams. So we measure net promoter scores on our employees, but also our customers. Target is plus 30, and we are at the moment, and hopefully for the long run, way over this target. And we are approaching our long-term goal of being more than five billion Swedish in 2025. And for you who are quick in math, you note that Q1 revenue times four is approaching this. So we are getting there as well. So what we do is to help our customers enable valuable data and give them insights from machines and systems in their production processes. So we actually make the products, our products make their machine communicate to make sure they can have a more efficient and more sustainable manufacturing. We work with two main segments, industrial automation, where we have three sub-segments. Manufacturing, which is more traditional factory automation and process automation. We have customers in transport and infrastructure, could be anything from harbors to logistic centers and warehousing. And we have also business in power and energy, both wind, solar communication, but also more and more in battery systems and energy storage and these kind of things. And we have a separate group working with building automation. This is not home automation. It's large commercial buildings like airports, shopping malls, hotels, where we primarily work with communication around HVAC, heating, ventilation, air conditioning, which normally is a very costly expense for building owners. The common denominator for all these things the communication technology where we provide the communication technology and making sure the system works well we have two types of customers in general we have makers of industrial equipment and we have users automation systems if we look into the details of this on the next slide we can take a closer look on our go to market on the left side with the makers and There we have device manufacturers where we sell technology that they embed inside their devices to communicate. This is where we started over 30 years ago and it's today 44% of our revenue. We have a sticky but quite time-consuming complicated sales process with DesignWin where we help these customers embed our technology inside their devices. Since this is both complicated and time-consuming, we only work with direct sales here. We have also machine builders. Our dream is that we should be included in every machine. We are not there yet. We are more specified as an option in the building material. So if the owner of this new machine would like to have remote access or integration to certain systems, the machine builder offer us as an option for the selection in their configurations. And here we work with both direct sales to large customers and distributions to many, many smaller machine And finally, the users. Users for us could be Volkswagen and Amazon and these kind of builders of cars or logistics systems and things like that using the automation system. 29% of our revenue, either we work here with project sales and system integrators or just plain product sales, either through traditional distributors, but to a more and more growing extent, e-commerce distributors. All right, so if you look on the business update before going to numbers, we are super happy with continued strong invoicing, good start of the year, both for delivery capacity that's been improved, but we will see that availability of material and the semiconductors that have been difficult to acquire before, it's getting easier. It's not perfect yet, but it's getting easier. So we think this is a solid start of the year, but also customers see that the component situation is better. So, of course, they also destock a bit because they expect our lead times to be better and better. And not only our lead times, lead times in general in industry are slowly improving. So in Europe and Asia, we see some destocking, but in the US we see good business and expansion. We also see a very good business in the building automation still. So that is also quite strong. And as I mentioned, improved delivery situation for critical components in the semiconductor field helps us. And this also means that we spend less money on this spot market, very expensive purchasing of critical components. So this is also helping our gross margin. And Joakim will talk about this in more detail. And finally, we are, as we speak, in Hannover, Germany, presenting our new integrated business where the acquired Procentec, which we acquired two years ago, is now fully integrated into a business line of Anybus. And we now have this fully together with our sales force and our systems. So we see that this will probably give a boost to the Procentec growth going forward. So Joachim, we are keen to look on the details.

Yes, let's start with the order intake then. And you saw it's 682 million that was shown in the quarter, so a 20% decline from our record quarter in Q1 2022. And the quarter is a bit bumpy. We're starting off with a very strong January, a lot of long orders, as we've seen during 2022. And then February, March has been showing a lot of destocking from some of our larger customers when, as Daphne explained, The whole situation in the supply chain is getting much better, and there is no need to have these high safety stock levels that many customers have been building up. And then we had a good ending to March. We did some good orders the last week of March, giving us a rather solid order intake given the situation. We knew that we were going to have a massive decline compared to that Q1 2022. With the 682, we were still rather happy to be able to close the quarter in that way. Looking at the different markets, the D-Stock has been pretty clear in Europe and Asia, where we have some of the large machine builders. It's good to note that America, that we've been seeing a bit of a decline throughout the end of 2022, is holding up really well. And we've shown the second best quarter ever in terms of order intake in the US. And maybe we're starting to see a little bit coming back after this decline. We saw that that early in the U.S., and maybe already through the worst. Let's see what the future will bring. About the different offers, we see that building automation is performing very well. We have not seen the same buildup as we've seen in the industrial automation business throughout 2022 in terms of ordering, and now we see a very solid demand on the building automation business. At the same time, we see this de-stocking within information-centric, where we have especially our E1 brand, where some of our big distributors are starting to lower their inventory levels. So we hope that that will turn around for the coming quarters. All in all, we close with a book to bill of 0.88, which we think is a rather healthy pace of taking down this big order backlog. I'll show you that in a few slides, how that looks. Maybe first, let's have a look on this slide that we've been showing now for a couple of quarters with those long boost orders. And what we can see now in Q1 is for the first time in a very long time, we see that we don't really have any boost orders. And I guess 682 should be seen as the net because we do get some long orders, but there's also some destocking from those previous boost orders. So all in all, we think 682 is a pretty good reflection of the underlying demand in the business. And if you were to adjust Q1 2022 for those 250 million in boost orders, you would see a 12% increase in the underlying market development, which we think is rather healthy. And then going over to our net sales, we're managing to beat the strong Q4 and set another record level in terms of net sales with 773 million and a 40% organic growth. This is good work by our supply chain to manage to push this out. And we see a much better situation in terms of capacity of components. Still some issues, but not impacting the sales too much, I'd say. And this puts us in a good position to also then capitalize on this solid backlog that we have. We note that we have record level of sales in America and Asia, which are taking a large share of the overall group sales. That's fine to see. And if we go over to the next slide looking at the backlog and putting this into relation, we see that we are taking down some 91 million of our backlog and closing about 1.3 billion. So still a very strong backlog and this puts us in a good situation to continue to show growth throughout 2023. And looking on the right-hand side also graph that we've been shown for some time now, the amount of our orders that we get deliver more than a quarter out. We don't see a big change to this and if we were to see this book to bill becoming lower than this 0.88 then I think we also should be starting to see a change in the delivery times due to our customers. So we hope that we should be able to take this down over the coming quarters but we think it will be a slow process. Then looking at the sales per region, as I said, Americas, APEC, now together 40% of sales, and the EMEA region represents 60% of sales. We think this is a healthy evening out, and we're happy to see the Americas and APEC region taking a larger share of the group to stand on more legs for our site. If we go over to the profitability, pretty good graph on the left-hand side, continued increase on profits, closing with an EBIT of 211 million, and very healthy margins of 27.4% compared to the adjusted margins of 21.7 a year ago. So we're very happy with this development, and the main drivers behind this is, of course, the volume in itself. the gross margin and that we're we're increasing opus quite a bit but not as much as as the sales growth so yes commenting on the gross margin we're happy to to present 64.8 percent of three percentage points compared to a year ago and continuing to improve the margins from from the second half of 2022. the main drivers behind the development is is of course the price adjustments we made towards our customers And that's been going pretty much as planned. We've been seeing the results that we expected to see. The spot market purchases have been fewer. We still have a few million on that, but it's significantly lower than a year ago. And I think that's been declining throughout 2022 as well with the component availability becoming better and better. We also have a favorable currency situation. The Swedish crown is rather weak in relation to the big currencies. Euros and dollars would be our main ones. So that is also helping us. And finally, the scale that we're getting into production. So we get better utilization on our fixed cost in manufacturing. So all in all, I think the price adjustments, the current situation, and the increasing production volumes represent roughly equal parts to 1.8. And then final note I wanted to make just on the OPEC side. So we know we have a dramatic increase with 33% to 290 million. And two main areas is we continue to invest in the sales and marketing organization to make sure we can continue to keep the growth pace. And then we're also just in the process of changing ERP system, which is always a big project. And we're going to go live in a couple of weeks with a new system, and that's been driving some costs for us, especially now in Q1. Looking at our EPS, so 3.7 crowns, solid EPS. The net financials are positive revaluation of cash in foreign currencies behind that. So still on a rather small level, so very clean net financial, I must say. and a solid EPS as a result of the strong deliveries. Then a few notes on the cash flow performance. So we do 155 million, which is almost twice in comparison to a year ago. That's good. We could have seen a little bit better here. We still have some inventory that we were building up. We're making this merger with the percentage business, which has been causing some short-term buildup. And also with the high growth we're seeing, we need to make sure that we have components in place to meet that. So it's also an effect of the high growth phase. And the good deliveries in March is also ending us with a high account receivable, which is hitting their working capital a little bit. We see small signs that some customers are waiting a few extra days to pay. So we're trying to chase them on this. But I guess it is also an effect, the fact that money is So we need to chase that, as always. But all in all, a rather solid situation on the cash flows. Cash conversion of 64%. We would like to see a little bit higher there. I'm sure we'll see that in the coming quarters when we don't have such a high inventory buildup. Just a final note on the balance sheet. So we see a bit of an increase in leasing debt due to some new offices. Uh, so that's, uh, not nothing to worry about and, um, otherwise we can see that we have actually our cash is larger than our interest period. That's for the 1st time in many quarters. That puts us in a in a good position also to to look for. Or, which is a ongoing topic of course, for for us. Yes, to summarize the 1st quarter before we let the participants ask questions. So we say that we. We see this de-stocking is starting to happen in some areas, and the order intake is not at the same level as it was a year ago with the boost effects. And still, we must say that talking to our customers, they are adjusting the inventory levels, but they're still quite positive on the outlook and the demand from their customers in their turn. So that's really good. And in terms of the deliveries, we have very good to another record with record sales, gross margins, EBIT margins. So I think we're quite happy the way, so far at least, we managed to navigate this rather challenging macro environment with high inflation and hope we can continue to deliver in a good pace. So with that, let's open up the line for questions.

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