HMS Networks AB (publ)

Thank you, operator. Good morning, everybody. Thanks for joining this Friday morning call. We just released our quarter two report and myself and Joakim would like to give you a brief update. And I will start with a summary and a business update. And then Joakim will follow the standard procedure of diving into the financial results. And we end up with a Q&A session at the end. But just a few numbers from Q2. We are quite happy to see a continued good growth on net sales. partly also supported by currency translations and also a little bit of a better component supply than we used to have so we have some good things there but there's also some challenges in the capacity especially during the beginning of the quarter Joakim will be back on that and we see as expected a lower order intake but here we'll spend some time later with Joakim to really understand because this is a complex material and material with De-stocking, boost orders, etc. So we need to take this step by step later, but we'll be back on that. Profit-wise, better than last year, but compared to previous quarter, not so good and we'll be back on that. Keeping the EBIT margin well above our target of 20%, but a bit lower than previous quarters. Cash flow is not so great despite we see inventory build up and we have done some things here to increase our resilience going forward so it's better than last year but we're not really happy with 78 million in cash flow and as a consequence this EPS keeps on improving quarter by quarter and I think we skip the year-to-date numbers it's quarter one quarter two and And I'll do a very brief overview of the business. For you who are new on the call, I take this just as an introduction of the company. Industrial communication, we call it industrial ICT. That's our business. Well established in this market. It's a niche market worldwide. We have almost 10 million devices connected, over 400,000 machines connected to our cloud solution, Talk2M. So we feel we are market leader in this segment and we have a good position here. We are around 750 employees around the world in 18 countries. We started a small office in Vietnam early in this quarter last quarter and Revenue last year was 2.5 billion Swedish. We are on a 2025 journey with three main topics We are working with our sustainability and especially working with our customers Sustainability where we have also an ambition of helping them to reduce their co2 emissions We think that happy and high-performing employees generate loyal customers, so we focus a lot on our net promoter score, both with staff and customers, where we score very high now with our staff. We see a reduction on MPS from a very high number to a lower number with customers due to longer lead times, increased prices, so we're working hard now to regain the good confidence we have had with customers in the past, but there have been some effects last 18 months in the lead times that makes our customers not so happy and we have our revenue targets of pi billion for 2025. all right so we talk about valuable data and insights from machines and systems so it's about connectivity and getting data together from different machines but also getting this data into it systems to cloud systems making sure we help customers to understand and use this data that is hidden inside their machines and devices. And we have two types of business. We have the industrial automation that is more than 90%. Mainly manufacturing could be factory automation like automotive or semiconductor and food and beverage. We also have transportation infrastructure. We're working with infrastructure projects and also warehouses, AGVs and these material handling things. we have a small segment in power energy both with power generation but also renewables we work quite much with the battery systems we call it best battery energy storage systems and we have a business with building automation especially with heating ventilation and air conditioning how you communicate with different subsystem in buildings less than 10 percent of revenue but actually growing quite well the common denominator common denominator in these businesses is the communication protocols, the communication technology that is used to make sure that customers have good systems, good uptime, and can use their different subsystems to communicate. We have two types of customers. We have the makers of industrial equipment, and we have the users of automation system. Makers could be the Atlas Copcos and ABBs of the world. The users are more the Volkswagens and the organizations that use automation system. to manufacture or process their things. And we see three types of business. The makers are both device manufacturers and machine builders. And this is the big portion of the revenue, 44% of revenue last year with device manufacturers, 27 with machine builders. Here we mainly go with direct business or in some cases with distribution. But in both cases here, we are specified with either indesigns or part of a bill of material in these machines. So this is a quite sticky business where when customers sell their machines, we get included as part of their bill of material. In addition, we also work with system integrators and end users. 29% of our revenue here, it's more of a system integrated business. Our partners, they integrate and develop different automation system and they use our products our hardware and our software and here we go to market both through traditional partners and distributors but also to a growing part also e-commerce specialized industrial automation e-commerce partners here all right so if we take just a few highlights of the quarter we see a actually quite continued stable demand despite some macro indicators but in our segments we see that business goes on and We've been waiting for a slowdown, but still business continues to develop quite well. And Joachim will talk more about this when we look on the order situation. Our largest market, Continental Europe, is stable. We see mixed things in Asia. Japan, our biggest market there, is both some customers who place very long orders. In Japan, normally they like to have more on inventory. But we also see other customers in Asia that do more of destocking to adjust their large inventories same as customers in north america we see good solid volumes but we also see some elements of destocking in north america as i mentioned strong development in building automation it's less than 10 of our business but growing really really nice both in the us and in europe From a supply point of view, we talked a lot last two years about semiconductors, component shortage. We still see some issues, but it's much, much better than it was a year ago. There are some hiccups. We invest quite much in building up inventory to make sure that we have a good resilience for the future. We also have some challenges in our go-live with our new ERP system that have made us Going to in May, we had not full delivery capacity in the rollout. We are back on full capacity again, but we see this. I think we lost 40 million Swedish in revenue in quarter two due to this rollout of the ERP system. Joakim will talk more about this. But this ERP system is also part of Our ambition to take the next step in our growth. Last two, three years, we invested a lot in more salespeople, more product development. But we also feel now that we need to move up to the next level in our support system. So we have a new ERP system. We have Richard, our new chief operating officer, a new role starting here. Focus on supply chain, focus on sustainability, focus on IT, where we see that these systems need to come to the next level to support our growth going forward. And we also have Mayra who join us now as the chief HR officer. We see also we need to have more structure in our HR work around the world. So this is two very important roles to build the next step we need to take to continue our growth journey. So with this, I would like to hand over to Joachim taking a deep dive into Q2 numbers. Thank you, Stefan.

I will do that. So let's kick it off with the order intake. Jone Peter Reistadler, And I think this is require some some explanation, a lot of things that are moving that we need to get to the bottom with and. Jone Peter Reistadler, reported, we see the 703 million, which would be done 14% decline or 17% organic decline and for the year to date numbers just shy of 1.4 billion, which would be equal to an organic 18% decline. Jone Peter Reistadler, Before we get into this analysis just wanted to mention two things and that's the building automation that stuff was also referring to. This is continuing very well also in the second quarter. So we're more than 20% up for both in terms of organic orders and in sales. And here we see some good orders from retrofitting applications with new requirements in place that you need to be able to connect some of those AC aggregates around the world. So that's very good to see that type of business, some good project sales on top of the normal business. Then also due to the Swedish crown is weakening. We also have, I'm just mentioning this, but the book to bill number in constant currencies would be 0.94. In sales and order intake just happened to be the same number, 703 million with the currency effects. But let me take a few minutes to explain what we really see on the underlying order intake. And what we say is that we see that demand is really holding up quite well. You've seen this graph before. We've had about 1 billion of Swedish crowns in 21 and 22, and those boost orders. Staffan, can you mute your line, please? Due to customers placing orders pretty far out in the future. And now we're starting for the first quarter to see the destocking happening. And we have 30 million of destocking in the second quarter. Also worth to mention, again, the Swedish Crown. We have 35 million in positive effect from revaluation of the already existing order book. And this is primarily, the destocking is primarily attributed to the Americas and a little bit in Japan as well. In Japan, we see a bit of a mixed picture, but in Americas, we definitely see this destocking. And here I have, just to explain what we really see, this is a bit complicated slide. I'll try to take it slow. So yes, starting on the left, we have the order intake reported in Q2 22 of 850 million. And then to the right, we have the reported order intake in Q2 23, 703 million. So all in all, a 14% decline reported. Then going back to the left again, we adjust for this boost effect of 150 million that we saw in Q2 22. to get to a normalized order intake for Q222 of 665 million. From there, we see the revaluation of the order book of 35 million FX effects. Then the FX effect on the order intake in the quarter, 19 million. And then we have actually an underlying growth of 40 million in terms of order intake. So this gives us to a normalized order intake for Q2 23 of 733. And obviously we have to adjust for this destocking to get the report of 703. So I think this may be one of the key points to understand in this call that we have underlying demand is pretty much on the same level as it was last year. So we don't really see that big change in order intake. It's not really what we think we see in the markets. Then continue to the sales. We have also the 703 million, a 10% organic increase for the first six months. ESGI 1.5 billion, a 24% organic increase. And here, as Staffan also mentioned, I just wanted to make sure that's clear. We had this 40 million that we had to postpone in deliveries. We went live with a new ERP system on the 2nd of May this year. As always, when you do that type of big projects, it's a bit difficult the first couple of weeks. So we had to run the supply chain on a slightly lower pace than what we normally do. So that built up this 40% gap to where we should have been. Now it's going well in June. The second part of June was exactly what we should do. But we don't really have the capacity yet to make up for this. We will get there during the second half of the year and I will be able to be on on the capacity that we need so last few weeks was good and then we should be able to um to provide what we should also one thing to to mention is what we see from the customers in the market i think we see quite different behaviors some customers are still saying that they really want deliveries as soon as possible and are suffering still from the the long lead times component situation not being as it should be but we also have some of the larger customers that are in a bit of a different phase where they are happy with their inventory levels and they are now back to managing inventory levels quite carefully trying to in some cases reschedule some deliveries. So it's a little bit of different mix that we've seen before but still the demand with customers that would like to have deliveries is rather strong so we're not too worried about that. Then a few notes on the backlog. So as you see here we have an order book that is on the same level as it was in Q1, 1.3 billion. And the reason for not going down more than that is that we have this 40 million of sales that we discussed that should have been delivered. And then also the revaluation due to the weakest Swedish crown. And we have about 60% of our sales in euros, 25% in US dollars, and then some part also in Japanese yen. I added a new graph to the right to put this maybe in more of a context, looking at the ratio of order backlog in relation to rolling 12 months sales. And you see, we come from before the whole component situation started, we in 2020, 2019, we come from a ratio that is just shy of 0.2. And then when we peaked in last late part of 2022, we were at 0.65. And now we're moving slowly Jan-Willem Wasmann, And downwards again and closing the quarter at point 46 and we get a lot of questions So where do you expect to get to so what's the normal order book that you would you should have. Jan-Willem Wasmann, And that's of course a difficult question to answer we don't have a clear answer on it, but what we believe is that. Jan-Willem Wasmann, somewhere in between what it was before and what it is now is probably quite quite reasonable for us to. to end up meaning that order book should of course come down a little bit more. And that's why we think also we will have a good base for the remaining part of the year. Looking at the sales per region, Americas was strong with the 169 million and 24% of sales. Europe about where it used to be at 59%. And APEC a bit weak with 17%. And here is really China that is low then. that may be expected. And we see a pretty big impact from a really strong 2022 and big expectations of 23, which is not really materializing with economies. It's not really there where it was supposed to be. So a lot of customers have ordered too much and need to adjust that, which we see on lower sales in China. China is not one of our biggest markets. Last year it was about 6% of sales and this year it will probably be a bit less. Not a huge impact on the group level, but I wanted to mention it. Let's have a look then at the results. Unfortunately, this graph is not looking as beautiful as it used to be with a bit of a drop here in Q2. We reached 150 million in EBIT compared to 143 last quarter and margins of 21.4%. Still okay margins above the 20% target, but not where we have been used to be the last couple of quarters. We are not too worried about this situation. To be honest, we know we have the 40 million missing in sales. That should bump up the EBIT level quite a bit. We also have a lot of OPEX investments going on at the moment with the ERP rollout. We're also investing in our IT systems to make the customer journey more digitalized. So really good investments for the future, but it also consumes a little bit of cash at the moment. Good to note that the gross margins are on the solid levels, 64.7. We were at 64.8%. 18 Q1, so I think these are, we've said it before, we're quite comfortable with those levels. I think we should be able to be there also going forward. And what's managed us to get there is really the price adjustments that we managed to push through to our customers towards, especially towards 2022. We have, of course, the Swedish crowd is helping us a little bit here still. And a big difference compared to Q2 last year when we were at 62.2. is that the spot purchases are pretty much gone now. We have a few small spot purchases of components. It was a completely different story in 2022. And just a final note on the OPEX. So to be clear with that, we've been through the main part of the ERP rollouts. So the supply chain to a large extent is already rolled out. We have our sales companies left. So it will not be as intense as before, meaning the cost will not be as high for this, but it will remain in the rest of 2023 and also in 2024. Pretty much for the full year 2022, we'll continue with this. We will also integrate some of our acquisitions in terms of ERP on the second half of 2024. So that cost will not disappear, but it will be lower than what it was now. Looking at the EPS, well, obviously with the EBIT being lower, the EPS is also lower. Not a lot of comments on this. We're at 2.48. We paid a dividend in May. of four crowns so that's basically it i think let's let's go to the cash flow instead with the 78 million in the quarter which we are not fully happy with there are some good explanations though the main part is the inventory build up we continue to see some some deliveries from orders that we placed more than 12 months out with those really long lead times and here of course we went up in a bit of a squeeze when we did not deliver everything that we should in terms of sales Also, FX is impacting that a little bit. So I think the underlying, you see 100 when you look at the balance sheet, but maybe the underlying should be more like 70 million. That would be a normal situation here. We think that we will towards the second half of the year be looking to maintain or maybe even reduce these levels a little bit. And then my final slide, looking at the balance sheet again, we see a very solid balance sheet. We have interest bearing net depth of 93 million, which is almost nothing. So we said it's a couple of quarters before we are in good shape and for further acquisitions. And that's something we're looking at and get back to as soon as we have something interesting to present. So with that, I'd like to leave the staff to wrap the presentation up.

Thanks Joakim. Thank you. So just a few things and just highlighting what Joachim already said. I think we see that auto intake is not as bad as it looks like and we feel a solid demand underneath. But we just want to explain this in detail because of course we see the number. It looks kind of strange. We see this destocking effect. We expect this to continue. We really would like to get our order book down least below a billion so we work on that as well because we need to get back on good service levels to our customers. We talked about some of the postponed deliveries we have around 40 million of course this is a hiccup we feel we have full capacity again so this ERP system it's complex material so this is something that we we're not super surprised about it but we are back on track here. We also mentioned the cash flow. We are building inventory with stronger resilience for the future, but we need to work more on the cash flow. This is not what we are happy with. So we see that stable gross margin, large order book. We are quite optimistic for the rest of the year. We have a solid base. So we keep on tracking here and we feel this is a bit of a hiccup quarter for us. But as you hear me and hear Joakim, We are not too worried about this. We feel that there's good business to do and we have a good margin and a large audiobook. So we remain on the positive side. With that, I think we open for questions.