HMS Networks AB (publ)

Good morning, everybody. Good morning from a wintry Halmstad, Sweden. I heard that the sound here might be a little bit not full quality, but let's try it out and continue. So welcome to this quarter four presentation. I'll start with a couple of updates and then Joakim will go and talk more about the red line acquisition and some more details about our financials. uh we just presented our quarter four and uh stable net sales and actually quite much stability when it comes to revenue but also for profit wise uh it's quite good the big thing here is with the order intake as we have communicated the previous quarters we are in the cycle of this kind of destocking and adjustments from the previous years of the boosted orders is uh catching up at the moment and joaquin will spend quite much time to Make sure you understand what we see and be as transparent as we can be. But minus 41% on organic order intake. From an EBIT perspective, when we look on this, we see that we are flat. The reason why we say flat is because we have some cost for acquisition and this one-time cost and some restructuring. So we do adjusted EBIT on this. It's quite much flat from the same quarter last year. And we land in an adjusted EBIT margin of 25%. And we see a general stable development, I would say. We also concluded yesterday, the board concluded that they propose a dividend up 10% from last year to 440. and let me just for you the newcomers of the call talk about our business very briefly we talk about hardware meets software that is hms and we work with industrial ict information and communication technology um well connected in this industry been here for many years and we are one established and well-known player in our almost 10 million devices connected through our any bus brand and soon half a million e1 connected cloud cloud connected machines On one hand, we are a tech company working with new technology, but most of our customers are industrial end users in automotive, pulp and paper, food and beverage. All these industries like to talk about technology, but they even more like to have a stable supply of technology and the products for a very long life cycle. We are 800 employees. I talked about this acquisition that will add another 400, but Joakim will talk about this more in detail. Headquartered here in beautiful Halmstad, Sweden, but Sweden is a very small market for us. The majority of our business would be continental Europe, North America, and Japan. That's our three biggest markets. Revenue of 3 billion, EBIT margin 25%, and we've been growing around 20% on average per year the last 10 years. The majority of that have been organic growth, and then we made a couple of small acquisitions during the years here. We work with industrial automation in manufacturing, transportation, infrastructure, power and energy. And then we have a smaller, it's like five, six, seven percent revenue today in building automation, where it's the communication that is used in the HVAC systems, in commercial buildings and industrial buildings. The common denominator is the communication. Communication technology is the same or similar in these industries. We work with two types of customers, makers. These are the Atlas, Copco and ABBs of the world, but also the users. That could be Volkswagen or Stora Enso, the companies that manufacture something that use automation technology. The majority of our business is in the makers, where we have 44% of our revenue with our device manufacturers, where we work with sales with InDesign, a very sticky model we have. We also work with machine builders that we would like to be part of every machine's building material, either in the standard or at least be on their option list. Here we work with a combination of direct sales and distribution. And then we work more and more with end users. We've done some acquisitions here to be larger in this portion here. And it's now representing 31% of our revenue. So as you see, we have quite a good mix of different type of customers. I think Joakim will also talk about the geographic mix we have a bit later. We are executing on a 2025 plan where we had four original targets with organic growth, with M&A, with our people agenda, happy and high-performing employees generating loyal customers, but also a very detailed sustainability agenda. We're executing these four, but since last year, we added two things. we added operational efficiency actually there you see in quarter four some restructuring costs where we are taking some measures now to improve our efficiency but also doing some organizational changes we also work with a sales excellence program where we see an opportunity to be more even more efficient in our sales around the world in our 18 countries where we have direct sales so the plan the the plan here 2025 keeping working with the planet keep working with the people keep working with the growth where we focus a lot now with science-based targets, but also how we can help our customers so they can improve. I mean, we can't count on that in our data, but of course the nature doesn't care. We see last year we saved 1 million tons of CO2 with our customers by using remote access of machines, by using smarter energy systems and things like this. This is not on our books, it's on their books, but it's still a contribution that we would like to improve to triple this effect in the coming years. We talk about a high number of net promoter scores with customers, with employees. We also would like to increase our share with female managers. We are 22, 23% right now. Good improvement from previous years, but we need to keep on working with this diversity. We have new growth ambitions and profitability ambitions. We would like to be 25% EBIT. That's the base. And we keep on working with our PI billion for 2025. We see that organic growth will make us land more than PI billion 2025. But the plus stands for acquisitions. And as Joakim was talking, the big acquisition of Red Lion coming up here in spring will, of course, change our total revenue. Short business update. Since it's a full year, we talk about the yearly design wins. These are customers that we acquire and work with through our design win process. especially I would say device manufacturers and some machine builders, very sticky. They integrate our solution deeply into their brains, their electronics and their software. We start with design wins. This means that it takes maybe 12, 18 months for them to be convinced and then integrate our technology. Then they go into active base and we have 1,843 customers in active base. The active base in our industry could be like seven to eight years, up to 15 years. This means that they manufacture this robot series and keep on selling it for maybe seven, eight years. Or in the process industry, the life cycle is even longer. When this product is discontinued, not available for sale anymore, we terminate this as a design win. So this is the balance you can see here. So we see that we keep attracting new design wins, 139 new ones. So we keep having an attractive product offer, winning customers. And this accumulates to a base of a good chunk of customers that keep on ordering, of course, based on their needs. So in good times, they order a lot. bad times they don't order a lot but it's a steady flow of orders and we also see quite few terminated design this means that the feeling we have on the market is that people keep on rolling what they have during covid there was a lot of issues with component supplies and not too many developments was made new developments the maintenance of existing products to be able to ship them was the key thing here So this works well. We think that the CAGR of 6% year by year here is a solid pace and we are happy with this. We see that the discussion of order intake normalization, it continues as expected in Europe and Japan. We see this continuing, but the interesting news here is that we are increasing our orders in North America. North America was early into this adjustment and now they're also early out. So we see this as an indicator that we think that these inventory adjustments are in the right, getting to the end, also in the next quarter, probably in Europe and Japan as well. We spend a lot of time in R&D, especially on E1 now, when we focus on the next generation products, both on the hardware, but also the cloud access here. And we talked about the Red Lion acquisition. We signed 11 of December. Joakim will talk more about this, but we are really excited about the opportunity to become bigger in North America, but also do more cross-selling where we see a lot of synergies in sales between the two companies. If we look at the full year, we talk about the story about order normalization. We see stable design wins. We see that previous year's challenge in supply have easened. We still have quite high inventory, but we see that our lead times is better. We don't spend a lot of money on buying components on spot market anymore, so things are normalizing here. We also spent a lot of time in changing ERP system during the year after some hiccups. It's working really well now. We integrate the acquisition of Procentech made some years ago into Anybus and we updated our financial targets. Many of you joined our capital markets in September. So we are trying to build a company platform that is ready for growth the coming years. So 2023 have also been an investment year to build a new base in the company. All right, Joachim, we're both sitting here with a bit of cold, but I hope your voice is still loud and clear.

I hope so. Thank you, Stefan. It helps when I get the chance to speak about my two favorite topics, the Red Lion acquisition and our numbers. Let's start with the Red Lion acquisition. And I think when we make an acquisition this large, more than 40% of sales in HMS, we want to spend some time to explain what it is we're doing. I know some of you have already seen this, but let's take it one more time. Just a quick overview of the company. So a U.S. company, 84% of sales in the U.S., quite similar to HMS in many ways, to a large extent complementing offers, maybe 95% complementing and 10% overlap. So the offer is divided in three different parts. One that's called access, which is industrial gateways, protocol converters, remote access, and so on. which is quite similar to the Anybus and E1 offering that HMS is carrying. Then we have the second part, which is what's called Connect, which is basically Ethernet switches, something that we've been after for a couple of years, trying to complement our offer with that. I think an Ethernet switch is something you'll find in all installations, and we see big opportunities for cross-selling in this area, and also to bring this offer to Europe. We hope we can be successful with that. And then the last part is the visualization part. which to the largest extent is human machine interface products. And maybe the main difference between Red Lion and HMS is the main customer groups, where HMS in general are quite strong on the manufacturing floors. And Red Lion has been a bit better in finding more, what can we say, remote applications like different energy sources, water and wastewater, oil and gas, and those type of applications. I think we'll have a good chance of... of cross-selling to some of those areas as well. The company has been around since 1972, about 400 employees, out of which 300 is in the US. Four development centers, two in the US, one in Germany, one in India. It's also a pretty good mix there. And what we're really keen on is to try to utilize this strong distributed network that they have in North America. They will allow us better access to the local market there. From a financial perspective, about 1.4 billion Swedish crowns in the last 12 months, ending in Q3 2023. 55% gross margin, so strong gross margins. The reason why it's a little bit lower than HMS, we feel, is that they go through distribution to a very large extent. And of course, there is a middleman that needs to make some money as well. Otherwise, we see a strong and very popular product offering. And it comes down to solid EBIT margins of 21%. And obviously, this is something we want to work with to try to push it towards our 25% target. The rationale for the acquisitions, I think I touched upon it already, mainly two things. One is the graphic presence to get a stronger footprint in the US and to get a platform to build from also with American-made products, but also to to get this wider product offering and potentially move slightly upwards in the value chain with that. And we also see a surprisingly strong culture fit, we must say. We're really happy to see this when we've been talking to management and visiting the sites that we think quite alike in how we treat each other, treat people and want to make people to grow and so on. So that's very nice to see. Yes, some financial aspects as well. So we signed binding agreement on december december 11th um we we paid 345 million us dollars about 3.6 billion swedish crowns um and um of course value basis we think when we look at the numbers this will be a creative to uh to the eps basically from day one and um we think we'll close in early early q2 most likely at this point in time We're through the antitrust filing, so that went well. And we have this foreign investment approval that is pending that we think we'll get in a few months' time. And I think Stefan touched upon it already. We'll take up $225 million worth of new debt. And actually today, we're going to hold an extra GM to mandate the board to issue some new shares to cover the $120 million U.S. dollar financing that we're going to have replaced by equity. So this will, in terms of leverage, this will end up somewhere around two times net EBITDA when the share issue has been done. And that will be done after closing. All right, so that was the red line. Let's have a look on the financials. And I'll start maybe on the most interesting topic this time, the order intake. And maybe as the first comment, it's not as bad as it looks when you see this. You look at this graph to the upper left, that used to be really good looking. is now starting to look not so nice anymore. I think we expect this to happen. We're a little bit surprised that it happened so quickly after second quarter 2023, this order normalization. And we see organic decline now by 34%, giving a total order intake of 426 million. And then we also need to keep in mind that the Swedish crown has actually strengthened, which is impacting this negatively for us, having a lot of the order book in euros and dollars. For the full year, 2.3 billion in order intake. And you'll see in a second that we had 3 billion in sales. So obviously a big difference there. And this is really this normalization of the order book that we're seeing. I'll try to talk through this on the next slide to give you some more clarity in what we feel is happening. But before that, maybe just to highlight, I think Stefan touched upon it already. It's a little bit of a different picture looking at different geographies where we see maybe Europe as we believe it's going to get in Q4. It's been escalating a little bit since Q3 on this order normalization. Japan is also at similar levels as we saw in Q3, whereas in the U.S., we see a bit of a trend shift where we are significantly up versus Q2 and also slightly up versus Q3. So we think that most of this destocking has been done in the U.S., and we see When we look at the point of sale, so what our distributors actually push to the market, we see a growth in those numbers. So that's quite positive. And we think we're going to see a much better development during 2024 in the US. And then it's not too bad that we get a big acquisition coming in to support also in times when maybe the European market, which is our biggest market, will be a bit weaker, at least in the start of the year. But to try to explain to you what we believe we're seeing, we've been talking to probably 100 plus of our largest customers to see what they are actually doing. How do they see upon the future? And it's pretty clear that they are a bit hesitant. And they are, as we write the report, in a wait and see mode. What's going to happen on their demand? Some have destocking that they need to get done. I mean, we're in the same position ourselves. We carry a little bit too much inventory at the time. And maybe the reason for that is that we've been so keen on being able to deliver, so we've maybe been taking on a bit too much. Not a huge problem, not great for the cash flow short term, but we'll get that sorted. And for the underlying demand, if I now get to that, we see that you've been seeing this graph now with us for many, many quarters. And the reported 426 we see is maybe some 618 million in underlying demand. And then we adjust the 42 million, which is a revaluation of the order book where the Swedish crown is now getting stronger. So that's not really any new orders that is impacting. That's just existing order book that is revalued. And we have this destocking effect that we expect to be or estimate to be about 150 million after these discussions with our top 100 customers. Of course, that's not a precise science, but it's the best estimate we can do and what we've been trying to do through this whole period just to give you the best feeling for what the underlying market is like. So if you believe in this, you see that it's for sure the market is down a little bit, but it's not like when you see the numbers in the report and you think, Jesus, what's going on? It's a small decline that we're seeing, and we think that we might see that for another quarter or two as well before we see a big jump up. And just to put it in a different perspective, comparing, making a bridge from Q4 2022 to Q4 2023, we were starting to normalize the 2022 number, going from the 718 to the left, adjusting for the boost effect that we saw in Q4 2022, to a normalized level of 633 million. And then if I go to the very right in the graph from the reported 426 in Q4 this year, adding back the revaluation of backlog, adding back the destocking to get to the 618. If you buy this concept, you see that we're down some 2% in underlying market demand. Of course, everybody can have their own view on this, but this is our best estimate of what we feel is going on in the market at the moment. Going over to the sales, it's like a different curve, quite stable, as we say. I think stable is the exact word that we use. Quite happy with 760 million in sales in Q4. And the reason for this number is, of course, that we have this built up order book that has been, with our means, quite big that we can use to deliver out. So we use another 300 million from the order book on top of the order intake to get to this number. We need to keep in mind when you do the year-on-year comparison that Q4 2022, as you also see in the graph, was extremely strong, by far the best quarter in 2022. So some people might be a bit surprised that we have organic decline in sales, minus 3% from quarter to quarter. And I think for the full year, we're still up 15% in sales. So I think when we summarize the year, I think we will put a good year to the books and with over 3 billion in sales for the first time. So quite happy with that actually. I think we've had also on the sales, America is doing well. Japan has been doing well with a big order book. Small slowdown in Europe. And I mean, we're gonna have, we talked about that when we look at the outlook. We'll have a bit more challenging on the sales from the next quarter or two, given that order book is now getting a bit smaller. So I'll talk a bit more about that on this slide. So to the left, look at that order book. If we take the first step to look at this, the closing level for 2022, that was about 1.4 billion. And now we've been seeing this pretty dramatic reduction throughout the year in the second part of 2023 primarily. And in Q4, you also see the 300 million reduction from previous quarter. We see now that the order book is coming back to normal levels. And if you look on the right side to the graph, we've been looking at this metric backlog divided by rolling 12 months net sales. You also see that we started before the component shortage. We were about, yeah, 0.18, 0.17, something like that. And now we're down to 0.26, having been on 0.65 in mid-2022. So it's been, again, a pretty rapid reduction here and not necessarily bad. It is going quickly. It means that we can come back to growth faster. but just to show that now I think we're starting to get to the level where we should be at, so there's not too much extra to take from. Now we need to see the ordering coming back to support the sales. Looking at the sales per region, the U.S. had a better quarter, as we touched upon, a little bit weaker than we normally see in Europe, 59% of sales, normally 60%, 62%, something like that, and then APAC about 18%. Talking about the profitability, I think all in all we get to a pretty good number. There are some adjustment items to comment on. So we do adjusted margins of 25.3 in the quarter with an adjusted EBITDA of 193 million for the full year, adjusted EBITDA of 777, like the airplane, easy to remember. and 25.7%. So we happen to see that we meet actually financial targets of 25% in EBIT for both the quarter and the year. The one main driver to that has been the continuous strengthening of the gross margin where we reached 65.3% in Q4 and 65% for the year compared to 63.6% in Q4 last year. So we've seen an improvement throughout the year and Yeah, I think we've been doing a decent job to navigate through this price situation that's been going up and down for the last two years. And we're good to see that we can come out on top. Of course, I should say also that we have some help from currency here and we have some help from the fact that we're getting some economy of scale. Also good that we can utilize that. But that is also drivers to this improved margins. Looking at the OPEX, you might have noted that the growth rate has come down quite a bit in Q4 compared to previous quarters in the year, where we've been 20-25% up. We only have a 3% organic increase in OPEX. If we adjust for a small restructuring program that we ran with a restructuring cost of 7 million, where primarily we've taken out some synergies on the integration of Procentec that we've been working on throughout the year, especially on the sales organization in Europe, where we see we can do this a bit more efficiently. And then we have 17 million of acquisition costs related to the Red Lion acquisition that we also adjust for. So 3% organic increase in OPEX and you've seen 20% plus throughout the year. For the full year, we're still 20% up in organic OPEX increase. And of course, for 2024, we'll be a lot more careful. We'll still see a small increase in OPEX for 2024. But it will be maybe mid single digits or something like that when we have been a bit more cost cautious going forward. And I think we've also been through some of the investments to larger states in 2023 with the European system that we've been rolling out, taking also a lot of cost over the P&L and with some investments in the sales organization around the world. Earnings per share, 236 in earnings per share, 286 adjusted in Q4. And for the full year, we had 12.23 and 12.73 adjusted. Based on this, the board came to the proposal of 4.4 Swedish crowns for dividend for 2023. I think Staffan commented on this already, 10% up versus last year. And maybe I should also briefly mention that we have a pretty big net financial item in Q4 where we have the Swedish crown. The strengthening of the Swedish crown is making some impact on the revaluation of internal balances. So that's pretty much the main thing on the net financials. The cash flow, 119 million. And the cash conversion that is a bit lower than what we would have hoped for. I think the main reason is the same as it was the last two, three quarters that we still see a bit of a build up on inventory. So we've placed a lot of orders in 2022 that we can't cancel, we can't reschedule. So we need to take all the volumes. And I think we'll have a bit of a challenge with this going forward. We would like to take the inventory down from these levels. I think we will have a difficult time doing that for the coming quarter, maybe even two quarters will be challenging. But we should see a bit of a working capital release towards the end of 2024. And again, I think the driver of this is that we've really been keen on getting delivered performance up. So I think that's positive that we managed to do that and get the sales going in the right direction. But maybe we've been a bit too optimistic in some of those forecasts. work on that it's not a big problem a bit of a cash constraint in the short term that's that's all for the full year cash flow of 519 million and also here you see a pretty big inventory build up of 227 that is of course impacting where a big part of that can be released we believe in next year or sorry in this year of course we're already in January so on go to the balance sheet Not a lot has happened here since last time. We have interest-bearing net cash, if you can call it that, with 99 million. And then we have the leasing debt of 261. And that's related to our option for the OASIS, 20%, that we do not own, 127 million. So I think this is all good. And this will be looking a lot differently in a quarter or two when we get the acquisition in. Then we can talk more about this. And then just to wrap this up before we hand over to questions, a quick summary of 2023, the main items that you should take away. What we have been seeing now, especially in the second half, is this big order intake normalization. Also been reducing our backlog drastically with some 630 million. I think we must say that execution has been solid on the net sales, the 15% organic growth. do more than 3 billion in sales. The gross money improvements of two percentage points to 65%, quite happy with that. Adjusted EBIT of 777 million, reaching the target of 25%. Dividend increase by 10%. We have the nice acquisition of Red Lion that we signed in December 11th. So I think those were maybe the main takeaways for 2023. And now I think we hand over to operator and see if we have any questions from the call.

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