HMS Networks AB (publ)

Thank you very much. Good morning everybody. Welcome to this quarter two update from HMS. The agenda we have is quite standardized. I'll start with a short summary of our business since there are some newcomers on the call. Then introduction. I'll do a brief update and then Joakim will quickly move into what you're really here for, the financial results. And we end up with a Q&A. So just a brief view over quarter two, a quarter where there's quite many different things happening. We have been talking about destocking and this difficult market in how to predict really the market demand. We talk about a soft market, but we also talk about this new fairly large acquisition of red line control that is coming in with the first quarter here. So in total growth, plus 20%. Of course, this is driven by the B acquisition. But we see negative growth, organic growth without red line of minus 20. So the bad order situation is now showing us in quite weak revenue. Order intake, mixed picture. Of course, we see a total add from a red line. We also see a sequential growth from last quarter with 9%. But in total, it's a weak situation with a minus 22 organic growth. we talk a lot more in the financial numbers about our adjusted numbers and Joakim will explain this more so here when we look at the adjusted number it looks we're moving in the right direction and our EBIT margins are quite fair coming in with the large red lion but Joakim will move into this and we see improvement of our cash flow but before diving into the numbers let me just make a very quick update of our business for the people who are new in the call We talk about industrial ICT, information and communication technology. That's our business. We need to update this slide because we have more than 10 million devices connected through our Anybus brand. So we are very well connected in this industry. As we say here, millions of devices can't be wrong. So we have a very good position with the industrial market here. In addition, we have over half a million cloud connected machines through our Ebon brand, but we also have a leading position. With Red Lion, we are now almost 1,200 employees around the world, around 1,300 in R&D, around 1,300 in sales and marketing, and that's where we wanted to be. The Swedish market is a small portion. We are with daughter companies in 18 countries, and the large market we have is U.S., Germany, Japan, and most of the industrialized world is our big market. Last year, 3 billion in revenue, EBIT margin 25%. and we have a good history of growth, CAGR of 20% per year, last 10 years, where the majority is organic and some part of that is through acquisitions through the years. We talk about our playing field where we work with industrial communication technology in mainly manufacturing, transportation and infrastructure, as well as power and energy, where the big portion of the business would be in the traditional manufacturing piece. Also Redline coming in and opening some new areas especially in energy distribution oil and gas and some of this application in more harsh environments and we also have a business that is fairly small today in building automation that we see nice growth and a little bit different market and different business for us there two types of customers we have the makers that makes the machines the devices where we sell things to them that they build into their machines and their devices and then we have the users where we sell normally through system integrators to applications where the end customer is using the automation equipment. The go-to-market is on the left side, our device manufacturers, which is a quite big portion of our revenue, where we have direct go-to-market with our own sales force. We make design wins, and it's a very sticky business. We have the machine builders that we want to be part of every machine. In reality, we are more on the option list. If the machine needs this kind of function, we should be on their list as an approved supplier. And then end users and system integrators, where we see and need to have more connections to the end users to really understand the end user requirements. The acquisition with Red Lion does not have any device manufacturers. They focus on machine builders and system integrators. And for our strategy, we have six pillars. We talk about organic growth right now, quite weak. We talk about M&A, where we have a full plate with Red Lion, but we keep on looking for a new, smaller acquisition going forward as well. We have a people agenda where we talk about happy and high-performing employees. We work with our sustainability targets and the planet. And the last two years, we added also operational efficiency, where we use much more of AI tools and want to do things in a more efficient way. And we're also doing some changes in our go-to-market and learning from best practice in different countries to accelerate our sales excellence. Targets for 2025 coming up here for next year. For Planet we talk about our science-based target where we are working to get our targets approved, but we also talk about how we help our customers reducing their CO2 footprint where we have quite big effect. Last year we saved almost 1 million ton of CO2 for them and we want to triple that by 2030. We want to have happy employees and happy customers. We measure net promoter scores and we also promote quite Quite much our ambition to get more female managers, where we are today, I think, at 23. But the aim is to have over 30% female managers in the company, because we know that also attracts more female engineers and female salespeople. Growth, we have an ambition to maintain a 25% EBIT margin. We work hard now with the big portion of Red Lion coming in with a slightly lower EBIT. So that's a challenge we have to make sure we can get back on 25%. And we have our long-term target for 2025 to be plus 3.14 pi billion, where we feel quite confident with this new acquisition. This feels almost an obsolete target. Short business update. North America, we had a hiccup last quarter. It's getting back. It's a good market. We have good orders, and we see good projects in North America coming up here. But Europe is slower. Germany is slower. a bit on the negative side and people are reluctant to wait and see there. So the recovery that we felt should come here, the coming quarters, especially Europe, it will take a few quarters more. And China, which is a small market for us, I think 4% is developing well. And Japan, we see some signs of improvement, but there we have a lot of the business where We have big impact on destocking and stocking, so it's been difficult to really get our arms around the real demand on that. On these calls, we talked quite much the last years about 5G as a new technology. We see this is coming up as a runner up for special application, especially in mobile application. We have AGVs and robot application. We need this new technology, but it will take more time before 5G becomes more of a general purpose standard. we are seeing good progress now with our first release for the board market and it's quite interesting to follow but as we said many years it will take some time for this to really kick off Joachim will talk more about Red Lion. We try to make it easy to understand in our reports. It's a nice company. Integration is following our plan. We see many opportunities to improve things. But of course, these are quite long processes. So we need a couple of quarters before we can explain to you really in numbers these synergies. And we had a restructuring program, especially in Europe, to do some changes. We talked about this. It's finalized and we're moving on from there. With that Joakim, we should continue.

All right. Thank you, Staffan. Let me dig into the financial results. And as you might have seen, this is from a CFO perspective, an interesting report, a lot of things going on. We also have the integration of Reliant coming in. We present the report also a preliminary purchase price allocation, which is giving a lot of amortization on the excess values. And I just wanted, before we go into numbers, just wanted to explain a little bit what we have been doing. So we have always been reported EBIT as our main metric for measuring profitability. We will also have our targets and been trying to keep that as a clean, clean number to just show reported EBIT and work with that. I think with the acquisition of Reliant and the the pretty big amortization of the excess values, we've decided to make a change and to also report adjusted EBIT. And the reason we choose to go with adjusted EBIT is that we still want to take responsibility for the amortization of the balanced R&D costs that we do have as normally the biggest investment in the business. And that's why we don't go with EBITDA. So we're still going to work with EBIT. We have the adjusted EBIT, and we also will have the adjusted earnings per share that we'll have a look at as a consequence. Just wanted to make a note of that. And then, as you saw, also we made a take a new grip on the report, trying to make it easy to understand HMS with and without Red Lion, and then we'll see what happens for next year. But for now, this is how we'll report it. Let's start then to have a look at the order intake, which is also a bit Difficult to analyze in a sense. I think we have all in all, we see 769 million, which is a growth of 9% reported, which is maybe not so interesting since we had the acquisition coming in with a lot and in 253 million to that. So the organic decline compared to Q2 2023 was minus 22%. What is interesting though is that sequentially we are up 9% organic. So we see a continued improvement from Q4 to Q1 to Q1 to Q2. We might have hoped for a little bit more than 9% improvement. It's still in the right direction. And as we do talk about in the report as well, we see that this recovery has been slightly dried out in time. So we're still convinced that we will see a good future. We think that Q3 will be better than Q2. And then we think that Q4 will be the quarter where it really starts to release. That's what we're hearing in discussions with our customers, looking at inventory that they carry. We also had about 100 million impact from destocking. I'll show you that graph in a second. And before I wanted to mention that, let's just talk a minute on Red Lion. Staffa mentioned that our business in the U.S. that had a bit of a bump in Q1 was now back and showing good growth. on the order side and on the red line side we we had a little bit of a slow quarter and we hope that this is just going to be a bump and um there was a period of a couple of weeks where we were a bit lower than we should and maybe we are putting too much effort into the integration i'll talk to talk to that in a second as well um really happy to have that good progress on integration but we also need to keep track on the on the ongoing business This graph I think most of you have seen now for a couple of quarters. We've been doing it since Q1 2021, trying to show what's the underlying market really, the dark blue, and then the boost effect, the lighter blue, and then the green, which is the destocking. And here you see that the underlying market is pretty much as it's been the last couple of quarters, 625 is what we estimate. We had about 100 million in destocking, primarily in continental Europe and Japan. and um we actually expect this to be the last quarter where this is significant uh let's see what q3 brings but we think that will be a significantly lower number and it might also be that that we will we'll stop with this graph going forward let's see how the future plays out but but this is uh this is really something that we we think will have passed now which is good and then we can just be looking at the underlying demand and understand how the market is developing based on that. I also included this comparison where we restate Q2 2023 in compare with the normalized Q2 2022. And we see here that we had a decline of about 10% in the market. With that said, remember that Q2 2022 was actually the strongest quarter that we have reported in terms of underlying demand. So for sure the market is not as strong as it was a year ago, but it's not as dramatic as if you look on the reported numbers. This is, and just to say, this one on the previous slide is of course excluding Red Lion, so the organic HMS business. Going over to sales, 845 million, keeping up fairly well. We have 20% plus reported given the integration of Red Lion organic minus 20%, and this is also But we still have tough comps here throughout the year of 2023. We know that. And the organic growth will probably take a few quarters more until we can see growth in that. We expected book-to-bill to maybe be quite close to one. It was 0.92. I believe that this might be the last quarter where we've had book-to-bill less than one. That should be more than one going forward. And Reliant helped with about one third of the business. I was really positive. is that the E1 business is doing much better. It's coming back, and we actually see a smaller gap on the installed devices and the sold devices, which is good, meaning that the destocking is getting lower. And then we have a record quarter, actually, for Intesys, which is really good. It's been a bit of a different cyclicality for Intesys. We didn't see as much of a buildup. on orders through 21, 22, and it's just been ticking on very well throughout the whole period. Very nice business we have here in the building automation space. So I think in terms of net sales and goes for orders as well, it's really down to Anybus and Ixhut where we do struggle a little bit and where we need to get those big customers back to ordering, which we think they will do throughout the rest of the year, and especially in Q4. So all in all, the market is still in a hesitant mode. We hope that that will sort itself out with more calm around the macro situation and the fact that the destocking is wearing out. I put together one slide on Red Lion just to give you some also historic quarterly data to understand what's going on. And I think the sales development is here we do fairly well. The reason why the beginning of 2023 was really good was this big boost of demand that was delivered out during that period. The order intake boost you don't see because that was before 2023. And again, I think the point where we're not super happy is that we didn't see continued recovery on the order side. We believe that we've been putting too much effort on integration. We're really happy with that progress. The main thing that we are working on, the main value add that we see is the cross-selling. So we've been doing a lot of joint customer visits and distributor visits in the US, which is the biggest market. In APAC, we've been integrating the sales organizations completely. Of course, some tweaks to be done to get that to work perfectly, but that's live as of now. And in Europe, we also do a lot of joint efforts trying to use the HMS infrastructure for line access. I think this has been a high focus now for the first quarter with relying in our ownership. And I think we also need to balance that with having good focus on getting the big wins in the markets where we were lacking a little bit on the other side here in Q2. And just having a look at the backlog, I think I've changed this graph slightly now. You see we have 713 million of backlog, which I think is a kind of normal level. 115 of those is within Red Lion. And since they rely on businesses almost exclusively to distributors, which keep their own inventory, that backlog will always be quite small. So I think what you see here is kind of normal levels in terms of if you compare to sales. So I think this is something that you'll continue to see levels of this, maybe 18% of sales going forward as well. The sales per region graph, this is completely changed now to what we normally see. We have a pretty good balance between the US and Europe, 42% in Europe, 44% in Europe, and then APAC being 14%. Again, I think this is what we can expect going forward with two sort of equally large markets in the US and Europe for the HMS part. Then going into... Yeah, maybe what we have most to explain, trying to understand the results, because there's a lot of things going on in the quarter, and I have a separate slide to try to explain that. So what we're looking at now is the adjusted EBIT, 172 million, 20.4% margin, which I think is an okay margin given the low top line at this point. I think this is a quarter where we knew it would be tough on the top line side. And hopefully we can improve from here. And then the profitability should work with us as well. So we have really, I think what's a good point first, maybe, gross margins of 61.9. Here we see already some improvements on the red line gross margins. We see also okay margins on the HMS side, 63.9, which was an improvement from Q1, given that the volumes are fairly low. So I think we're happy with that development that we can still perform these margins with this low volume. I think that's good to see. On the OPEX side, we've been doing a pretty tough effort to try to keep that in chess, given that the sales are a bit lower. So we're reporting now 423 million in OPEX, which is an organic decline by 21%. Of course, a pretty big Big decline there. Majority of that is not personnel, even if we have taken out some costs in Q2. I'll talk to that in a second. I think we're trying to hold back on limited traveling, really trying to hold back on use of consultants, all types of consultants we're trying to hold back on. And I think our organization has really done a good job in listening to the instructions and trying to be careful with the cost. And this is a result of that that we see. We do have 69 million that are affecting comparability. And I want to talk you through that to make you understand what's going on. It's really two things that we have here. We have first the Reliant acquisition, where we have amortization of excess values of 24 million that is impacting. This is solely related to the Reliant amortization of 24 million. Then we have a few million more in amortization of excess values from previous acquisitions. There's adding a few million on top on that side. Then we have transaction integration cost of 50 million. We had the final cost for the transaction for insurance and the last lawyer fees and so on. It was paid in a quarter and then also some integration costs we have for continued integration work. And then, as you might remember, we communicated just in the beginning of the quarter that we're entering into this restructuring program that has been finalized. We've taken out 44 positions in total, 22 of them in the headquarters in Sweden. And the impact from the program would be a saving of 41 million full year effects, whereof 23 million will impact 2024. And of course, some of that impact comes into Q2 as well, one of the reasons why we could have a lower cost in Q2. Then the bill for this program totaled 27 million in restructuring costs that we take in full in Q2. So I think all in all, this was slightly lower than we communicated in the release. So I think good to see that we are within that space. And I think we're all happy with that. This program has been going fairly well. about equal parts on early reliance synergies, the restructuring within Alibas, and then some fine tuning of the organization primarily in Europe on the cost side. Moving on to the earnings per share, here we have looking also at the adjusted earnings per share. So we have restated this, and we have 2.12 SEC in adjusted earnings per share. due to all these excess values, amortization and restructuring costs and so on. What's a bit new for us is to have significant interest costs. We have a net financials of 61 million, where the main part is interest costs, which is 43 million out of that, of the acquisition of Reliant. Of course, that's a number that will come down with amortization of the debt and Also, we believe that the interest rates will be coming down. Of course, not in our hands, but that should be coming down, the interest costs and such. We paid a dividend of 4.4 SEK per share after the AGM that was held at the end of April. Then let's have a look at the cash flow as well. And I think this was a bit of a positive for us. We're starting to see small inventory reductions. As communicated before, we see the majority of inventory reductions in the second half of the year. But we started to see this trend downwards a little bit already in Q2, which was good, at least to see that we are not building more inventory and building working capital. So a small working capital release and quite solid cash flows otherwise to 152 million. And yeah, the best for a couple of quarters. And then to end off with a bit of a dramatic slide looking at second quarter on the net debt, almost 2.8 billion in net debt. We've been looking at net debt in relation to adjusted EBITDA, and here we have reported 3.05. We've also made an adjustment for net debt pre-IFRS 16. As you see, we report separately the 255 million there in the light blue. and that in relation to adjusted EBITDA as well, which is 2.58. I think this is maybe a more relevant metric, at least when we look at ourselves, looking at how highly levered the company is. So a little bit higher than we had expected due to the performance in Q1 and Q2 that has not been where we hoped it would be a half year ago. But I think, as we said, the return or the recovery is expected to come the second half of the year instead and then we hope that the result will follow that also wanted to mention i think you've all seen that we made a directed issue that generated 1.39 billion sec in capital to repay a bridge financing of the acquisition and we now have increased the number of shares by about three and a half million to just about 50 million shares in total in the company That was all we had on the financial update. Staffan, do you want to have a few summarizing words before we let in Q&A? Well, I think we can.

There are two things we really want to focus on. We really want to make sure that we understand the numbers. It's kind of complex with Red Lion and all these things. But inside the organization, we have a big focus on what we call win, grow, keep. We see that the market is weaker. But our commercial organization put a lot of effort now to win new customers, win new projects. We work with some existing customers, how can we improve them, but also making sure that now after COVID, we can be out and meeting existing customers to make sure we keep them. And what we see in our week order is not that our customer is leaving us for a competitor. So it's important also that we are out and talking to these customers. Even if they see a weak market, we need to make sure that we stay and keep them. And secondly, Red Lion, we're quite excited about Red Lion. As I said before, it will take a couple of quarters before we see this in numbers. But the more we learn, the more excitement we get around this because we see a lot of common things in the cross-selling, in future product development and supply chain and things like that. So we're really happy about this. But unfortunately, we have a situation in the market that is quite weak at the moment. So we need to focus on the things we actually can have an impact on. And we do a quite good job there. So with that, should we move into Q&A?