HMS Networks AB (publ)

and doing more investments in becoming a manufacturing company again, we think that this is a midterm opportunity for HMS. But tariffs is complex, and I just want to show one picture that illustrate how we see this. And sorry for the bit crowded picture, but let's focus on the circle one here. Made in Europe, sold to North America. This is around 15% of our group sales of finished goods. And right now we see that there's a tariff of 10%. Some of our products is under this exempt rules as well, but it's still unclear with this custom codes and things like this. So that's one part. Second part, and the bullet with the two here, made in Europe that is sold, well, shipped to US, but it's for customers in Canada and Mexico. This is less than 5% of our revenue. Same here, 10% tariffs. But here we also have other opportunities to do direct shipment to Canada or Mexico. So all in all, you can see that made in Europe and for the U.S. market is some 10% of our revenue. Number three here, Asia and China to U.S. This is mainly components that we use in our red line or our North American manufacturing. Very high tariffs from China and then 10 percent from rest of them from Asia. And here we have some impact on the cost of the material. And number four here, this is what we sell from U.S., mainly Red Lion, to China. And this is less than half percent of our group sales. So that part of the business is really, really small. So our strategy right now, short term, is to make sure that whatever will be the cost increase of tariffs, we will pass that through customers to price increases. to cover that cost. And we also do some logistic flow adjustments to make sure that we navigate well in this. But also midterm, we think that we have a great opportunity with our own manufacturing in US and we can also move some, especially late configuration of some products from Europe to US. And the fact that we are now investing in our manufacturing in the North American plant in York, will also give us a great opportunity to have much more of flexibility between our european manufacturing and north american manufacturing so we feel that we have been analyzing this well and we are prepared for this uncertainty with that i would like to leave over to joachim to talk about our financials for quarter one all right thank you stuff and then let's dive into the numbers

if we look at the order intake i think first of all we're quite happy to see that we managed to beat the q4 order intake with a 930 million that we deliver in in the quarter and you see if you if you look on the upper left graph you see that we have a tick up between q3 and q4 last year in order intake of course part of that is explained that we had a peak acquisition that came in and added some some orders to this as well But also that we saw this big improvement in relying with the project business that we had been missing a little bit in the first two quarters with relying into the group. and we thought that that would be difficult to match going into Q1 since we had a substantial part of project orders in Q4 but we actually see that is developing really well and we continue to have now not as big product orders but various product orders for also for different brands we talk a bit more on that when we come to the IDS division So I think all in all, with the organic growth being back to the 12%, which is really good to see, and this product business developing well, we have these pretty good numbers in orders. We've seen a strong development in both in Americas and in APEC, where we face also difficult comparable in APEC. So that is good to see that the Japanese market is showing recovery and that this destocking is wearing off also in Japan. Where we still see a bit of weakness is in Europe, where we definitely think that the market has more to give. And we'll talk about this more when we talk about the outlook for the coming quarters as well. But all in all, I think good performance from Redline and from Peak, the new acquisitions, the organic development is solid. And we see a bit of a headwind from FX with the Swedish crown strengthening towards the end of the quarter. So not a huge impact in quarter one. We think there will be a slightly larger impact from the stronger SEC in the coming quarters. Then going over to sales, here we have 890 million in reported, which has done an organic decline by 17%. So it's maybe not super intuitive to see the 12% growth in orders and the 17% decline in sales. The main reason for this is that we had the Anybus embedded business. So the majority of this INT division, we were looking into a pretty good backlog going into 2024. And especially in Q1, we had some really strong deliveries of embedded, which is not there now, of course. And that's why you see the decline. If I take that away, the rest of the business is developing quite solid and in a similar way as we see with the order intake. It's also good to note that we have a book to build of 109 in Q1. So we're continuing actually now for, I think it's the second straight quarter to build some order book, which is going to be very helpful facing a somewhat uncertain future with the tariffs and all that. Also here we can see that Red Lion and Peak are developing well. So that's nice to see that the acquisitions we've made is doing good the first couple of quarters here. Then we have some new slides that we didn't have before since we now are into segment reporting and we report three different segments or three different divisions separately. And let's start them with industrial data solutions, IDS, where we have an increase of 11% in order intake. And let me just explain what you're looking at here. Here we perform the numbers from 2024 as well. So everything here is comparable. There is no M&A effects in these numbers. And here you see also then the growth that we're talking about in Red Lion with both the Antron business and the Red Lion brand is doing well in terms of project business. So before we've seen a lot of projects within the Antron brand for the switch business, and now we see it's more wider over the full offering, which we of course like. We can also note that E1 is improving both in terms of sales and orders. So that's also good to see that that is continuing on a nice track. If we talk about the results, this is the first time that we showed the results on the division level. So we do 93 million in adjusted EBIT in Q1, which is a margin of 22.2%. And if you think about that, the majority of this division is the Red Lion acquisition, which is about two-thirds of the division. And when we acquired Red Lion, we were looking into some 19-20% EBIT. We're pretty pleased that we managed to take this division to 22% already now. i also wanted to to make you aware that that this is a pretty america's heavy heavy division you see that two-thirds of the sales goes into the americas and um this is a bit different compared you'll see to to the other divisions so all in all a good start in in ids and um quite happy with sorry with the margin development Then going over to INT, a little bit of a different story. And here you see the point I was trying to make with the difference in sales and orders from the embedded business. So if we stay on the graphs first to the left, look in the bottom left, you see the net sales of 345 million in Q1 2024, and then a pretty big decline from there, just into Q2 that year and then further on. We're happy to see that the trend is kind of broken. We see a sequential growth in sales. If you look on the upper left, you can see the similar trend in orders starting even in Q3 2024 and then slowly ticking up. And also here we can see that the Americas are doing okay and APEC is doing good with Japan coming back. Still softness in Europe. And here you see that the EMEA region represents 58% of sales. So here we still think that there is some improvement to have from when the European region is coming back as well. Timing of that is of course difficult to say. But I think we are carefully optimistic for the future for INT with more and more customers coming back and placing orders. So even if the underlying market is not doing great, we think that in comparison with 2024, we have a good chance of performing better in INT. Just talking about the profitability for a second, we do 72 million in adjusted EBITs. which represents a margin of 27.9. Obviously, that's a very strong number. And the reason for this good performance is the really big customer base, the legacy we have in this division with a lot of design wins that is generating very good sales. So this is a division that we will be a cash cow in terms of profitability. Then going over to new industries where we have the building automation and the vehicle communication business. I think all in all a solid quarter. We also have the performer numbers with peak in here so you can compare everything. And a little bit of a tick up in orders and a small increase in sales. And we should also say that I think Q1 in 24 was pretty good, pretty good comparable. It was a strong quarter in itself. So I think we're okay with this development in terms of profitability. We are pretty much in line with the group average. We've been seeing good development for vehicle communication in Americas, maybe a bit of early orders to try to offset the potential tariff situation from some of our distributors around some 10, 50 million SEC in those orders that were placed a bit early, we believe. The building automation business has been doing also started start to the year. Very strong development in Middle East, which is a fairly new business for us. We've been there for some four or five years and it's developing really good and actually turning into the biggest region for the building automation business. Also here you can see that we have the majority of the business in the EMEA region with two thirds of all the business going into EMEA and then Americas and APEC with a bit smaller parts. Then looking at the sales per region, you see we have now 41% in America, 45% in Europe, and 14% in the APEC region. And I think this is fairly what we expect from the future as well. Then talking about the profitability for the group. We do an adjusted EBIT of 218 million, 24.5% adjusted EBIT margin, which we are quite happy with. The volumes are improving. They're still not great. And to manage to be this close to the target with some more potential on the sales, we think that's pretty good. One of the main drivers and maybe one of the best from our perspective, the best points in this report is the gross margin. where we managed to improve the gross margin from 62.6% to 63%, also with the Red Lion and Peak businesses diluting the margin a little bit. So it's actually better than what it looks like, the comparison, because Q1 2024 was without the acquisitions. And the reason for this margin is, first of all, a pretty favorable product mix. from the fact that we have less embedded than what we had a year ago. So that is helping a little bit. Most gross margins are fairly similar within the divisions. We're probably going to get the question. We're not going to answer it exactly what it is on the different divisions. But what we can say is that the embedded business tends to be a bit lower in gross margin. So that's one item. And then we've been seeing good improvements in Reliance and also some improvements in Peak. in the uh in the recent recent quarters and that continues now in in q1 and here we've been working with some selective price increases we've been trying to we've been doing some investments in the reliant manufacturing space and trying to shape up on basically the operational excellence here and there so happy to see the results of this the other thing that builds to the the strong margin on the EBIT margin is the cost control and the OPEX, where we managed to do what we said in Q4, get the costs out in relation to the reorganization and get all that to work. So we're looking at an organic saving of 6% in OPEX. And then we also have Of course, salary inflation is already included when we look at that number. So all in all, it's good to see that the plans have played out the way we wanted to and the bills to the 24.5% margin. Earnings per share, it's improving again, 3.17 adjusted for the amortization of overvalues. and so still keep a fair amount of debt you'll see when we get to that slide the interest cost comes down to 34 million and that financials of 30 million negative so that's something we're gonna leave with for some quarters of course. Looking at the cash flow, solid cash flow with 187 million. And we continue to release some inventory and working capital overall. So we have a 45 million help from working capital release in Q1. The majority of that is related to inventory. And we think that we can continue a couple of quarters to reduce a bit more of inventory. That will help the cash flow throughout the year as well. That's quite positive. And this comes down to a cash conversion of 73%, which we think is pretty fair. And of course, the cash flow is supporting us to deliver the company. As you can see here, we have reduced some 300 million in debt and a bit more interest-bearing debt, actually. The net debt through EBITDA, if we look on a pre-IFRS 16 basis, also with Performa for the acquisitions, which we think is the most relevant comparison, is 3.05%. And here we come from Q4 from 3.37. So it's a 32 basis point reduction in net debt through EBITDA, which of course we're quite happy with. Now we have, as you probably know, the Swedish crown strengthened quite a bit towards the end of March. And we have all the debt in euros and dollars. So we get some currency help here as well to de-lever. And this reduction of 320 million that we have in interest bearing debt is about two thirds related to currency and one third related to the cash flow. And my point here is that we will not be able to manage to continue this pace of of 30 plus basis points in reduction of net debt EBITDA since we don't expect to see the same currency effects every quarter of course but we're going to continue to come down in leverage and we expect that we should be able to come down below 2.5 towards the end of the year in net debt EBITDA and for this year i think we will continue to have a full focus on on trimming the new organization getting folks on new new wins integrate acquisitions and reduce the leverage to to come back to a level where we can be a bit more offensive And then just to summarize the first quarter, three main takeaways that we would like you to take with you. First, the order intake improvement. We have a recovery from our big customers. We see a 12% organic increase. We see solid product business in the US. And the book to bill is 109, excluding currency effects. So moving in the right direction. Then we have a solid profitability and good cash flows with adjusted EBIT margin over 24.5%, almost back to the target. And despite some diluting acquisitions, we're improving gross margins and we're maintaining a good cost control for the future here. Cash flow at 187 million reduces leverage to 3.05%. And we will continue that trend throughout the year. And then the third one, we have to mention the tariffs. Even if we believe that this is a business opportunity for us in the medium term and that we're well positioned against competition in the US with our own manufacturing and with investments coming into automation in the US in the short term, this is causing uncertainty in the market and decisions are being put on hold or postponed, which is of course not great. It's super difficult to say exactly how this is going to impact the year. I'm sure we're going to get questions on this. We continue to follow it closely. If we exclude the tariffs, we are quite positive to the development. We know that there is more to have in Europe, but this will be a very interesting thing to follow in the near future. Our strategy will be to protect the bottom line. So that means that you can expect slightly higher sales and slightly lower gross margin as an effect of that. Now we've been talking a lot, so I'm going to hand over to operator and open up for questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Joachim Gunnel from DNB Markets. Please go ahead.

Thank you and good morning, the dynamic duo here. So when we think about the linearity or the strength of new orders throughout the quarter, I'm just curious to how that shapes out. Because there's some companies reliant upon discrete automation CapEx who have said essentially that it was lights out for the last two weeks of March. Can you say anything with regards to the linearity throughout the quarter and perhaps also how April looks to be tracking for you?

I guess I can take that one. Maybe surprisingly for you, Joakim, but I think we've had a pretty solid pace throughout the full quarter. The third week of March was actually really strong for us. We haven't seen that trend really. um april also started pretty much on the same pace as we've been seeing in q1 and i think what we are what we are thinking about is also the fact that we we mentioned the peak business that some distributors were actually placing orders to in case there were tariffs and um so so that might be offsetting of course and we also think we have a few of those orders in in beginning of april companies that would like to or distributors that would like to build a bit of inventory in case the tariff situation were to become worse. So it's difficult to see exactly what is what in this. I'm not sure if you want to add maybe to that Staffan.

I think for distributors who place pre-orders, I think we have also distributors who are a little bit burned by high inventory in the past. So there's also reluctance at the distributors to place a lot of orders just in case there comes this tariff. So I think that effect has been a little bit balanced by the history we've had the last two years with too high inventory levels.

That's very helpful. Thank you. So no material, quite immediate impact here on orders so far. But when you're talking about this with customers about the pipeline for the remainder of the years, do you think that you are increasingly seeing customers worried about the environment, putting a pause on investment decisions? And are there any industries that you would call out as incrementally weak?

I think we have talked about automotive in the past, especially in Europe, to be weak. However, we've got some data that indicates a bit of strength in Germany and some others indicates weakness. But I think when we talk to customers, I was in the US two weeks ago, and people are everything from upset to shocked about these tariffs. Our exposure to China is quite low, but companies who have exposure to China for a lot of manufacturing are quite concerned. And it takes time to change these things and the flows. So we think that, and we see this ourselves as well, that some decision we have taken in doing investments in U.S., When we buy these machines, multimillion machines from Germany, now we have more tariffs on them. And that delays the process. Even if we make the decisions already, it still reroutes the sort of things and delays. I think everything is a little bit delayed, I think. Short term, midterm, maybe it will be good.

That sounds encouraging. And just finally, so if we look at the tariff and FX situation today and then basically the broader implications for you, margins were stellar here in Q1 for you. But is it fair to consider that these Q1 margins, both from a gross and EBIT perspective, could be peak for this year and that we could see a gradual deterioration throughout the remainder of the year, but safeguarded absolute levels?

Maybe I try to take that one. I think we don't want to speculate in and guide exactly what the margins could be. I think maybe we'll conclude this by saying that, you know, with everything else not moving, the fact that we will push these tariff effects, pretty much isolated tariff effects to the customers means that we will see a slightly higher top line. And well, mathematically, that will dilute the gross and EBIT margin a little bit. And then I think you need to make your own analysis, Joakim, on the EBIT margins for the rest of the year.

Will do. Thank you very much and have a great day.

Thank you. The next question comes from Simon Granath from ABG. Please go ahead.

Thank you. Good morning, Staffan and Joakim. Initially, I had a question on Red Lion, which performed well here in this quarter. And last quarter, you acknowledged some one-off orders. Are you seeing similar effects here, or what is behind the strong orders? I note your comment of the advantage versus competitors of manufacturing. So I'm also wondering if that is helping orders. Thank you.

I think what we've been seeing in the quarter is we've been seeing more project orders, but average size has been a bit smaller. And I think that's probably preferred for us to see that we're winning more, but even if the parties aren't as big. So we've been seeing it across the wider offering. So it's been more or less across the whole red line offering, which has been very good to see. And now I kind of lost your last question, what that was. Can you repeat that again? Sorry.

Yes, of course. Yes, so it was whether you have seen any tailwinds to orders due to the competitive advantage versus competitors on the supply chain.

Right. I can't say that we have seen that, but we've heard when we were over in the US two weeks ago that more and more companies are starting to think buy American for all the American players. So that's why we say that we believe that we could have a competitive advantage going forward since some of the key competitors in some of the niches we are in are from Europe and Asia. So nothing that we've seen, but it's more of an observation for the future.

That makes a lot of sense. And just a clarification on the pre-buying, and sorry if I did not pay enough attention to your previous answer, but the 50 million that you highlighted in the quarterly results, is that related to peak systems, American distributors, and is your assessment here that it was only that business that saw tailwinds, or did you see similar trends in other parts of your business?

No, I think you described it perfectly. That's what we have seen for sure. um and then there might be some other effects but there might also be some other effects with people not placing orders because of uncertainty I think what Staffan was was trying to cover before it's uh it's difficult to see exactly what is what but that we know for a fact because we had discussions very good thank you and I know

that it's still early stage, but you do highlight some potential price increases due to the tariffs. Could you elaborate to an extent on the potential magnitude on this? Are we talking about similar price hikes during the high inflation, or should it be more moderate than that?

Should I take it, Stefan? yeah go ahead yeah so good question difficult to answer good question i'm not sure if you're going to be happy with the answer though i think we we're in the middle of communicating this to customers so we we don't want to out exactly what we're doing um and maybe what we what we were trying to explain with this um slide that stuff i presented with the different flows that we had is that some of the tariff impact with common components So obviously, in terms of protecting the gross profit on those orders, we don't have to push as big price increases. And some of the flows, especially finished goods from Europe, the old HMS, so to say, before the acquisitions of Reliant and Peak. Here we have finished goods going from Europe. into the us and obviously the the increase or the impact from the uh the tariffs will be higher in comparison to the sales price of the product so then we have to do a bit more but all in all as as we said before we're going to protect the the gross profit as such and that will leave us it will not be double digit increases it will be single digit increases but we need to have the communication to customers before we can air everything in the in calls here

I can only highlight what I meant when I showed this tariff slide earlier, that mid-term that we are planning to move some production over to U.S. for popular U.S. products, or at least the late configuration of those. When we do that, we do that to generate more resilience towards customers. But the cost of doing this manufacturing is actually higher in the US than where we are manufacturing today. So the reason why we have not manufactured in the US in the past was high cost. But the math is changing a bit now. So we also see that we are doing So some of these moves of logistic flow and manufacturing will be based also on other things than just the lowest possible cost and the highest possible quality. So in the US, we have high quality, but a slightly higher cost. Therefore, we need to adjust some of the pricing as well.

Perfect. Appreciate that. And then as a final question from me, you have announced a capital markets day after the summer. Any first glimpse into what we can expect for you to present during that day?

Well, not really at the moment. We are working with the strategy towards 2030 and that's what we will present. So we are sure it will be an exciting day, but we are not ready to talk about it at the moment. But look forward to see you then and we'll make the presentation then.

Absolutely. See you there and looking forward to it. Thank you for having my questions.

Thanks, Simon.

The next question comes from Eric Larson from Seb. Please go ahead.

Thank you and good morning. Hope you're doing good. I actually had a question on the manufacturing side that you just talked about, just kind of on the process of moving production, I guess, partly to the U.S. What's the timeline on that? And if it's roughly 15% of sales going from Europe to the U.S. today or North America today, To what extent do you think you can move that, if that's possible to answer?

I think what we're looking at right now is some products that are high revenue in the US and low number of different part numbers. So with this kind of not the product, but we have a quite long tail. And what we see in step one is probably doing what we call the late configuration, which means that maybe packaging or programming and labeling and these kind of things. So that is easy to change. But this is What we do in manufacturing right now in North America is to implement our common ERP system. We are investing in new machines in this York facility to upgrade that to the same level we have in our factory in Sweden to make this become a sister factory. And we need to finish up these effects, these activities first before we do this kind of move of products. So best case, I would say late this year and probably more focused on 2026.

Okay, perfect. And then just a general question on costs, Opex, that you've been saving quite well here over the past year. How do you think about the return of costs and what costs are you seeing coming back here, assuming that demand should improve?

I think we have a couple of things that we know that we're going to have to invest in on the product development side. So that if we see that the demand is stabilizing a bit now, we're probably going to take the opportunity to make those investments. So I think you can expect a slightly higher cost increase throughout the year than what we see now. And we're going to be pretty careful with this, but these are some important things to safeguard future growth to get the right products out. So that we're probably going to see.

Okay, and then just finally on this new organization that has been going on for a few months now, what sort of the internal response or how is the process evolving? Is everything going smooth so far or is it more to be done, so to say?

I think keep in mind that we are both doing a new organization at the same time as we integrate two new acquisitions that we did last year. So I think we are positively surprised that most things have been developing better than expected. Of course, we have some challenges when we used to have this other organization where especially sales and support was one geographical organization. These teams are now split it up into three different division. Of course, they always create some challenges, especially on small markets where it's not easy to divide the teams into other segments and stuff like that. We have had a little bit of, I wouldn't say challenges, but we had to work with these things to make it perfect and done some changes. Sometimes you discover that you made something wrong. Let's fix it. So everything has not been perfect, but we are getting there.

Okay. Sounds good. That's all from me. Thank you.

Thank you.

The next question comes from Gustav Bernablad from Nordia. Please go ahead.

Thank you. It's Gustav from Nordia. Just to start off, I mean, very helpful with the tariff slide there, but can you just clarify, I mean, regarding if we sort of look at the flows that is going from China and Asia to the U.S., you comment it's mainly related to Reliant, but can you just elaborate a little bit more about this? And if it's a majority of what you're selling that is shipped that way, so to say?

Well, here we need to be a little bit careful because, of course, we know what we have as direct exposure. But we saw this a couple of years ago in the shortage of components that there were links to China that we wasn't aware of. So we need to investigate this further because we see a risk that there are certain suppliers that is not in China, but we think have indirect relationship to China. So we expect that could be inflation through this. So we're not ready with that analyze and we can't really give you any more data on that at the moment.

Yeah, okay. That's fair. Thank you. And then just regarding red line, I mean, when we look at the profitability, if we take a sort of run rate margin on adjusted EBIT, is the sort of 22.8% that we saw in 2024, is that sort of a good level to look at it? Or should we think sort of a notch up from that level?

Well, if I start Joakim, you can provide more facts, but I think it's important that we going forward, we don't really look on this as Red Lion. Red Lion is one part of IDS and there will be certain costs within IDS that is not really distributed on the legacy business or Red Lion. So I think going forward, we will look on this as the division and they are accountable for their revenue and their profits. Joakim, would you like to add anything more on the Red Lion part?

No, I fully agree. I think over time we have an ambition to get to the 25% for the group and we would like our divisions to sort of move towards that direction. Then some will always be a bit lower, some will be a bit higher because of the dynamics. um so i think in in the short term we're gonna try to trim and and improve as much as possible and see if we can push that a little bit but i think it's as we said we're pretty happy with with the performance uh we already managed to improve the margin in that business um a bit so yeah i don't i think that means that i don't have a lot to add stuff on okay

okay perfect and just the last one here the regarding sort of the project related orders to Red Lion but I mean is this something new to that business or is this something that they have always had or has it increased just why you comment a bit more on it or

Yeah, the reason we comment a bit more on it because we saw less of it in Q2 and Q3. And I think we did get some questions in Q2 and Q3 why we were not delivering as we thought we would be doing in Red Lion. And then we said this was the reason. And now we are back and seeing this as we expected when we acquired the company. So we are acknowledging that that is in place and the things are developing as they should.

Okay, perfect, perfect. All right, that was all for me. Thank you very much. Thank you.

As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you. And thanks, everybody, for attending this quarter one update. And we live in an interesting world. A lot of things are happening. But as you hear from both me and Joachim, midterm, we are quite optimistic about that things are moving in the right direction. Short term, we work hard to make sure we understand what's going on and act on it. But let's keep on working on it. And I look forward to see you in the Q2 report. And after that, please note that we have our Capital Markets Day coming up a bit later. Have a nice spring. Thank you. Goodbye.