HMS Networks AB (publ)

Welcome to the HMS Network's Q4 presentation for 2025. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to CEO Staffan Dahlstrom and CFO Joachim Niedborn. Please go ahead.

Thank you. Good morning, everybody. We are sending here from a beautiful winter Stockholm with snow on the streets. It's a fantastic day. And we also have some good news to present. Quarter four report. Myself, Staffan Dahlström will start and Joakim will take the following sessions about financial summary. And then we end up with the Q&A. So just a quick highlight, quarter four, we are quite happy to see a very good development on net sales, organic growth, 23%. That's good, we think. On the order intake, we see organic growth, but we see also that the market is still a little bit soft, a bit hesitant. We're happy to get 3% growth, but we're also waiting for the pickup that we've been talking about, and we hope that it will come 2026 instead. very good development on all our profits depending with which line you look at it's either 50 or 100 percent up so it's we really see a good development good gross margin good profits and this lands in a adjusted margin of 28 slightly higher than our target in combination with a good cash flow and we're very happy to see this and this Joakim will talk more about our net depth and things like that but this really plays out with a good adjusted ETS of 4.17 so we closed 2025 as a quite good year net sales we are growing after uh quite a lot of years of inventory reductions and things like that we are back in good shape again we see the order intake has been growing organically by 10 so the market is not great but it's not that bad either compared to 2024. And 9-11 as the adjusted EBIT and we see also at the end that we are doing a good adjusted EPS 1373 and this also means that the board proposed the highest dividend so far 480 per share for the meeting in April. If we look at the markets, we see in Q4 a small improvement in Europe. Also in Germany, we are growing compared to last year. So even if the data isn't great for central Europe, we're seeing that it goes in the right direction. We have a fantastic year in North America, but a little bit of softer market in Q4, especially for these larger project orders in infrastructure. We're also comparing ourselves with Q4, where we've got some really nice orders in North America. But we're quite sure that North America will pick up again, so we think this softer order intake is a temporary effect in North America. We also made a lot of changes in the Red Lion, and we got this new factory when we acquired this, where we keep on investing. We are seeing a much better delivery performance. We're not fully yet completed there, but so far we are seeing that quarter four, we're delivering a lot from the order book, and we're getting back into relevant lead times, and we hope to be fully in shape here in quarter one. So that's good. We also keep our flag high when it comes to sustainability. So our planet target is important for us, and we got approval from science-based targets, a significant milestone for the company in our reduction of both reducing our own CO2, but also being active partners with our customers to help them reduce their CO2 impact for the coming years. So now we are committing to the 2030 targets, and then we also have the long-term targets for 2050. We made a small acquisition. We signed it last quarter and we now, second of January, closed the acquisition of Molex Industrial Communication, a business that we are integrating now in Industrial Network Technology, INT division. And I just would like to show two slides to describe this acquisition. a molex is a gigantic private owned company by in the industry's family and they were saying that what we have in industrial communication it's not bad but we don't really have a ability to ignore the size we have to really focus on it and they were asking us you know maybe hms can take this and revitalize the business they also felt that The main business for them is cables, connectors and these kind of things. And these active components with software and hardware was difficult for their sales, big sales teams to sell because it's very complex products. So we made a deal with them to take over this asset. So we get two R&D teams, one in Canada, one in France. 31 R&D engineers, very happy to get this. We are investing more in R&D, so getting more resources here is very good. But we also get complementing products and technology. We get large customers in mainly U.S. and Japan. Some of them are already HMS customers, but with this offer, we also can make a more complete solution. We paid 7 million U.S. dollar, and we expect this to be north of 10 million U.S. dollar in annual revenue. And what we do here is that the Molex products, compared to HMS products, HMS is really working with what is called adapters. These are all the thousands of devices inside a factory that is sitting into robots or drives or sensors and these kind of things. And all these things are connected to the controllers of the network. So the high volume products that HMS is focused on, that is more than 90% of all devices. That's relevant for our current offer. But the network controllers where Molex is very good, they are less in volume, but higher in complexity, higher in price and making both these things are very important. And you see the examples here with our robot customers where we've been connecting the robot to the network. But also around Molex, we can also do sub-networking around the robots. And we think this is a very good step for the division INT. And we are quite excited about how we can develop this together with the teams in Canada and France here. So a lot of things is happening. And Joachim, let's move into some numbers.

Yes, let's do that. And we will start with having a look at the order intake. And as Staffan already said, we do see a small organic growth of 3% in orders. And if you see on the graph to the upper left, you see that we had a really strong Q4 in 2024, where we had some good product orders in the IDS business. And therefore, we think that 3% is not so bad, actually, even if we strive for more than that. Given the comparable, that's a fair number. You also see that there is a massive currency effect with a 10% negative effect from currency movements, where we see that especially the US dollar, but also the Euro versus the SEC is continuing to be weaker and weaker. We've been seeing that also after the period ended. If we look at the different markets, we do see Europe continuing slowly but safely in the right direction. It's been improving throughout the year. Upfront, we thought this would be a little bit of a quicker recovery, but we still see it's going in the right direction. So we think that is a little bit positive after all. And Stefan also mentioned that we had a bit of a weaker market in North America in the fourth quarter. Looking at the pipeline and so on, we believe that this is a temporary decline that we're facing. So we think that there is potential to improve a little bit from those levels going forward. If we look in Asia, we've been having a bit of a slow market in Japan for us, where China has been going well the whole year. And now we do see a bit of a recovery in Japan. It's related a lot to INT business and some of the big customers coming back and placing some orders. This inventory build-up situation with our customers have been the largest in Japan, and that's why that's been taking a bit more time. And overall, if we lift lift the view to a higher altitude, we see that for the full year, we see organic growth now on the orders of 10%. So it is moving in the right direction, and I think 10% is a decent pace for us to move forward here. Going over to sales, a little bit of a different situation. We have very good deliveries in Q4. So we reached 951 million in sales, organically plus 23%. And the reason, the story behind this is basically what you saw in the order intake in Q4 2024 and Q1 2025, when we had a lot of good project orders where the bulk is delivered now in Q4. So we managed to deliver out of that nice backlog, and we've been fighting a lot in our delivery, on our delivery sites, especially in North America, to get all the goods out. And I think we managed to catch up fairly well in Q4, too. to what we're supposed to deliver and try to keep our customers as happy as possible here with the lead times. Looking for the whole year, we've been struggling a little bit in the first quarters, also due to pretty strong comparables in 2024. And now we actually turn the whole year positive growth, organic growth of 3% with the strong ending of the year. so of course we would like to show more than three percent growth for the full year but it's it's good that we can turn this around and show a positive development it's been a bit of a bumpy road for the last years for us and we've been having maybe a little bit more than the industry average having the industry the inventory build up during 22 21 and 22 and then the reduction in 24 and maybe partly in 25 as well. So all in all, showing growth is good to see. And the drivers of the growth is a lot the IDS division and the North America's market will be doing those good deliveries in the fourth quarter. We also see on the sales side continued recovery in Europe, same as with the order side. Slowly but safely better. That's not the main driver in the quarter, but it's going in the right direction. And, of course, also here you see overall that the currency is playing a big role. So it's a pretty big difference on the reported and the organic numbers. For the full year, you also see that we have a pretty big acquisition effect with 18% growth from the red line and the peak acquisition. A few words about the divisions. You have first IDS, Industrial Data Solutions, where I think you see in the graphs, you see this story that I was talking about with really good order intake in Q4 and Q1, Q4-24 and Q1-25. And then you see the sales graph is improving in Q3 and especially in Q4-25. So I think those product orders that were received in the end of 24 and beginning of 21, sorry, beginning of 2025, you should maybe see that more of the sales graph that it's evening out a little bit over the period. And with that strong comparable, obviously the order intake is down now 15% organic. We would love to see a little bit more than 374. And we think that we have a good chance to improve going forward here. And on sales, of course, a very nice number, 481. And as I said, deliveries of these big projects. So I think we're very happy about the delivery in IDS. We do almost 29% margin in Q4, which is extremely high and not something that we probably will show going forward. For the full year, we are now at 24% in this business. And then with two-thirds roughly coming from the Red Lion acquisition, we're very happy with that development that we've had. over this period in the HMS family. And this of course is a big contributor to the overall strong profitability in Q4. Then over to INT, and here we see pretty clearly this gradual improvement that we were talking about. You see on the order side, now we have 17% growth that we present organic, this is 27. So in that pretty big currency headwind, we're still managing to grow this in a good way. And the main thing we see here is that some of the bigger customers are coming back, filling up their inventories. And also the European market, partly also the Japanese market, are now coming back and placing orders. So this is very positive, we think. And you see not maybe the full thing converting to sales, but also sales is moving in the right direction and showing a 13% organic growth. As you know, this is our cash cow delivering really solid margins. We do 31% margin in the quarter and almost at that level for the full year. So this is a very solid business. And the team now will have their hands full with integrating this Molex acquisition and also delivering on the strategy for 2030. So it will be an eventful year, 2026 in INT. And then we have new industries, also solid development, both on the orders and on sales. Organic orders, 18% up, organic sales, 12% up, and an okay quarter. We would maybe like to see a little bit higher margin, but 22.7% is an okay level. We had in Q3 a very good development in building automation. Now it's a little bit softer in building automation, a little bit better in vehicle communication. So it's good that those parts are complementing each other and smoothing out the curve for us. Over to the profitability and obviously record profitability in the quarter, 268 million in the adjusted EBIT, a 28% margin, which is, of course, strong for us. And for Q4, it sticks out maybe even more. We normally have a bit of a higher cost costume in Q4. And we don't see the same increase on the cost side in Q4. We are starting some of those development projects that we presented earlier this year on the Capital Markets Day. We will see those projects rolling into 2026 and onwards with us trying to deliver those 2030 strategic plans. So all in all, over 900 million, 911 million for the year, 25.5% in adjusted EBIT margin. I think that was good to see that we managed to beat the long-term goal of 25%. And this puts us in a good position for the future as well. The good profitability comes from primarily the volume increase. The gross margin is stable at 63% in line with our own expectations, and we think that's fairly where we should be with this constellation that we have in the group. And maybe the other thing that sticks out a little bit is the lower OPEX, where I think we've been still being a bit careful on the cost side. And as I mentioned before, we will start doing a bit more investment going forward. Maybe to mention also on the FX side, you've been seeing the FX effects a lot on the top line, not to the same extent on the bottom line due to some good hedges throughout the year. We're starting to see that effect wearing off a little bit now. The hedges are not as good as they were before, not the same high rates. And we do see an EBIT impact of minus 15 due to currency, which is a bit more than what we've seen earlier this year. And with the recent development of currencies, I think this is something that we need to keep an eye out for in 2026. So there will be a bit of an impact from this going forward, obviously. And then to our EPS, and I'm showing in the graph here an adjusted EPS of 4.17 sec, which is in itself very nice. The reported EPS is a lot lower, 1.44 compared to 1.49. And then, obviously, we have the net financials and all that is nothing strange. But we also have a non-recurring tax effect of 104 million SEK, which is related to the Reliant acquisition. And we elected to do a so-called 338H10 election. And that basically means that we're treating for tax purposes in the U.S., we're treating this acquisition as an asset deal. So we have an amortization of all those assets that we got in the deal, which will lower our tax in the US for the coming 15 years. And that is giving us now a positive effect to make this election. We need to pay this one time tax, but we will have a pretty big upside for the coming years. So the net present value of the tax saving is a lot bigger than this cost that we take in Q4. This is really complicated and Complicated material and very special US tax laws that we're working with here. So this is the situation and we're going to look into this forward if it's really right that it should be 104 million. Looking for the full year, we do 13.73 in the adjusted EBIT. It's plus 42% compared to a year ago. And the board, as Staffan mentioned, also proposes a dividend of now 4.8. And the reason it was zero last year was not that we didn't make any profits. It was that we made two really big acquisitions and to not having to take in more new shares, we elected to cancel the dividend for a one-time thing in 2024. And then over to the cash flow. So here we have continued improvements on working capital and inventory reductions. So we've been now reducing our inventory for the full year of 207 million. And that is of course helping the cash flow a lot. We do 231 million in the quarter and 877 million for the full year, which we are very happy with. And the cash conversion is still quite good, 82% for the full year. And obviously this one time effect in tax is holding back the cash flow with the 104 million. So without that, you would have seen a record cash flow for the group. And for the future, we still believe that we are in a pretty good situation here. Even if we grow in 2026, we believe that we should be able to keep working capital neutral and maybe even reduce a little bit of inventory further. So we should be able to show a good cash conversion also for the coming year. And then to, I just love this graph to the left, the net debt graph. It's continued to be reduced. And we were in a situation a year ago where we took on a lot of debt to make these two acquisitions in 2024. And of course, in my role, it's really nice to see that we're following the plan and managing to close the year in net debt through EBITDA pre-IFRS 16 of 2.13. And we said here before that we should be in line with our long-term target to be below 2.5 and that we can also deliver that. This is very good to see and of course has a lot to do with the good performance and the strong cash conversion throughout the year. In Q4, when we have now a new strategic plan in place, we also signed a new financing agreement in December here with two Swedish banks for the coming years to be able to finance our expansion plans in the 2030 strategy plan. Finally, before we let open up a question, some takeaways for the full year, if we look what's been happening. From an internal perspective, we've been making a big change from the 1st of January 2025 with a completely new organization, a pretty big change actually, going into three divisions. We now have full accountability of strategy, resources, finances, and all that comes with that. and the reason for that was to to get the full customer focus throughout the whole organization from sales from rd from product development and all this and i think with the performance in the year we we are quite happy how this has been actually playing out in in real life as well, taking it from the plan to reality. And as a step in the new divisions, we also worked with the 2030 strategy. All divisions have set their own strategy for 2030 here that we presented in September. Performance-wise, we still managed to deliver some organic growth in what we say is a bit of a challenging or a bit uncertain market with a lot of macro challenges that's been playing out throughout the year. We grow now the orders by 10% and sales 3% for the year. And we managed to also to lift the profitability and show a really good cash flow with an adjusted EBIT that is up 37% in the whole year, delivering 25.5% margin. And solid cost control is, of course, a good part of delivering that good results. And also as I mentioned before the cash flow that we managed to convert those profits into cash is of course very key for us. So all in all a solid year and with that we are sure that there are a lot of questions from the group. So feel free.