MilDef Group AB (publ)

Good morning, everyone. I believe it is now 10 o'clock in this wonderful morning in the summer of July, July 25th. Welcome to the investor call with Mildef with a special focus on Mildef's reporting on the second quarter of 2024. This call will be presented as normally by our CFO, President Daniel Ljunggren and CFO, We expect approximately 40 minutes to be sufficient for the presentation and the Q&A. A friendly reminder is to keep your microphones muted. Please open up your mics for the Q&A that will follow, or state your question in the chat, and I will moderate the lineup of questions. Also for information, we record this meeting. And again, welcome to the presentation about Mildev's second quarter 2024. So with no further ado, take it away, Daniel Ljunggren, Vivike Åsson.

Thank you very much for that, Olof, and welcome to everyone. And thank you for joining this call around the MILDEF Q2 report. Today, my name is Daniel Ljunggren, CEO of MILDEF, for the ones of you that are new to MILDEF. And together with me also, I have the CFO, Vivica Jonsson, who will deep dive a little bit more into the numbers later on. But I will start a deep dive into the highlights of the Q2. We had a strong order intake in the second quarter. It was up 43% if we compare to the same quarter last year. And that is now very pleased to see that the increased activities level on the market is now showing in our order backlog again. Sales increased 4.4% that we were up to really tough comps in the sales. There was some one-off revenues in the second quarter last year, but we have now been able to reach the same platform and increase the sales slightly, even if it's a single digit growth rate. Organic growth the last the Q223 was plus 104% so you know that we are up to some tough comps there but despite that we see this strong order intake in the second quarter we're saying that we're not seeing the full impact from the increased defense spending we will probably see that from 25 and going forward for many years but the full impact from the increased defense spending due to russia's invasion of ukraine in february 2022 has not really been a major impact for a company like mildew that is late in the cycle in this defense industry improved margins we saw here in the second quarter that we improved the gross margin in second quarter it ended up with 51.1 percent compared to 50.1 so one percentage point better than we did last year and this is normally where we're saying that this is depending on the customer on the product mix but i also would like to say that this also has been And impacted by all the activities that we have done around increasing the gross margin from different perspective, from a customer perspective, from a supplier perspective, from an internal efficiency perspective. I think we are now able to see gross margin going forward plus 50%, even if we can see individual quarters coming below 50%. I think we now have reached a new platform there as well. EBITDA margin 7.8% compared to 16.5%. And that is also, of course, a result of the increased revenues and the improved gross margin. But I also think that the OPEX are in good control. It's flat compared to Q1. So it feels like when we have this scenario, we can prove that we have our scalable business and also that we have seen increased We have seen impact from the increased focus of operational efficiency. I have talked about the market now for a couple of quarters and we still talk about that there is a more active market. We have an all-time high order backlog when we now close the first half of 2024. It's 1.45 billion Swedish krona and that of course supports future growth. And as I said before, we expect to see the full effects of the increased defense spending first in 2025 and beyond. And I think when we now move into hopefully an increased demand landscape going forward, and I think it's a long-term demand landscape that will be here for many years, we can see Millev is well positioned for taking advantage of these opportunities and more active market offers. Little bit more numbers around the Q2. I was talking about the net sales. It ended up with 302 million Swedish kronor. And as I said, we have established a new higher level in the middle of, even if we just grow 4.4%, I think it's a strong quarter compared to the tough comparison quarter we had. Order intakes, drawing as I said, up 43%. That's very good. Now coming back, drawing after a weak Q1. And even if the volatility between the quarters will remain, this quarter order intake, I think, reflects the growing market demands. EBITDA, our operating profit, was strong due to higher net sales, but also, I think, improved operational efficiency, so improved gross margins. Also, of course, supported an increased EBITDA. And as I said, OPEX develops according to plan, and I think they are under good control. Operating cash flow, I think it's very positive to say that we're now in the third quarter in a row. Show a stable positive operating cash flow. The operating cash flow is very important for us. It gives us the flexibility going forward if we need to ramp up the production for the increased demand, or we need to invest in technology, or we need to go into more acquisition. That is very helpful to have this positive operating cash flow. And we have been struggling for a time, but now it's the third quarter in a row where we show a stable, positive operating cash flow. In the news, in the middle of news, so to say, in the second quarter, there was an announcement of three large orders. First of all, if we start from the left, our subsidiary Handhold won a 69 million Swedish krona contract. And this was the first... order releasing the rationalities we have talked about when we acquired Handheld. We are taking the Handheld products and we are militarizing it and we are selling it into our military sales channels and it's very pleased to see that we now have the first big contract in place. Also in the second quarter we signed a 10-year framework agreement with BOS Systems before us and on top of that they also placed an order worth 52 million Swedish kronor. And finally, the big one order that was announced in Q2 was a strategic hardware contract in Estonia. Estonia is a new geographic market for us. It's very interesting to see that our product portfolio could be sold to other geographic areas as well. And when we closed the Q2 here in July, we also announced that we are expanding our integration services in Stockholm through a new lease contract. That is a premises that is four times more capacities than we have in our current premises. And this will hopefully stand ready for moving in in the autumn 2025. And it's addressing what we see, the increased demand we see for integration services on the Swedish market. So it's very pleased to see that we are addressing this before it's too late. And finally, we also recruited a new member of the group management team, Magnus Horvann. He will be the vice president for our business area, Nordics. And we will welcome him into Middle-Left in September. I was talking a little bit around acquisition and I wrote in the CEO comments as well that we made a minor asset acquisition in the second quarter a pure technology acquisition I would say it's a UK company that is called Advanced Vision Technology Limited and that minor asset acquisition expands our product portfolio with ruggedized displays in three different screen sizes It's also displays that are highly price competitive and are designed to meet current and future platform requirements for military use. And on top of that, this is an acquisition at strength in our position in UK and also with support us achieving our ambitions, long-term growth targets. Then this asset acquisition was financed with own available. Yeah, this is. No, thanks. This acquisition, of course, is something that we hopefully can see in order intake going forward when we can utilize the benefits of these three new displays. Short tour around in the Miller universe just to catch up with everyone. This is the Miller footprint. As you can see on the left there, we have presence in nine countries. And the figures you see on the screen right now is a breakdown of our revenues the last 12 months. So you can see that the Nordics is standing for 56% of the net sales, Europe 25%, and North America 17%. And the minus and the plus you see below that is the development if we compare the last 12 months to the previous last 12 months, so to say. That gives you some kind of flavor on how our revenues look in terms of geographic. Customer segments, we are a defense company. Our legacy is defense. We are coming from defense. But we also have added sales to government and what we call critical infrastructure. It could be police, Coast Guard, transportation, field hospital, and firefighting in the woods and things like that. But mainly our core business is around the defense sector. And it's a strong demand we see going forward in the defense sector. If we break down our offering to the customer, 70% of the sales is related to the hardware. Hardware is what we have done in more than 25 years. And that is still the biggest portion of the revenues. But we also, in the last years, have added revenues coming from solutions and services, integration services. It's system engineering, where we help the customer to design exactly how their systems should look like, etc. And we also have the software. It's just down for 5% in the last 12 months, but hopefully that is something that will increase going forward. route to the market this is our how mill of products ends up on the market so to say and how our sales channel looks like we have the end users that is a defense in different countries in northern eu and the nato so to say and we in some areas selling directly to Some government, of course, we have the Swedish, we have the Norwegians, we have the Danes, where we act as a prime that we can sell our products directly to the government. But we also have a business-to-business segment, global business-to-business, big tier ones in the defense industry, integrators in the defense industry, where we sell our products. It could be Saab here in Sweden, or it could be L3 Harris in US, or RBSL in UK, for example. And on top of that, we also on minor local markets where we don't have a presence, we use local business to business partners that helps us selling our products on the European market mainly. By that, I will stop for a little bit and I will give the word to Vivica Jonsson who will walk you through some of the financial numbers. So please, Vivica, take it away.

Thank you, Daniel, and good morning to all participants on the call. I always want to start with zooming out the picture a little bit and looking at Milefs development over time. And on the next slide, you will see the historical development year by year leading up to the full year of 2023. 36% annual growth rate and then escalating to 57%. It's always good to look at Mildev over more than a quarter. And those of you who follow us for some time now knows that very well. And this is what you see when you zoom out the timeline. Going a bit more into current affairs, we are looking at the rolling 12 graph to your left on the net sales development. We are increasing 6% net sales on a rolling 12 basis compared to rolling 12 in Q2 2023. Quite a modest development given our long-term targets, but it's important to remember that we are on an historical high level here that we are not only maintaining, but actually adding further growth too. The isolated Q2, as Daniel mentioned, is a 43% growth, and that's a good sign of a growth company, in my book at least. Turning to the gross margin to your right here is probably the KPI that I like to talk about the most, since it demonstrates to me the solid development of the company's internal work, where we're working through the whole value chain from our customer contracts to our supplier agreements and our internal efficiency in between. We've said here about the long-term ambition of around 50%, where it will be slowly but surely going up. And I think that this will demonstrate in this graph. Turning to the next slide, we will be looking into the order intake, which is flat compared to rolling 12 in Q2 2023. It's the same logic here, really, that we are on a historical high level compared to where Mielev is coming from. And we have quickly raised, and now we are on this 43% growth in the Q2. From the order intake, we go to EBITDA. It's a scalable business model that we are operating. And when we add volumes, we add EBITDA. We had here a rolling 12 growth of 6% in our net sales, and we have 2% here in our EBITDA. This is indicating that we are adding a little bit faster the resources to run our business than we are adding our sales, which is correct. we are preparing for a further expansion for future growth. So that is a proper analyst of that number. The customer needs that center, of course, and then we need to be prepared. A strong order backlog. It's a clear sign of a growth company that we're adding orders quicker than we are delivering to our customers. And this is now leaving us with an all-time high backlog of orders. 1.4 billion Swedish. A strong indication of growth. Looking at the next slide, we are seeing the duration. When will we deliver what we have in our backlog, so to say? And then we are dividing that into the current year, 2024, and then further on, 2025, 2026, and then beyond. If we look on the 2024, And that is an 8% growth of backlog for current year compared to 2023. It's also a growth in, if we add 25 and 26 together here, that's a 9% growth on how this graph looked in 2023 at the same time. And beyond 2026, it's also a strengthened number. So all in all, a growing backlog and the duration per time is also strengthened. Final financial slide before I give you back to Daniel. It's the working capital and our net debt in relation to EVTA. Our working capital is a constant focus area for us where we are working to improve our position from both angles, if you will, both in lowering the absolute terms and of course also to strengthen our sales. As I discussed on the previous slides, we do see that we are now preparing for further growth than the 4% that we did in the quarter in isolation. We have our working capital in relation to sales at around 35%. We did finish the quarter with a strong delivery month in June, which, of course, then was a larger purchasing month in May, which was a quite adverse development at the end of the quarter on the payable receivable net. In relation to net debt and EBITDA, this is a rather uneventful KPI to follow in Miele after the last five quarters. We are remaining well below our long-term target of 2.5 this month on, or sorry, this quarter on 1.8. And with that said, I will leave it back to Daniel.

Thank you very much for that, Vivica, explaining the long-term financial development of Mielef. Shortly before we go for the Q&A session, I will give you some future look into what we see on the market and the dynamic in the market. And we have talked about this many times and we continue to talk about it because we still think that this is the dynamic on the market. If we go back to February 2022, where Russia invasion Ukraine, the main focus for our customer and customer was around operational things, fuel, ammunition, training drones, etc. And if you are in the ammunition business, you have definitely felt the increased military spending in Europe in the past. to years. What happened in the second wave, so to say, was that the big platform providers, like Saab in Sweden, Foxhub, Kongsborg in Norway, they had started to receive orders on big platforms like troop transportation, battle tanks, aircraft, ships. We're talking about CV-90s, for example, up in Öresund, where they have increased all the backlog heavily. So they have really felt, if you were in this industry and you are producing ammunition or the big platform providers, you have felt the increased military spending in Europe. But for many of the companies, small and medium companies in the defense industry are still in the third wave and are waiting to see full impact from the increased defense spending And I hear a lot of the peers that are talking about from 2025 and beyond, we will probably see the increased defense spending in Europe also impacting the small and medium defense companies. So even if we are presenting a strong order intake here in the second quarter, we still think that the big volumes are ahead of us. Some focus areas in 2024, of course, we do everything we can to capture the growing market. There is a lot of opportunities out there and the activities level on the market is high. So we are expanding geographically and also widen our customer base. Number two, of course, very important to be a relevant player in the market is to continue to have strong focus on delivering on time and also meet the increased demand going forward. Number three is around increasing middle of customer offering and providing to the customer exactly what they want. And we have, for example, a dismounted soldier system that is more addressing the digitalization of the individual soldier. And that is somewhere we have done development in our product portfolio. And hopefully we can see impact in order intake and order backlog from that going forward. And number four, that we have pinpointed as one of the focus areas for 2024, the working capital and operating cash flow. As I said, this now was the third quarter in a row where we presented a stable, positive operating cash flow. And the next one that we should try to get down is the net working capital. And we are working on that, and hopefully that will give an impact going forward. That's all around the presentation, so let us open up the floor for questions.

Thank you so much, Daniel Ljunggren, President and CEO of Mildef, and Vivica Jonsson, CFO of Mildef. We have a chat that can be used. Preferably, just go ahead and state your question verbally. I see that Erik has raised his hand, so please open your mic, Erik, and go ahead.

I don't think I was first though, but sure. Okay. Thank you. I have a few questions. Firstly, on the working capital side, I get what you say on an unfavorable development there in the net on working capital towards the end of the quarter, but still clearly this metric has not developed anywhere nearly how you expected it to one or two years back. What's the What dynamic is causing that? And should we revise our thinking on where your normalized working capital needs are going forward? Secondly, more of a technicality perhaps, really high amortization figure in the quarter, at least compared to prior quarters and what you've been investing. Is there anything specific going on there? And then the third question is, In terms of your capability to take in orders here in the second half that you also deliver, could that be a materially different number compared to what it was last year? Or is last year's, call it in-for-out orders in the second half, a good proxy for where we could be this year? Thank you.

Thank you, Erik. Let me try to address that from the first one to the third one then. So the working capital development, it has not developed as quickly in the right direction as we had hoped. And obviously in the quarter as such, it's developing in the completely different direction. As I've stated many times, it takes a long time for activities to have effect in the P&L in this business. All the customer contract we are Negotiating today, it takes time for them to be deliveries, so to say. I think that the sales development is a little bit slower than you might have expected from our long-term targets of 25%. I see that coming back up being one of the key components in getting that metric down since it's a ratio. And we are working actively with our working capital position as such. Addressing the increased depreciation is related to our product development that we increased in 2023 and especially towards the end of 2023 and starting to depreciate here during the first half of 2024. So the increase is related fully to product development depreciations. In for out is always a tricky one in this business. We have both dynamics in play here where things are going quicker, but we're also seeing more long-term orders being placed, I mean, for deliveries later on in time. So is the dynamic the same as it was last year? Possibly, but most likely not. But it's... difficult to draw any conclusion if it's the one or the other way. Do you want to add to that one, Daniel, or does that cover your thoughts as well?

Maybe some extra flavor on top of that, because it's like you say, Erik, it's probably quite much the same dynamic that we saw last year, but maybe we see a little bit more prioritized fast deliveries from the customer side that maybe could give us a new dynamics for 2024 that they are really need the products and here and now so to say so they need to step up and make things and then we can if it's doable maybe take order and delivering within 2024 more than we usually have done in the past okay thank you thank you eric

So apologies, Tom at Pareto. You were number one, but I had a computer meltdown one minute ahead of the meeting. I need a mildew computer going forward, Daniel. So Tom from Pareto, please go ahead.

Thank you. Just two questions from my end. You previously stated that you have sufficient capacity to meet the growing demand, and now you're investing in additional capacity. Are you seeing any changes on the domestic market that were not visible one or two quarters ago?

I mean the lease agreement we are signed now is up in Stockholm is addressing the integration services and the integration services is has a great need for space in their premises so to say they are taking the big platforms like a TV combat boat 19 for example where they take it to their premises and then making the installation of the different IT infrastructure into it so When we have talked about that we have more capacity, then we are talking mainly about the hardware business that we have been doing for many years. But when we look at the integration services, it's a totally different play. And now we have addressed and put us in a position where we can grow four times over a long time going forward on the integration services.

Perfect. Thanks. And just a question on the orders you were touching on it just recently, but say the Estonian order, what sort of timeline do you have on deliveries here? Can we expect two, three quarters or before end of 24?

There is always a different dynamic. It depends on what kind of product. It depends on how much there needs to be new development into this product. But what we have seen here in the big orders in the second quarter here, I think the big lion part of that revenue will fall into 2025. Maybe there will be a small portion into 2024. And there is also a dynamic where we maybe can have more in 2024 due to we can ramp up some things in the supply chain make us delivering faster. The Estonia order, for example, I know that they have asked for as soon as possible, and maybe we can do more on that order.

All right, thanks. That's all for me.

Thank you, Tom, most kindly. I see no more raised hands. If you see that, Daniel or Vivica, yes. Mattias, please introduce yourself and open up your microphone.

Go ahead. Can you hear me? Fine. Yes, we're... So, Mathis Arzin, Credit Mutual Asset Management. Regarding the expanding capacities in Stockholm, can you just give more colors on impact on cost and capex maybe in the coming quarters? If I understand well, it will impact from N24 to N25. So, yeah, if you have any colors on that.

We estimate the new premises to stand ready in the autumn 2025. And this is also that we will consolidate our current premises that we have up in Stockholm. So the net extra charge for premises will be absorbed by this that we're closing down some of the current lease contracts that we already have in place and we have not here and now said that we will go out and present the exact numbers of the net impact for the increased rent so to say but there will be a big lion part of it will be absorbed by that we are closing down other sites that we have in Stockholm and consolidate our Stockholm business into one roof okay

Okay, thank you.

Thank you, Mathis, for that question. I see no raised hands and I cannot see anything in the chat or maybe my phone is limiting me, but I can't see any question in the chat. So maybe we are at the end and maybe you want to conclude a little bit, Daniel, before you flick to the last picture and I'll send us off on an invitation.

Once again, thank you all for joining this call and making an update on the Q2 report and hope you stay with me in the future and follow our journey going forward. And I know that you will next, Olof, talk about something that maybe some of these people wants to join. So please go forward in the presentation.

Yeah, if you want to change picture, Daniel, please go ahead. And we'll just make a friendly reminder that you're all invited to the first ever Capital Markets Day of Mildef on September 17th. You are quarterly invited to this first ever event at the AdSix Hotel in Stockholm. This is a morning over lunch event, and we will display the strength of the business model of Mildef and how the markets are expected to develop in the future with a focus on the, of course, the ongoing defense and security ramp up. In addition to the lovely management of Mildef displayed on the picture, we will also introduce Swedish Security and Defense Industry Association, SOF, They will participate to further explain the evolution of the defense sector and how it all adds up. Registration. You can shoot me an email, Olof Engvall, or you can wait till the next press release goes out in August and the registration opens. That's all for now, ladies and gentlemen. Don't be a stranger. Stay in touch. Follow us on LinkedIn. Send an email or make a call. We're here to assist you understand Mildev's continuing journey. Have a fine summer and thanks for now.

Thank you all. Take care.