MilDef Group AB (publ)

Ladies and gentlemen, a warm welcome to the investor call, the Q3 investor call with Mildef, with a special focus on the Mildef reporting on the third quarter of 2024. This call will be, as always, presented by our CEO and president, Mr. Daniel Ljunggren, and our CFO, Vivica Jonsson. We expect approximately max 45 minutes to be sufficient for the presentation and the Q&A. And I will try to keep our microphones muted. And if not, please help me to do so. And then we open up your mics or the chat for the following Q&A after the presentation. I will line up and moderate the questions that you will have. Also, for your information, we record this meeting. So, again, a warm welcome to the presentation of Mildef's third quarter of 2024. So, with no further ado, please take it away, Daniel Ljunggren and Vivica Jonsson.

Thank you very much for that, Olof, and good morning to everyone, and thank you for joining this call around Mildef Interim Report Q3 2024. I think we will directly jump into the highlight for the third quarter, First bullet is the new long-term profitability target that was adopted by the board of directors. We increased our long-term profitability target from at least 10% EBITDA to at least 15% EBITDA instead. And that is, of course, an ambitious target, but I also think it's a realistic target in the near future, so to say. Also, what we see on the market here, number two, the long-term demand drive, strong interest in Milov portfolio. We still have an urgent need to continue to support Ukraine in their conflict against Russia. There's still a big need to ramp up the defense capabilities in Europe. Europe has underinvested for many, many years in the defense industry, and there is now a rapid need to increase the defense capabilities. And that, in combination with Mildov, has a great position on the market, has led to a strong order intake in the third quarter, actually a record high order intake for Mildov in the third quarter. But I'm also happy to see that we have continued to improve the free cash flow, major improvement from Q3 last year, and it's now the fourth quarter in the row where we have improved the cash flow. Also a big event that was happening in the Q3 was that we have now signed a significant premise contract in Stockholm. Of course, aiming to expand the capacities we have mainly on the integration services side, where we now have four times higher capabilities when we move into the new premises. And also when we move out from the third quarter, we now have a record high order backlog to deliver upon. If we jump a little bit further into details around the financials number, we saw that the top net sales was increased by 10% if we compare to Q3 23. But the most, I think it's important and the most pleasure with the report here in Q3 was the order intake that was up 134% increase in Q3. A couple of large contract was won in Q3, put us in this record high order intake position. And the increase, of course, reflects the more active market, growing demand, and that Milov has a strong position on this growing market. If we look at the EBITDA, we can see that there has been an improvement. We have made in percentage 12.5% in Q3, and that is something that we can compare to 8.4% that we did the same quarter last year. We also see that the gross margin is stable on 50%, and we also can see that the OPEX is nearly flat if we compare to Q3 2023. Last but very important bullet is that we have major improvement of the free cash flow. It's now the fourth quarter in a row. We see increased positive free cash flow, and I think that this demonstrates the operational efficiency that we are putting high focus on, and I think this is a result of that. There has been a very hectic and intensive Q3 for Middle Left. There has been a lot of corporate news released, as I said, the news. where we foredouble the integration service premises capabilities up in Stockholm. Hopefully, we can move into that new facilities in autumn 2025. That's the plan. I also welcome Magnus Hagman, who will be the new vice president of Nordics. He will lead and management the business area Nordics. And as I said, the new target profitability that Vivike Jonsson will give you a little bit more flavor on later on. And we've also performed our first ever capital market day And it was a great event, and it was very high interest from the audience. And also, as you can see in the bottom row here, the business news was a couple of major important contracts that we won in the third quarter. And I also would like to highlight that this is different customer in different countries, puts Miller in a good position and not increasing the customer concentration. So it's different programs and different countries and different customer. I think that is important to add as well. A little bit of brief outlook on the middle of the universe, what to whom and how we sell, so to say. If we break down the top line, the revenues and see the geographic split of it, we can see that the last 12 months we have Nordics that stands for 59% of the net sales. We have Europe standing for 23% of the net sales. And we have North America standing for 15% of net sales. Slightly little bit more in the Nordics than we had one quarter ago. and slight less on Europe and North America. Customer segments, defense is still our core business, and defense is 80% of our net sales, but we also have the critical infrastructure that stands for around 20% of the net sales. And if we look at breakdown of the portfolio, we can still see that hardware is the lion part of our revenues, that is our legacy, and it stands for 70% of the net sales. Solution, where we see the service integrations, etc., stand for 25% of the sales, and we still have the software standing for roughly 5% of the net sales. And with that start, and presenting the highlights and the high-level numbers, I will leave the word over to our CFO, Vivica Jonsson, to give you some more details around the financial summary.

Thank you, Daniel, and good morning, everyone on the call. As always, we'd like to start with zooming out the picture about 10 years and showing you the long-term growth that Mildef is capable of. And as you can clearly see, there is an escalation the closer we get to present date, with 57% since the company went on the stock exchange with the IPO in 2021. Coming a little bit more into present date, the rolling 12 numbers of a strong order intake. Daniel mentioned the 134% in the isolated quarter as an order intake increase. Rolling 12, it's 34. Still a very good numbers. Of course, made up of a string of larger orders and strategically important ones. But we also see a good drive in the base business as such. Millef is well positioned in an active market and that is boding well for the future and it's proving with good order intake growth. Coming over to the sales side, a bit softer start of 2024 is giving a bleak 2% sales increase as a rolling 12 number. We had 10% in the isolated a quarter three and we must remember that 2023 we established ourselves on a completely new level historically of the sales number and we're keeping up with that pace and given the strong order intake in in q3 and also on rolling 12 basis i think we have a good future to look forward to also in this number The right-hand part of this slide is showing the gross margin development. It's always one of my favorite topics, especially given the solid performance of it. And we are talking about moving towards the 50%. You saw in the isolated third quarter here, 50%, and the rolling 12 is 49.4 now for the second quarter in a row. We don't see these drop downs in the isolated quarters since about two years, a bit more, which is something that I'm very happy about that we can show you a solid and stable development. We are keeping our target of around 50% in short to medium term here on rolling 12. with strong order intake comes a good order backlog unless you manage to deliver everything at once with the lead times in our industry that's not possible so we have an order backlog at an all-time high just north of 1.6 billion swedish so as i said i think the sales number will have itself a boost based on what we have in the books and when will that happen one might wonder and this slide is an indication of that i want to stress again that this is our outlook as per the 30th of september that can change based on a number of reasons and a customer request is the most usual ones that make this change We are about 60 million more for the coming year than we were in 2023 for 2024 at the same time. What I'm very happy to say is that we have during the third quarter here strengthened the 2025 deliveries with about 250 million. So that's always something. And we have a fourth quarter in front of us to further strengthen that position. Daniel mentioned, I would say a little bit more about our new long-term profitability target, and I will. We have changed from our previous target of EBITDA of at least 10% over time to an EBITDA margin of at least 15% over time. It's ambitious, but we feel it's realistic and achievable. We're happy from the management side to accept the challenge from the board of directors, and we believe to be able to deliver on this. It better reflects our operational performance as well, and we think it's a good sign of the financial maturity of the company that we want to talk about EBITDA now, where we are carrying our operational depreciations of material assets in our operating margin without breaking that out. Speaking of EBITDA, we look at the rolling 12 of our EBITDA development. It's following roughly along the lines of the sales development. That was 2%. Here we see 3%. I believe in the third quarter we showed that even though we had only, if you will, 10% increase of sales, we still strengthened our profitability quite well, which is showing an increased cost awareness and it's showing that we are able to increase our profitability despite not having the full boost from a larger sales numbers although in a scalable business model it's very helpful for the profitability with a good sales number Finally, for the financial part, another favorite topic of mine, and I'm sure of yours as well, our working capital. We had during Q2 a quite unfavorable development, which is now eased during Q3, and we are back around these 33%. We have communicated a medium-term target of around 25% working capital in relation to sales. I would say that's in the longer range of medium, but I see the 30 as more of a short-term medium. Now I'm making up my own grades of the time, but just to give you an indication of the timeline there, it takes time in our industry. We are very happy about the cash flow, our free cash flow in the quarter. It's indicating that we are working on a lot of efficiency measures that are starting to pay off, and we believe that it will come to the working capital graph soon as well. Net debt in relation to EBITDA as a final point here. I mean, it's not so dramatic to talk about. We are down to 1.4. We haven't changed our capital structure, rather boosted our profitability. And with that, Daniel, the boosted profitability, I will hand it back to you.

Thank you very much, Vivica, for putting some extra flavor on the financial numbers, so to say. Before we let the Q&A session start, I will just give you some future outlook, what we see coming up here in 2025 and beyond. And we talked about this long-term demand drive, strong interest from middle of portfolio. As I said, there is an urgent need to continue to support Ukraine in their conflict against Russia. There is still a very urgent need to ramp up the defense capabilities in Europe. And hopefully that will drive, and as we see it will drive, continued demand for many, many years going forward. Here in October, there was a major trade show in the US called AUSA. And on that market, we launched our new dismounted soldier concept. And this is around bullet number two, where we see that the end user needs drives innovation and volumes, where we see that we're going from digitalizing vehicles to digitalizing individual soldier. And that is a great driver for digitalization and there is a great demand for digitalization in the defense industry. So that is hopefully something that we can see will have a positive impact on Mielev going forward as well. Final bullets around outlook is the active M&A agenda. Mielev went an IPO in June 2021 and we had already back then said that the M&A agenda will be high topic on this company's agenda. And we continue to do that, and we're looking for strategic acquisition that can create value for this company, boost growth, and also give us more market access around in the different countries. So that is the outlook for 2025 and beyond. And by that, I think I will leave the word over to Olof, who will kickstart this Q&A session and see if there is any questions.

Thank you so much, Daniel and Vivica, for that snappy 15-minute short presentation. Of course, time is valuable, so we don't want to linger on indefinitely on these meetings. Anyways, thank you, 35 of you souls, ladies and gentlemen, for participating in this call and also for participating on the Mildef journey. And now... The Q&A session has opened and I believe it was, was it Erik Goldrang first come out or was it Mattias Montgomery? Please speak out.

Can you hear me? Absolutely.

So, can you remind me of the working capital seasonal pattern? Is it typically a tie-up in Q3? And why didn't we see that in this quarter? Thank you.

Thank you, Mattias, for that question. We have previously seen during the end of the year a working capital build-up, maybe more towards Q4 than Q3. And then we get paid in Q1, if we say it like that. It's not that strong of a trend as it has been historically. We have seen during the last couple of years that it has eased a little bit, but it's still present, if I express myself in such a way.

Okay, great. Thank you. And sorry if you have already mentioned it somewhere, but the selling expense in absolute numbers, it's the lowest number in several quarters. Could you just describe what happened here? And should we take this number with us in our estimates or what's going on? Thank you.

Yeah, thank you very much for that question. It's a Swedish vacation time. There has been a lot of vacation use during this summer. We have expanded our Swedish organization during the last couple of years. So this effecting Q3 has increased a little bit this year versus the previous ones. So you should see that as a Q3 effect rather than an every quarter effect.

Okay, great, thank you. And the financial, the net financials, last question. It's surprising the low, could you just describe what happened here in the financial net?

Yes, that was a currency revaluation that was positive in the third quarter that impacted also the year-to-date numbers as such. So it's pure currency that has had such a positive impact. The underlying financial cost is going on as per previously, roughly.

Okay, sorry, I missed that one. Thank you. No, no worries.

Thank you for that, Mattias Montgomery. Soon I will go to Tomas Blickstad's questions, but first we'll let Hugo Lise from Carnegie. Please go ahead, Hugo.

Hi, thank you for taking my questions. Some questions on the orders. I missed the large follow-up order. Volume order. Has this been lost or is there an update on the status?

I lost you there in the beginning. And hi, Helge. And thank you. The question was around which order?

The large follow-up order.

Yeah.

From your development order like a year ago. One and a half year ago. Yeah.

Okay, now I'm with you. That is still something that is not ordered yet and it's not in the order intake and it's not in the order backlog for middle of yet. So hopefully we will see that going forward when we now moving into 2025.

But it's not lost?

Not lost, but delayed in time, I would say.

Okay, okay. Do you have any updates on your possibilities to deliver your IT systems to the CV90 orders? from Slovakia and CES?

No major further update. We continue to work with the case. We work together with BOE Eglunds and hopefully we will see something in a positive direction coming up soon, but still nothing is done yet.

Okay. Also, could you share some, or how the collaboration with the non drone producer in America is progressing?

It's progressing well. We have the contract and we're now moving on to more operational matters with the customer. We are trying to finalize the development, finalizing the deliveries coming up here in 2025. So hopefully that will continue to go good. But as I hear from the operational part of the company, there is no showstoppers. We continue to work closely with the customer and hopefully that will continue to play out well.

Perfect. That's all for me. Thank you, Hugo.

Thank you, Hugo Leesjö from Carnegie. Now, Thomas Blikstad, and I will... Speak out your questions. Two questions from Thomas. Given that the order intake was very strong this quarter, is there a seasonality effect in play or is this a sort of new baseline? That's the first one. I go to the second straight away. Do you still expect the working capital release in Q4 or is this where seasonality change in cash flow? So first question about the order intake, Daniel or Vivica.

Thank you very much for the question. And I wouldn't say it's due to seasonality effect. I would say it's more that the volatility between different quarters. But I think also we have now seen two quarters in a row where we are performing order intake above 400 million. There was a weak start of this year in Q1. But now in two last previous two quarters, I think that we have a very strong order intake and it's not due to seasonality i think it's more due to now we are starting to see some of the new defense spending rippling down in the defense echo industry system and that is something that's starting to impact the company like middle of i said before that we are seeing the beginning of the beginning of this new ramp up and it's now starting to to impact the late cycle company as middle of so no seasonality but uh as i always say there will be volatility order intake quarter by quarter going forward so and i think that hopefully we answer that bbk also answer the second question i know that thomas wrote this in the chat before and the question was raised so i think that has been covered as well

That is true.

So now we go to Jakob Gravdal. As you move into the third phase of the cycle and the beginning of the beginning, as you say, Daniel, do you see more activity in retrofit projects like the CV90, 72 million project? This project has a fairly short order to delivery cycle. Would that be typical for these kinds of projects?

Thank you very much for the question. We see more and more retrofit. We see more and more urgent need to do this kind of midlife upgrades on the platform they have for CB90, for example. It's better to upgrade the current ones they have than buying totally new ones. So that is something that we see. And normally I have said when you're talking about a CV90, for example, you do IT midlife upgrades each five to seven years or something, even if the platform can live by themselves in 30 years or something like that. And that is something we see more and more. So this is also connected to the increased digitalization need at the end customers. They are doing more and more to be more and more capabilities out there on the field and having this edge against their opponents.

Thank you for all these good questions.

The last one from Jakob Gravdal. I see no further question in the chat, but I will chat on myself for a few more moments to give you... Oh, and here we go, from Danske Bank. Daniel Lindqvist, on the Q3 vacation effect, admin cost was up sequentially and R&D down more than we expected. Has some cost been moved between these cost lines?

Thank you, Daniel. Structurally, there is no change between the lines. I think this is more of a when you take vacation kind of situation that R&D has probably been better as taking more vacation during the summer, whereas you have some admin that is more spread. Take finance for an example. Somebody has the poor taste of putting a Q2 report in the middle of the summer, stopping finance from taking vacation, for example. So I think it's more of those coincidental bits during Q3.

Thank you for the question, Daniel, with Danske Bank.

And Niklas Möller is raising his hand. So please open your mic and go ahead.

Morning.

Just to zoom out a little bit. What is your biggest headache going forward? Is it costs?

Is it capacity, personnel or others? Thank you very much, Niklas, for the question. I think, and we have said this a couple of times before, it's a growing pain. So we are trying to addressing all the bottlenecks that we can see going forward. And of course, personnel and resources around that is one bottleneck that we can see mainly on increasing Middle-Left's engineering capacity. So we are looking and we are now recruiting a high number of engineers in Helsingborg and Skåne where we have the R&D department. So we're trying to identify the potential bottlenecks that we can see and trying to address them so we are ready when this new military spending will hit us harder than it has done 24. Sounds like positive problems.

That's nice.

So good work. Nice. Thank you very much, Niklas.

Thank you for that good question, Niklas.

Any further questions I can say and just give you a reminder that if you missed out on the Capital Markets Day, the first ever for Mildef on September 17th, you can still see the video recording from the full morning on our website. So if you missed out on the Capital Markets Day, please go ahead and see Daniels and Vivica's and the full management team presentation behind the scenes of the Mildef universe. It's quite educational. So don't miss out on that if you have a few moments of spare time instead of watching Netflix. Maybe you could do that at times. I see no further questions. I see no raised hands. So I give first, before I close the meeting, I give Daniel a last few final words from you.

Minor words is thank you everyone for following the Mieleff journey and hopefully many of you also on the shareholder list, so to say. So hopefully we can continue to making this company something better than it is today. So now we have pronounced release the third quarter here, a quarter that we think is very solid and something that we are proud to present. And let us keep in touch and see when we meet each other again in when we are releasing the Q4 report, how the full year has ended up. So have a nice Friday. Take care there and have a great weekend when we are heading into that as well.

Thank you all for joining and never hesitate to reach out. We're here to help you understand the Mildef journey. Thank you and have a fine fall. Bye bye.