MilDef Group AB (publ)

Ladies and gentlemen, a warm welcome to the investor call, the Q3 investor call with Mildeff with a special focus on the Mildeff 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 Mildeff'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, Olaf. And good morning to everyone. And thank you for joining this call around Mildeff 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 increase our long term profitability target from at least 10 percent EBITDA to at least 15 percent 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 drives strong interest in Mildeff 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 under invested 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 Mildeff 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 Mildeff 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 plan 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 contracts 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 Mildeff 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 a percentage .5% in Q3. And that is something that we can compare to 8.4 that we did last 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 Q3-23. 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 Mildeff. There has been a lot of corporate news released, as I said, the new, where we four double 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 Harbman, 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 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 Mildeff 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 a brief outlook on the Mildeff 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 percent of the net sales. We have Europe standing for 23 percent of the net sales and we have North America standing for 15 percent of net sales. Slightly little bit more in the Nordics than we had one quarter ago. And slightly less on Europe and North America. Customer segments, defense is still our core business and defense is 80 percent of our net sales. We also have the critical infrastructure that stands for around 20 percent of the net sales. And if we look at breakdown of the portfolio, we still see that hardware is the lion part of our revenues, that is our legacy, and it stands for 70 percent of the net sales. Solution, where we see the service integrations, et cetera, stands for 25 percent of the sales and we still have the software standing for roughly five percent 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, Vivike Jonsson, for 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 Milif is capable of. And as you can clearly see, there is an escalation the closer we get to present date with 57 percent 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 percent 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. Milif 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, the a bit softer start of 2024 is giving a bleak 2 percent sales increase as a rolling 12 number. We had 10 percent in the isolated quarter three. 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. Given the strong order intake 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 percent you saw in the isolated third quarter here, 50 percent. 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 percent 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, which the lead times in our industry, that's not possible. So we have an order backlog at an all time high just north of one point six 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 customer request is the most usual one 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 than I will. We have changed from our previous target of EBITDA of at least 10 percent over time to an EBIT-A margin of at least 15 percent over time. It's ambitious, but we feel it's realistic and achievable. We're happy to 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 EBIT-A now where we are carrying our operational depreciations of material assets in our operating margin without breaking that out. Speaking of EBIT-A, we look at the rolling 12 of our EBIT-A development. It's following roughly along the lines of the sales development. That was 2 percent. Here we see 3 percent. I believe in the third quarter we showed that even though we had only, if you will, 10 percent increase of sales, we still strengthen 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 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 east during Q3. And we are back around these 33 percent. We have communicated a medium term target of around 25 percent working capital in relations 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 one point four. 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, Vivike, for putting some extra flavor on the financial numbers. 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 for 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 solar 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 are going from digitalizing vehicles to digitalizing individual soldiers. 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 middle of going forward as well. Final bullets around outlook is the active M&A agenda. We had a middle of went to 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. 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 saws, ladies and gentlemen, for participating in this call and also for participating on the Mildeff journey. And now the Q&A session has opened and I believe it was, was it Erik Gåldrang first come out or was it Mattias Montgomery? Please speak out. Yeah, can you hear me?

Absolutely. So just 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 I'm 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 used during this summer. We have expanded our Swedish organization during the last couple of years. So this effect in 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 surprisingly 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.

Thank you for that, Mattias Montcomery. I will go soon. I will go to Thomas Blikstad's questions, but first we'll let Hugo Lieshö 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. Hi, Hugo, and thank you. The question was around which order?

The large follow-up order.

From your development

order a year ago, one and a half year ago.

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 from middle of yet. So hopefully we will see that going forward when we get to the end of the year. Now we're 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 Česk?

No major further update. We continue to work with the case. We work together with B.O. 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-drones 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 heard from the operational part of the company, there are 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, Helgur. 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, Hugo, for the question. And I wouldn't say that 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 eco industry system. And that is something that's starting to impact the company like Midlöf. I said before that we are seeing the beginning of the beginning of this new ramp up. And it's now starting to impact the late cycle company as Midlöf. So no seasonality. But as I always say, there will be volatility order intake quarter by quarter going forward. So I think that hopefully we answered that also answered the second question. I know that Thomas wrote this in the chat before 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 CV90, for example. It's better to upgrade the current ones. They have them buying totally new ones. So that is something that we see. And normally I've said when you're talking about the 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, 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 Grafdahl. 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, Donnie 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. 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 we have said this a couple of times before, that's a growing pain. So we are trying to addressing all the bottlenecks that we can see going forward. Of course, personnel and resources around that is one bottleneck that we can see mainly on increasing middle-less engineering capacity. So we are looking and we are now recruiting a high number of engineers in Helsingborg, in Skion, 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 before. Sounds like positive problems, Holdo. That's nice.

So

keep on the 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 Vivi Kass 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. Final words is thank you everyone for following Mildef and Mildef 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. And now we have pronounced the 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.