MilDef Group AB

STO:MILDEF

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone. I believe it is now 10:00 in this wonderful morning in the summer of July, July 25. Welcome to the investor call with MilDef with a special focus on MilDef reporting on the second quarter of 2024. This call will be presented normally by our CFO, President, Daniel Ljunggren, and CFO, Viveca Johnsson. We expect approximately 40 minutes to be sufficient for the presentation and the Q&A. A friendly reminder is to keep your microphones muted. [Operator Instructions]. And again, welcome to the presentation about MilDef's second quarter 2024. So, with no further ado, take it away, Daniel Ljunggren, MilDef.

[Daniel Ljungren, executive]

Thank you very much for that lot, 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, Viveca Johnsson, who will deep dive a little bit more into the numbers later on. But I will start to 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 Q2 '23 was plus 104%. So, you know that we are up to some tough comps there. But despite that we see the 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 MilDef 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 the second quarter. It ended up with 51.1% compared to 50.1%. So, 1 percentage point better than we did last year. And this is normally where we're saying that this is depending on the customer and the product mix. But I also would like to say that this also has been impacted by all the activities that we have done around increasing the gross margin from a 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 quarter 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, the 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, impact from the increased focus of operation 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 SEK 1.45 billion, and that, of course, support 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 MilDef is the well-positioned for taking advantage of these opportunities and more active market offers.



A little bit more numbers around the Q2. I was talking about the net sales has ended up with SEK 302 million. And as I said, we have established a new higher level in MilDef. Even if we just grew 4.4%, I think it's a strong quarter compared to the tough comparison quarter we had. Order intake drawing asset, up 43%. That's a very good now coming back, growing after a weak Q1. And even if the volatility between the quarters will remain, this quarter order intake, I think, reflects the growing market demand.



EBITDA, our operating profit was strong due to higher net sales, but also, I think, improved operational efficiencies, so improved gross margin. 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 and for the increased demand. So, 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 is 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 3 large orders. First of all, if we start from the left, our subsidiary handle, SEK 169 million 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're 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 BAE Systems Bofors. And on top of that, they also placed an order worth SEK 52 million. 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 4x more capacities than we have in our current premises. And this will hopefully stand ready for moving in, in the autumn 2025, and 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 Hagman. He will be the Vice President for our business area, Nordics, and we will welcome him into MilDef 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 U.K. company that is called Advanced Vision Technology Limited. And that minor asset acquisition expands our product portfolio with ruggedized displays in 3 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 and have strengthened our position in U.K., and also will support us achieving our ambitious long-term growth targets, and this asset acquisition was financed on available cash.



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 3 new displays. Short tour around in the MilDef universe just to catch up with everyone. This is the MilDef footprint. As you can see on the left there, we have presence in 9 countries. And the figures you see on the screen right now is the breakdown of our revenues the last 12 months. So, you can see that Nordics is standing for 56% of the net sales, Europe, 25%; and North America, 17%. And the minus on 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 and 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 car transportation, field hospital, and firefighting and the words 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, et cetera. 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 how MilDef product 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 Danish where we act as a prime that we can sell our product directly to the government. But we also have a business-to-business segment, global business to business. Big Tier 1s in the defense industry, integrators in the defense industry, where we sell our products. It could be SAAB in Sweden or it could be L3Harris in U.S. or RBSL in the U.K., 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 Viveca Johnsson, who will walk you through some of the financial numbers. So please, Viveca, take it away.

[Viveca Johnsson, executive]

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 MilDef 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 MilDef 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 sum out the time line. 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, a quite a modest development given our long-term targets. But it's important to remember that we are on a historical high level here that we are not only maintaining but actually adding further growth. So, 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. So, you're right here. It's 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 were 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 is well demonstrated 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 MilDef is coming from, and we have quickly raised and now we are on this 43% growth in Q2. From the order intake, we go to EBITDA. This is a scalable business model that we are operating. And when we add volumes, we have 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 further expansion for future growth. So that is a proper analyst of that number. The customer needs upsetting, 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 SEK 1.4 billion, 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 '25, '26, and then beyond. If we look on the 2024, 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 EBITDA. 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. And 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. And 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 large 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 middle after last 5 quarters. We are remaining well below our long-term target of 2.5 this month, sorry, this quarter of 1.8. And with that said, I will leave you back to Daniel.

[Daniel Ljungren, executive]

Thank you very much. Explaining the long-term financial development of MilDef. Shortly before we go for the Q&A session, and we'll 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, brain training grounds, et cetera. And if you are in the ammunition business, you have definitely felt that the increased military spending in Europe in the past 2 years. What happened in the second wave, so to say, was that the big platform providers like SAAB in Sweden, for example, KONGSBERG in Norway, they had started to receive orders on big platforms like troop transportation, battle tanks, aircraft, ships.



We're talking about CV1, for example, up in computer, switches, where they have increased their order 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 a 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 we are presenting a strong order intake here in the second quarter. We still think that the big volumes are in 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 MilDef's customer offering and providing to the customer exactly what they want. And we have, for example, the Dismounted Soldier System that is more addressing the digitalization of the individual soldier, and that is where we have done development around 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 one of the focus area 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.

[Operator]

Thank you so much, Daniel Ljunggren, President and CEO, MilDef, and Viveca Johnsson, CFO, MilDef. We have a chat that can be used. Preferably just to go ahead and state your question verbally. I see that Eric has raised his hand. So please open your mic Eric, and go ahead.

[Erik Golrang, analyst]

I don't think I was first though, but sure. 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, 1 or 2 years back. What's the dynamic is causing that? And should we revise our thinking on where your normalized working capital needs are going forward? Secondly, more of 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, 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.

[Viveca Johnsson, executive]

Thank you, Eric. 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 a 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. On the customer contract, we are negotiating today, it takes time for them to be delivered, 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, it's related to our product development that we increased that in 2023, and especially towards the end of '23 and starting to depreciate here during the first half of '24. So that -- 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 the 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?

[Daniel Ljungren, executive]

There may be some extra flavor on top of that because it's like you say, Eric, is 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 dynamic 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 deliver within 2024, more than we usually have done in the past.

[Operator]

So apologies, Tom at Pareto. You were #1, but I had a computer melt down 1 minute ahead of the meeting, I need to build that computer going forward, Daniel. So, Tom from Pareto.

[Tom Guinchard, analyst]

Just 2 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 1 or 2 quarters ago?

[Daniel Ljungren, executive]

I mean, the lease agreement we have signed now in open Stockholm is addressing the integration services, and the integration services has a great need for space in their premises, so to say. They are taking the big platforms like CVA Combat 9, 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 than 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 total different play. And now we have addressed and put us in a position where we can have -- grow 4x over a long time going forward on the integrated services.

[Tom Guinchard, analyst]

And just a question on the orders you were touching on it just recently, but say the Estonian order, what sort of time line do you have on deliveries here? Can we expect 2, 3 quarters before end of 2024?

[Daniel Ljungren, executive]

There is always a different dynamic. It depends on what kind of product, depends on how much there needs to be new developed into these products. But what we have seen here, 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 '24 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.

[Operator]

I see no more raised hands. If you see that, Daniel or Viveca? Yes, Matthias. [Operator Instructions].

[Matthias, analyst]

Yes. Can you hear me?

[Daniel Ljungren, executive]

Yes. Matthias,

[Matthias, analyst]

Credit Mutual Asset Management. Regarding the expanding capacities in Stockholm, can you just give more color on impact, on cost and CapEx maybe in the coming quarters? If I understand well, it will impact from '24 to '25. So, if you have any color on that?

[Daniel Ljungren, executive]

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 or now that we will go out and present the exact numbers of the net impact for the increased rents, 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.

[Operator]

Thank you, Matthias, 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 click to the last picture, and I'll send us off on an invitation.

[Daniel Ljungren, executive]

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

[Operator]

Yes. 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 17. You are currently invited to this first-ever event at Six Hotel in Stockholm. This is morning over lunch event, and we will delay the strength of the business model of MilDef and how the markets are expected to develop in the future with a focus on of course, the ongoing defense and security ramp-up. In addition to the lovely management of MilDef displayed on the picture, we also introduced Swedish Security and Defense Industry Association, SOFF. 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, Helsingborg, or you can wait until 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 e-mail or make a call. We're here to assist you understand MilDef's continuing journey. Have a fine summer and thanks for now.

[Daniel Ljungren, executive]

Thank you all. Take care.