MilDef Group AB
STO:MILDEF

Watchlist Manager
MilDef Group AB Logo
MilDef Group AB
STO:MILDEF
Watchlist
Price: 114.6 SEK -0.35% Market Closed
Market Cap: 4.6B SEK
Have any thoughts about
MilDef Group AB?
Write Note

Earnings Call Analysis

Summary
Q3-2023

Sales Growth and Strong Margins Amid Volatility

Despite a third-quarter sales growth rate of 38%, slightly lower than previous quarters, MilDef's consolidated view over nine months showed substantial growth of 89%. This brought their 12-month rolling sales growth to 78%, with a record-high operating profit and a robust order backlog of SEK 1.3 billion. The gross margin remained strong at 50%, and EBITDA soared to almost 200% growth from last year. The focus on a scalable business model is reflected in the consistent progression of their financial metrics across geographies. The group is positioned to capitalize on the growing demand landscape in the military sector and expanding market opportunities, particularly in the US and potential NATO affiliations. Despite challenges, the company maintains a historically high order backlog and a healthy balance sheet, with working capital at 35%, improved from last year's position.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

from 0
Operator

Ladies and gentlemen, a warm welcome to the MilDef Q3 Investor conference call this morning with a special focus, of course, on the third quarter of 2023 as well as the first 9 months of the year. This call will be presented by my colleagues, Daniel Ljunggren, CEO, and Viveca Johnsson, our new CFO. We expect approximately 45 minutes to be sufficient for this full meeting, the presentation and the following Q&A.

[Operator Instructions] Also for your clear and open information, we record this meeting. So again, a warm welcome to the MilDef presentation, 2023. So with no further ado, please take it away, Daniel Ljunggren and Viveca Johnsson.

D
Daniel Ljungren
executive

Thank you very much for that, Olof, and a warm welcome to everyone in this conference call and also a warm welcome to my new Sakhare Viveca Johnsson as the CFO. This will be her first quarterly report with MilDef. I will just move on and jump directly to what we say the highlights for the third quarter here in 2023.

Continued strong net sales growth isolated in the third quarter, we saw a sales growth of 38%. That is not in line with what we have seen in the 2 previous quarters. But still, if we zoom out and look at the first 9 months, we have a sales growth of 89% on a rolling 12-month basis, 78%.

So I think that we can say that we continue to have a strong net sales growth. I also will highlight this. And if we look at the long-term financial performance of MilDef, we can see that we now are performing operating profit on the last 12 months, that is an all-time high level. And on top of that, I also will mention that we still have a strong order backlog going forward.

We see order backlog now of SEK 1.3 billion. So we have a lot of more to anted order backlog and delivering to our customers. This is also something worth mentioning here on the highlands. In the third quarter, we unfortunately see that the security situation in our world has not improved. I think in the context of that, it's worth mentioning that MilDef has never been more relevant than what MilDef delivery has never been more relevant during the 26 years history in this company.

I think that is also worth mentioned as well. If we look out further and see and we have talked about this a couple of quarters now, the military spending is steeply going up, and we see a high demand landscape and we see that it will be here to stay if we look 5 to 10 years out from today. I think we can say that we will have a high demand landscape and it's here to stay.

Also worth mentioning is that I see a new dynamic on the market. Our end customer had if we go back a couple of years, limitations in time or they have a lot of time limitations in terms of money. And now I think that the limitations is about time, and they have a lot more money to spend.

And I think that is a dynamic work mentioned and a dynamic that I think will benefit MilDef if we look further out. Worth mention also as a highlight in the third quarter is that MilDef have continued to invest and improve our product portfolio. We have invested in a couple of new products that we hopefully can help us fill up the order backlog going forward. And I will come back a little bit later on slides going forward to the products that we now have released.

Some key figures for the third quarter here in Q3. We start with the net sales ended up on SEK 265 million. That is a 38% increase if we compare to last year Q3. If we zoom out and see the first 9 months, we can see an increase, as I said, 89%.

And we also can see that on a rolling 12-month basis, we see that we performed a strong growth on all our geographic markets we operate on. And we can also see that on a rolling 12-month basis that we have exceed SEK 1.1 billion. And I think that is worth to remember that we have made a tremendous movement in the long-term financial performance of MilDef that we today are performing a rolling 12 months base that is almost double what we did if we go back 12 months.

If we jump further on to the EBITDA, I will say that we have seen a very strong improvement in profitability in the last 12 months. And I think that also proves our scalability in the business and the business model we have. I'm also glad to announce that our gross margin here in the third quarter ended up on 50%. If we take year-to-date numbers when it comes to the EBITDA profit, I would just mention that I think it's a good movement we have done from the previous year where we had SEK 70 million, SEK 16.6 million in the first 9 months.

And now this year, the first 9 months, we are performing EUR 108.2 million. I think that it's what I'm talking about when we have done a movement and financial performance is good even if the third quarter wasn't as good as the previous quarter here this year. Order intake is something that we don't feel that we are very satisfied here in the third quarter. There is a major volatility quarter-by-quarter in our business.

I saw that there were good order intake of minor orders, but we also saw a delayment when it comes to a couple of potential major orders going forward. They were postponed in time. We ended up in the third quarter of EUR 107.2 million. We still -- and that was 42% decrease if we compare to a strong order intake previous year.

But also if we zoom out and look at the first 9 months, we increased our order intake by 21%, and that is indicated that we can continue to grow our strong net sales. And also worth mentioning is that we don't yet see any material impact post the Russian innovation of Ukraine. We are still waiting for the military spending to start rippling down and affecting miles net sales order intake in order backlog.

Also, if we move on to operating cash flow, which I think is very, very important for us. We are a fast-growing company. We need to have control. We don't tie up too much money. But I also want to highlight that in the -- when we are closing the Q3, we normally have our highest inventory level, and that is the same what we can see here this year.

And that is, of course, due to the delivery readiness we have for high deliveries in the last quarter here. So -- but also here, if we look at the year-to-date January to September, we can see that there is an improvement in the company. And I will predict that the working capital will be normalizing go back to historical level, and that will have a big impact on the operating cash flow going forward. Some Q3 business headlines. I think you all have already seen it in the presentation and maybe some I've seen on the website or other places that we have now launched a new brand.

And what I hear from customers and employees and other interest is that we see a very good feedback from the new MilDef look and how we have presented them. So I'm very happy to see that we now have taking MilDef to -- into the next modern brand.

I will also highlight that we have talked about our increased ambitions on the U.S. market. And in the third quarter, we have seen a couple of good orders contracts coming in, and we closed a U.S. contract worth USD 3.5 million. The U.S. market is by far the biggest military market in the world, and I think that we have a great potential on that market going forward. I will also highlight one of the new products that was released here in the third quarter created a very good interest from customers at some of the biggest exhibitions we have here in the third quarter.

And it's -- MilDef of tactical Android device. It's a small handle unit Android-based that sits very well what we can see forward going with the dismounted soldier and sold [indiscernible] how we can digitalize the solar going forward. So that is something that I have a big hope for going forward that it can be a very good product.

Also worth mentioning some other product development we have done in the third quarter that I also think will create good sales going forward. It's a new penalty technology where you where this is already used today in some of our platforms, and we have increased the technology around that, and that is also something that I see a big interest from our customers.

Let me zoom out and talk a little about the market that we see going forward, and this is probably -- I have seen this market for a while now, and I just want to highlight what I see in the market. And I see that from our end customer that is still a very great need of modernization and digitalization in the defense sector. There is a big debt to pay for the military.

They have decreased their spending and they also haven't had the most modern technologies. So now they are trying to catch up. And I think that is something that MilDef will benefit for going forward. Also, something I would like to mention around the market is that we, today, see the largest increase in military spending in Europe in the past 30 years.

We need to go back in early '19 something for see the military spending we see today. And then as I said, hasn't really started to rippling down on MilDef yet. And I think that is connected to this number 3 here that a lot of countries are still in their defense planning process. And we are, as a company late in the cycle.

We have seen that they have started to place orders on the big platforms, the vehicles, et cetera. And that is something that we can benefit from going forward. So hopefully, we will see that the effect from the increased military spending will starting to rippling down here.

Also very interesting from a company with a strong Swedish route is that we see the potential Nature Boost going in on Sweden. Hopefully, we'll get their native membership applied, and that is something that we keep on monitoring. And we think that in the long term, that will be a very benefit for miles. And by that said, I would like to leave the word over to Viveca Johnsson, who will walk you through the financial summary. So please Viveca take it away.

V
Viveca Johnsson
executive

Thank you, Daniel, and good morning, everyone. So we start with zooming out a picture a little bit from the isolated quarter into a rolling 12-month picture of the net sales, which is another all-time high for the MilDef group with a 78% growth from the same period last year.

We have good growth in all geographies that we measure. So that's also something that we are quite happy with. Along the right-hand side, you see the gross margin, which is on a solid level, 48-plus percent. And in the third quarter, it was earning from the net sales to another all-time high. We look at the EBITDA, we have the -- almost 200% growth from this period last year, which we are, of course, quite happy with.

And as Daniel mentioned, this is the scalability in the business model if we get the good volumes, we get the good profitability. And here, you have that illustrated in the rolling 12 months EBITDA. And from profitability, then back up to order intake. Rolling 12 and year-to-date first 9 months of the years, growth is north of 20%. The isolated quarter is not the success that we were hoping for.

But if we do zoom out to a longer time period, that is probably better view MilDef, given the volatility between quarters, we are still growing. Furthermore, again, as Daniel said, the military spend that is trickling through the system has not yet reached the MilDef offering that should bode well for the future.

From orders to orders, order backlog, which is usually where the orders end up, we are remaining on a historically high level here, a small increase from the position last year and finalizing on almost SEK 1.3 billion. This is including deliveries for both 2023 and for a much longer time as well. So 2026 and beyond.

And on the next slide, we will be looking into that duration, which is also showing the longer business cycle that Miller is operating with. So on the top left-hand side of this pie chart, you see what is for 2026 and beyond. The top right-hand part, the dark gray or almost black part is the 2023 delivery position. This is slightly lower than we had last year. Although we do think this bodes for a good delivery in the fourth quarter of 2023.

The final financial slide, so let's turn to the balance sheet side of things. The working capital and if we start by discussing it as a percentage of sales, we are now on 35%, which is coming down from the position we had last year after the acquisition of the handheld group. Daniel mentioned that we built some inventory to secure deliveries for the fourth quarter of 2023 and the first months quarters of '24 as well.

We do think we have reached a new platform level of working capital where we will not going forward, need to add as much working capital per sold Swedish krone and then we can beat the targets previously shown to you where this percentage is coming down somewhat. And on the right-hand side, we are looking at net debt in relation to EBITDA, another one that was up and peaking around the acquisition of the handheld group, which is now on a more solid level of SEK 2.1 billion which is below our long-term target of SEK 2.5 billion.

And with continued good profitability development, we will most likely be able to show an even lower number there. And with that, Daniel, I give it back to you for some future outlooks.

D
Daniel Ljungren
executive

Thank you very much for that, Viveca. It's very healthy to zoom out and see the long-term picture of MilDef and the financial performance over a longer time in the years to 1 quarter. It's quite volatile in our business sometimes, and I understand that maybe in some ways, our third quarter didn't really meet up the expectations. But if we zoom out and see 9 to 12 months, I think it's strong numbers there.

Future outlook, what I see going forward and what we should prioritize going forward. This is something that I mentioned during the whole 2023, that is continue from the company, a strong focus on customer deliveries in 2023. It's very important for us to be successful going forward as well as we meet our customers' requirements when it comes to deliveries here. Also super important for the mill that going forward is that we can capture the increased market opportunities in EU and NATO.

There will be a lot of opportunities that we need to turn into our order backlog instead and going forward, revenues and cash flows at important times here 6 to 12 months going forward, that we have an offering that we have business model that can capture all these market opportunities. We will continue to work hard, and we will continue to improve our working capital and operating cash flow.

This is very critical for the business going forward. We are growing fast. We are tying up more cash in inventory et cetera, in our net working capital. But we also need to find smarter ways, work harder with this, so we can improve the operating cash flow. That is something that we will focus on going forward as well.

Also worth mention that I said before that I think in the U.S. market, by far the biggest one, we have an untapped potential. I think we have a product portfolio that can do even more in the U.S. and there is really high volumes in the U.S., and we will try to do what we can to win more business on the U.S. ground. So we will continue to accelerate our U.S. expansion.

Last bullet here will be around the NATO. Hopefully, when you can now see that the Swedish membership in NATO will be applied. So we can also be aligned and within the NATO and membership in the NATO family. And I think that will be very important in the long term at least from MilDef and the position of MilDef.

As I said, Evan, if I understand that our Q3 numbers didn't really met the expectations on the market. I still have positive expectations for the rest of 2023. We go in -- we closed the third quarter with a strong order backlog. We see a more active market even if we didn't see that in the order intake here in the third quarter, we continue to see a more active market.

And due to that, I predict that we will continue to have a strong sales, a strong order intake and a strong profitability for the full year 2023. That's my expectations here and now. And with that said, I think we are in the Q&A session and the report on the presentation is done. So let's move over and see if there is any questions.

O
Olof Engvall
executive

We have a few questions actually. And the first question comes from Hans. How does the weak Swedish krona affect the MilDef of sales?

D
Daniel Ljungren
executive

It's, of course, giving us some extra boost on the top line there. I would say -- on the other side, we also purchased a lot of the products in Taiwan. So we have on the margin side we also have an effect there. So -- but of course, it's boosting the top line a little bit when it comes to the weak Swedish krona.

O
Olof Engvall
executive

Thank you for that. And the next question, series of question calls from Hugo Lish. What are your thoughts regarding the order log. The value of the order backlog for the remainder of this year is lower than it 1 year ago. What are your thoughts on this? It's the first question.

D
Daniel Ljungren
executive

Yes. I think we need to see that we also have things that is not in the order backlog that we also will be able to track Dana's revenue when we go into to that quarter. So I understand what Hogan mean and hopefully, we can boost that even more of those numbers going forward.

And we also know that we -- previous year, postponed some major orders. And hopefully, we can focus on delivering this year, we will hope that we can make all the deliveries that is expected in the fourth quarter.

O
Olof Engvall
executive

And another question from Hugo regarding our place in the value chain in a sense. We've seen news that certain subcontractors for Hugo's indiscernible] have received orders related to the significant 90 contracts. Do you have any updates regarding your potential involvement in delivering to the CV90 orders?

D
Daniel Ljungren
executive

I'm not going to go too much into detail on future business opportunities, I would say. But of course, we are one of the sub suppliers that we are talking -- are talking to Hugo around this. And I know that they have a massive order backlog, they will be delivering a lot of CV90s going forward, and we have a good history with Hugo. So I will be I would be surprised if we don't have a good dialogue with the Hgo, which we are having at the moment. So hopefully, we will see here in the fourth quarter that things are improving in terms of order intake.

O
Olof Engvall
executive

Thank you, Daniel. And final question from Hugo in January, you received a prototype order under your extensive framework agreement. I think that he means the F&B agreement. Can you provide an update on the progress of this project?

D
Daniel Ljungren
executive

I can do, and I can also mention that there is a long cycle sales cycles. And we haven't got the serial volumes order. So we are still waiting. We have done tremendous good work this year when it comes to the R&D and developing new products, et cetera. So now we have framework agreements in place. The products are developed. So now we are waiting for the final piece, the big serial volume orders.

O
Olof Engvall
executive

Thank you for that explanation. Over to Victor Lindstrom. Now with the recent acquisition and established office in the U.S., do you expect the cost base to grow at lower levels going forward?

D
Daniel Ljungren
executive

I do that. I expect that we will see synergies on the cost side. We will see that we are now starting to consolidate our business for example, in the U.S., but also in the U.K., for example, connected to handle. So I hope and I will see and now our prediction is that we will have cost synergies going forward, and that will have a great impact on the P&L and our profitability going forward.

So we are in that process of consolidating our business in U.S., in U.K. And it takes a little bit time before you're starting to see the cost synergies. But in 2024, we will absolutely see them.

O
Olof Engvall
executive

And as you can see in the Q3 report, the U.S. market sales for MilDef growing quite substantially. Final question from Victor, do you see any delayed order in Q3 that moved into Q4?

D
Daniel Ljungren
executive

Yes. As I said, we saw a good order still continued good order intake of small orders. But for a company of MilDef size, we need, and we have seen that in the past quarters when we have had a good order intake that we need those 1 or 2 big orders, and they have been delayed in time. So we have not seen any big orders.

So we have not announced any big orders in the third quarter. And that is what I mean. I think that the potential big worth has been delayed in time. And hopefully, now we can see in the fourth quarter that we now can close those business and turn it into order backlog.

O
Olof Engvall
executive

And on the same note, approximately from ADM, we have not lost orders. They have just been delayed. Is that correct?

D
Daniel Ljungren
executive

I would say that it's a correct picture, yes. And for those who have been with the middle of the time, do you know that it takes time. It's very tough to have a right when it comes to timing of order intake. So in isolated quarters, it can be very lumpy, high volatility. But normally in the end, we are not losing the business. It's just lacking in time.

O
Olof Engvall
executive

Thank you, everyone, for those good questions. We'll just idle on for a few more seconds so that somebody can shoot over another sharp question. Before we do that, I ask you to dwell on -- Well, let's say like this, MilDef has never been in this situation before, been larger or more relevant for its customers and possibly also shareholders. What do you expect for the remainder of '23 and moving into $24, Daniel?

D
Daniel Ljungren
executive

As you say, I think that mill is in a very good position. I think that we will see a high demand landscape that will have a good impact on MilDef. And we also see that we have resources, we have invested in our product portfolio. So I think we have done a lot of things right. And now we are, so to say, waiting for the increased military spending post Russian invasion to starting through rippling down to MilDef.

We are in -- we have the framework agreement in place. We have the portfolio in place. We have the capabilities in place. So even if we have grown a lot in the past years, we are still waiting to be able to accelerate even more. And I'm looking forward to do this together with all the employees at MilDef to take this to the next level.

O
Olof Engvall
executive

And that is the closing of this call today. Thank you, ladies and gentlemen, for taking part of the MilDef journey going forward. Thank you very much, Viveca Johnsson, and welcome to the MilDef family. Thank you, our CEO, Daniel Ljunggren, who has been a part of the MilDef family for us north of 10 years. So thank you for following this call. Don't be a stranger, stay in touch. Follow us on LinkedIn, send an e-mail or make a call. We are here to assist you understand the MilDef of continuing journey. So stay tuned for more. Have a fine day, stay safe.

D
Daniel Ljungren
executive

Thank you very much. Bye-bye.

All Transcripts

Back to Top