MilDef Group AB
STO:MILDEF

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MilDef Group AB
STO:MILDEF
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Market Cap: 4B SEK
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Earnings Call Analysis

Summary
Q4-2023

Robust Sales Growth and a Solid EBITDA Increase

MilDef achieved a remarkable net sales growth, consistently at 36% since 2018, and accelerating to 57% since 2021. The order intake surged by 29%, with an organic component exceeding 20%. The gross margin stabilized at an all-time high of 48.3%, closing in on the long-term target of 50%. An impressive EBITDA improvement of 180% highlights the company's scalability. With the order backlog hitting a record high, up 15%, and planned deliveries stretching to at least 2027, MilDef's prospects look strong for continued growth and profitability.

Earnings Call Transcript

Earnings Call Transcript
2023-Q4

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O
Olof Engvall
executive

I'm just performing a sound check. If somebody would like to say, yay, you're -- we can read you loud and clear, I would be very grateful.

U
Unknown Executive

Yes, we see you, too. Thanks.

O
Olof Engvall
executive

Thank you very much. Well, then, ladies and gentlemen, a warm welcome to the MilDef investor call this beautiful morning in Stockholm. My name is Olof Engvall. I'm the Head of Investor Relations and Corporate Com with MilDef. And this is an investor call with a special focus on MilDef's reporting on the Q4 numbers as well as the full year of 2023.

This call will be presented in a very short moment by our CEO and President, Daniel Ljunggren; and CFO, Viveca Johnsson. We expect approximately 45 minutes to be sufficient for this call. [Operator Instructions] Also for your understanding and full disclosure, we record this meeting for a later presentation on the MilDef Investor site.

So again, a very warm welcome to the MilDef Fourth Quarter and 2023 Full Year Presentation. So with no further ado, I will let the stage to Daniel Ljunggren and Viveca Johnsson. Thank you very much for that. Thank you for that. We understand annual was muted.

D
Daniel Ljungren
executive

Thank you very much for that, Olof.

O
Olof Engvall
executive

Daniel, I think you're muted. Thank you for that. We understand Daniel was muted, so...

D
Daniel Ljungren
executive

Sorry for that. A very good comment to make, and very welcome to everyone in this conference call, and thank you, Olof, for the beginning of this meeting. Today, we will present year-end and Q4 report for the MilDef company.

MilDef, what we do, we armor IT, or we armor IT, and we armor your IT when and where the stakes are the highest. We are a company that is building robust and solid IT solutions for the defense market.

Today, I would like to start with giving you the macro perspective, what we have seen on the market the past 2 years. And we see strong market fundamentals. We see also that the defense and end customer has a great need of modernization and digitalization in the defense sector. On top of that, we also see now the largest increase in military spending in Europe in the past 30 years.

If we continue, what we have seen now in the market as well is that a lot of countries are now in their defense planning process. And MilDef is, as we have said before, late in the cycle when it comes to the defense spending what they spend the money on.

And the fourth and last bullet is around the potential NATO boost. We all know that now the Swedish NATO membership is quite close. And hopefully, that will give MilDef, as a company, a boost into NATO business.

This is now a picture and a slide that we have shown in the past 3 quarters. And that also indicates that this is a quite slow-moving environment in the market in the defense industry, but it also indicates that there is a stability in the market. This is something, at least Bullet 1 and 2, that we will see 5 to 10 years from now, still a great need from the end customer, and now also the money is starting to ripple down a little bit in the system. And just to confirm this even more, we can see, on some of the selected key markets that MilDef operates in, we can see that the military spending is now starting ramping up and [ readily a ] more active market on some of the MilDef key markets.

Also, if we want to visualize what we have seen on the market the past 2 years, number one, what's happened after Russia's invasion of Ukraine is that our end customer is focusing 100% on operational capabilities. And that is quite logical because that's what's needed when things are happening. So, they are focusing on fuel, ammunition, uniforms to the soldier, drones, et cetera. And that was the true story the first 12 months at least of this post invasion of Ukraine. And then we started to see that a lot of platform providers like BAE, Hagglunds, like Saab, getting orders for the CV90s, et cetera. The ARCHER is one example of a big platform.

Now, our [indiscernible] replacing equipment and has been sent to Ukraine. It's not about here and now, starting to build up in higher capabilities, more to replace what has been sent to Ukraine.

And in the third wave, where we also find MilDef and what MilDef are doing is around IT power. All these platforms need to have some kind of intelligence going forward. It's very important to have IT power into this. And we are starting now to see the beginning of the beginning for a company like MilDef. The third wave is kind of here, and we saw that in the fourth quarter as well. And that is why I am now starting to rippling this down to the micro event and the microenvironment of MilDef. We saw in the fourth quarter a high order intake, record high order intake, especially also that we saw the biggest order ever for Handheld, our acquired company, in 2022, and that makes me especially happy around that one.

Also this week, we announced very nice news around our industry collaboration with Lockheed Martin. That is something that confirms MilDef and puts a quality sample of MilDef that Lockheed Martin, the biggest defense company in the world, is choosing MilDef as their partner on the Swedish market.

Now, I will deep-dive more into the highlights of Q4, isolated to the MilDef business. In total, in full year, 2023 was a strong year. And the strongest part of 2023 was the finish. That sets the tone for 2024. And both in terms of net sales and order intake, both those were record high in the fourth quarter in '23.

Also something that we have worked really hard with and we are now starting to see positive effects of the activity that has been done is the operating cash flow clearly improved in the fourth quarter. And hopefully, that is something that we can see going forward, well, very important for us to now show that we have an operating cash flow that has been improved.

Order backlog, all-time high at year-end. We are very optimistic about 2024 when we now go into the year with a record high order backlog when we leave 2023.

Dividends is now proposed, SEK 0.5 per share. We post the dividends the previous year. And now we have the dividends back again as proposed for the AGM to take a final decision in May this year, but it also has a good single value around what -- that net working capital is in the shape that we are considering dividends again.

Finally, MilDef more relevant than ever. I think that what we see in the context in the world, continued high unsurety in the world is making MilDef more relevant than ever in what we are delivering.

Also, as I said before, high-demand landscape and we think it's here to stay. We -- there has been discussions around the [ Kipship ] scenario, et cetera, in the defense industry. I think that, instead, we will see that building defense capabilities will take time, and it's gradually a more active market, which means that this will probably take longer time than expected from the beginning. So that is probably what we see here and now.

Some important key figures for the fourth quarter. Net sales, of course, as I said, our best quarter ever when it comes to the net sales, 12% organic growth from Q4. If we zoom out and look for the full year, it's a net sales growth of 57%, which actually is 47% organic. And I think that is what I'm most proud of when it comes to the full year growth, so to say.

Operating profit, when we're talking EBITDA, we see now that we have an improvement of the profitability. There is a proven scalability in our business model. And we also now see that we are making a quite heavy improvement from full year 2022 of SEK 60 million. '23 million is SEK 168 million instead, so we are making an improvement of 180%.

Gross margin, important target for us. We have said that, over time, we would like to move this above 50%. Now, in the fourth quarter, 48.2%.

Order intake, very important to fuel the MilDef engine and future revenues. Record high order intake in the fourth quarter, increased with 51% if we compare with the same period last year.

Finally, operating cash flow. We have announced that we will take every action we can to clearly improve that. And we now see, in the fourth quarter, that this is starting to give a positive effect. We see operating cash flow that is dramatically improved from last quarter, the same year.

And with that said, I would like to leave the word over to our CFO, Viveca Johnsson. So please take it, take it away.

V
Viveca Johnsson
executive

Thank you, Daniel, and good morning, everybody.

Daniel started by zooming out, so let me do the same and talk about the net sales growth over several years' time since 2018, where we've constantly seen a growth rate of 36% over these years and escalating to 57% since 2021, something to be proud of. And for the more long term, let's go back, then, to full year 2023 and our order intake, which you here see on a rolling 12-month basis. And of course, for Q4, that would be the full year of 2023. We see 29% growth, out of which about 20%, just north of 20%, even, is organic, something to be proud of.

We ended the year on a high note in terms of order intake with several interesting orders in Q4. This is a bit of -- or there is a bit of a lumpiness in receiving the orders. They come -- they don't come as smoothly as we or you would wish. They come at customer choosing. Some quarters, there's plenty, like in the fourth quarter, where we -- Daniel explained to you some 4 orders that we received that we are press-releasing, for example, the Clavister and the Handheld Makin order. Even previously, during the year, we've had a couple of orders worth mentioning, and I refer you to all the press releases that's gone out for that.

Looking over at the net sales, it's more of a smooth sales between quarters. That's normally because, when we receive an order, the deliveries are not for one single time. It's for several delivery times. Hence, the sale is smoother on the net sales. 56% growth, even higher than on the order intake side, SEK 1.2 million if we round it correctly, but SEK 1,151 million then.

Something to highlight here is the gross margin. Daniel mentioned that we have a long-term target of being closer to 50%. I'm happy to see a stabilized gross margin that is not showing any individual quarters with extreme deviations at this point. And we are ending the year on 48.3%, an all-time high.

And from one all-time line to another, the profitability, the EBITDA, which we have chosen as our profitability target to discuss, it's a growth of 180%. It's showing the scalability of our business model. It's showing that, when we add volumes, we keep our margins stable, this is what happens. It's 180% growth, SEK 168 million. It's our cost to serve that's gone down several percentage points, and our gross margin has gone up and our sales gone up, all indicators in the right position.

Order intake going up, sales going up. Normally, order backlog then also goes up, and this is exactly what we see here. And that's the third all-time high that we can show you here, SEK 1.3 billion, 15% growth. It sets the tone for 2024. And speaking of 2024, this is the order backlog duration where we have north of SEK 800 million planned at the end of 2023 for 2024.

What we also would like to emphasize here is, again, that it's worth viewing MilDef on a longer time frame than the individual quarters. As you see in this duration slide, there are already now orders for deliveries in 2027 and beyond -- beyond that. That's saying something about the decisioning and the delivering a customer requires in this industry.

So, from orders over to the working capital, Daniel mentioned that we had improved cash flow in the fourth quarter. And as the CFO, I'm, of course, particularly excited about that. One very important bit is the profitability, which I discussed a few slides ago. The other part of it is, of course, the development of our working capital position. It's been a bit strained the last couple of quarters. We are, in the fourth quarter, showing here steps in the right direction, coming down to 34% of net sales. We continue to focus on this key measure and balancing that with customer requirements and service level, of course. This is one of our key focus for 2024.

Net debt in relation to EBITDA is also moving in the right direction given the strong profitability development as well as the working capital moving in the proper direction. And this is also why it's now possible for our Board of Directors to recommend the AGM to put dividends back on the table.

And with that note, Daniel, what about the future?

D
Daniel Ljungren
executive

Thank you very much for that presentation, Viveca about -- around important numbers for MilDef. And now I'll just give you a short presentation on what we can expect going forward, future outlook.

Some focus areas that is very important for MilDef here in 2024 is to capture the growing market. We have looked into the defense spending that we will see increase in our key markets. And it's very important for us to be well-positioned for taking care of the growing market.

Customer deliveries is one of our most important because it sets the tone. It sets the brand on the table. It's giving our customer confidence to deal with MilDef. It's the continued strong focus on deliveries in time with right quality. That's what's making MilDef relevant in this industry.

Also, in customer offering, we are widening the customer offering. We have invested during the autumn last year into our product portfolio. And now we're taking the next step to invest in what we can see as a future need from the customer side. This [ mounted soldier ] system, which is around digitalization of the soldier, [ tempus ] and [ nature ] readiness. So we are widening our customer offering and making MilDef even more relevant within the end customer segment.

And we have talked about this a lot, the working capital and operating cash flow. Still, we have a laser-sharp focus on improving operating cash flow and also, by that, reduce the working capital.

Before we go over to the Q&A session and see if there is any questions from the audience, just a short summary of 2023. I'm proud to say that it was a strong full year and the strongest part of 2023 was the finish. We grew sales by 57% to SEK 1.151 million (sic) [ SEK 1,151 million ]. Order intake is up 29%. We are having operating cash flow of around SEK 9 million. It's not the best for the full year. We are making a clear improvement when it comes to operating cash flow, and we continue to, as I said, have a strong focus on that one.

Adjusted EBITDA, as you can see in the scalability in the business, we are improving EBITDA with 180%, moving it from SEK 60 million to SEK 168 million. And also to remember, going forward, the order backlog is record high. It's 15% more than it was 12 months ago. So the conclusion of that is that MilDef is more relevant than ever before that positions it for continued strong growth and profitability.

And with that said, I think we will see if we have any questions from the audience.

O
Olof Engvall
executive

Thank you so much, Daniel Ljunggren and Viveca Johnsson, for a presentation of Q4 numbers and full year 2023. I have no questions in the chat so far, but Erik Golrang, our friend at SEB, please go ahead, Erik.

E
Erik Golrang
analyst

So 3 -- 3 questions, I think. Firstly, on OpEx, selling, admin and R&D, the last 2 quarters of last year saw growth slightly higher than sales growth. What's your base case here for 2024? At what pace will you be expanding operational expenditure?

And then also on top line for this year, I mean, what's the best way to think about this? Order backlog up 15% year-on-year. I think orders with '24 duration up 10% compared to a year ago orders with '23 duration. Is there somewhere in between that's base case in terms of where you might end up growing, or is there a larger piece sort of framework agreements expected to come out this year?

And then the third question on working capital, 35% this quarter, 20%, 25% still the ambition. It's the first half or the second half, when do you expect to be below 25%? I'll start there.

D
Daniel Ljungren
executive

Good questions. I will try to sort them out and start with the first one you mentioned around the OpEx. Q4 normally more OpEx heavy than the rest of the quarters. We have, in the fourth quarter here, also some structural extra expenses in the OpEx, and that is something to bring with you as well.

Going forward, I think that we can continue to see the OpEx flattening out and also not having the same percentage as the top line sales. So, hopefully, we can continue to have an OpEx that is not near, by far, at the same range as the top sales.

And then there was a second question around...

E
Erik Golrang
analyst

'24 sales growth.

D
Daniel Ljungren
executive

'24 sales growth, as you mentioned, also the 10% higher in the order backlog around. We have a long-term target of 25% growing the company year-over-year. It's always hard and tricky to outline 2024 too much. But if we now did 57% in 2023, I can more and more -- of course, it's getting harder and harder to make those kind of numbers in percentage. So, let's see if we -- as you say, somewhere around our long-term financial target is where we're at least aiming to end up with.

And then there was a third question around the operating cash flow, et cetera, and the net working capital. Normally, I would say that going down to a historical number of 20%, 25% of rolling 12-month sales is something that we see in the second half of 2024. Q1 is normally a very strong operating cash flow quarter for us. So, when we're closing the Q1 here for '24, then we can maybe be more exact in terms of time when we see the net working capital coming down again.

E
Erik Golrang
analyst

Perfect. And then just to follow up...

V
Viveca Johnsson
executive

And just may I just add to that, Erik, as well? I mean we're doing a lot of actions now. But given the long cycles in the business, it's, of course, taking a bit of time before you see the full effect of those activities falling out.

E
Erik Golrang
analyst

And then just to follow-up, you mentioned some structural costs in the fourth quarter. Is that cost reductions, charges related to that? Could you put a figure on those?

D
Daniel Ljungren
executive

It's mainly cost reductions. We have, as some of you know, the Handheld acquisition. We have done a little bit of a restructuring on that side.

In terms of quantifying numbers, we are talking about around SEK 7 million to SEK 8 million on the OpEx. That is one-off items in the fourth quarter here.

O
Olof Engvall
executive

[Operator Instructions] Surprisingly, we are 35 lovely souls in the group, in the meeting. But Hugo, do you want to state your questions out verbally? Hugo Lisjo currently written some questions in the chat. If you don't want to state them yourself, I can read them out.

First of all, congratulations on another record quarter. First question, slightly lower gross margin than the last 2 quarters. Why, Daniel?

D
Daniel Ljungren
executive

This is something that we can expect to be a little bit lumpy going forward. In the fourth quarter, we normally -- as we also have a record net sales. When we have high-volume orders, sometimes they also carry a little bit lesser margin. So it's -- the gross margin quarter-by-quarter is depending on customer mix, product mix. So, it could be a little bit volatile.

I think the most important message around the gross margin is when Viveca talked about the long-term development of the gross margin. And with that now, we have a record high gross margin on a rolling 12-months basis, 48.2%. Still, we can expect that it will be a couple of percentage lumpiness in the gross margin in isolated quarters, but the long-term trend is here to stay, I think.

Then the second [indiscernible] but I can take that one. I can see it in the chat. The question is around that we have done a lot of work with Handheld, the acquisition we did in 2022 during. We have a lot of work this year in 2023. Are you happy and pleased with the outcome?

And the answer is probably that we were expecting more from Handheld in 2023. We have now done a couple of organization changes and structural changes that we think puts Handheld in the right direction again so they can come back to net sales growth again. And that is very important. And we also saw now, in the fourth quarter, the big order here for Handheld, for example. So, I'm very optimistic that Handheld will be a good acquisition over time. But isolated 2023, we are not happy about the Handheld performance.

O
Olof Engvall
executive

Thank you, Daniel. Thank you Hugo at Carnegie. I have a question, Daniel, in the meanwhile before we get more questions. We often talk about gross margins. It was 48.3% in '24. And you sometimes talk about we want to push that north of 50%. What needs to happen to push the gross margin north?

D
Daniel Ljungren
executive

I think also that we need to give it some time. This is an adjustment over time. When we have previous agreements and deals with the customer, et cetera, this needs to be evolved over time. And we have seen in the past now that the trend is going towards the plus 50% gross margin. And hopefully, we can go above that. But it's always what's happening on the market when it comes to component prices, et cetera. But I think we have a quite good market going forward to be able to reach that 50% gross margin.

And also now that MilDef is not only reliable up in hardware, we also have software. We have services. That also contributes to a positive trend of the gross margin.

O
Olof Engvall
executive

Thank you for that. 26.5 minutes past the hour. We are almost at the very end of this meeting. I see no raised hands. I see no more questions in the chat. So maybe we are landing this bird in a moment or so.

Thank you, Daniel Ljunggren, CEO, MilDef, entering your second year as the CEO, your second calendar year as the CEO of MilDef Group. And Viveca also came aboard quite recently and now going for her first full calendar year. This has also been the 10th quarterly report after the IPO of MilDef in June 2021.

So, thank you, ladies and gentlemen, for taking part in the MilDef journey and our universe, our Q4 numbers and full year 2023.

I just want to remind you about a 7-minute long interview with Daniel this very morning, live on Dagens industri [indiscernible] 7 minutes MilDef Universe with Daniel. So please go check that out, very illuminating.

Don't be a stranger going forward. Stay in touch. We're here to help you.

And by the way, we see a question now when I'm signing off. So thank you, [ Patrick Bachman ]. We'll throw in the final question. In Q3, you talked about some sales being postponed into Q4. Can you remind us of the size of those postponed sales? And how much of that has actually been realized in the quarter, Q4? Very good question, Patrick.

D
Daniel Ljungren
executive

We didn't really actually put a number on the postponed order that we saw in Q3. But now when we had the Q3 and the Q4, we can, of course, see that, in the Q3, SEK 177 million order intake and, in the fourth quarter, plus SEK 400 million. So, not exactly calibrating around the dynamics of how much was postponed and if we have received what we think what was postponed. But of course, if you put together Q3 and Q4, I think that is the best way to look at it. And then you see almost SEK 600 million in the second half of 2023.

So, there is a lumpiness quarter by quarter except in the order intake. But how much that was realized that we were talking about, it's probably the most of the things that we were talking about has fallen into Q4.

O
Olof Engvall
executive

Thank you, [ Patrick Bachman ]. And we have another message. So the longer I keep talking here at the very end, we get more questions. Lovely. Thank you for that. From [ Nicolas Mueller ], what is your biggest challenges for '24 and beyond challenges?

D
Daniel Ljungren
executive

Good question. We have -- if we, like, deep down, take it down to small level, we talked about the operating cash flow, net working capital. That is one of the big things that we need to address during 2024, but also be able to be ready now when we see the market needs sharply being increased. That is something very important for us to be addressing, the growing pain that we can feel in the company sometimes. We need to be taking care of our organization and making sure that we are ready when we now see increased needs in the market. So, I think that is probably the biggest one that I will highlight, that we need to take care of the growing pain of the business.

O
Olof Engvall
executive

Thank you for that, [ Nicolas Mueller ]. Thank you for the thanks. Well, ladies and gentlemen, it's almost 30 minutes past the hour, so we are closing this lovely investor call with Viveca Johnsson, Daniel Ljunggren, and myself. Thank you for following MilDef through the universe. Don't be a stranger. Stay in touch. We're here to help you understand our worlds. Send an e-mail, make a call, or follow our journey on LinkedIn. So stay tuned for more and stay safe. Thank you very much.

D
Daniel Ljungren
executive

Thank you very much.

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