HMS Networks AB (publ) (HMS) Earnings Call Transcript & Summary

Welcome to the HMS Networks Q2 presentation for 2025. [Operator Instructions] Now I will hand the conference over to CEO, Staffan Dahlstrom; and CFO, Joakim Nideborn. Please go ahead.

Thank you, operator. Good morning, everybody. Welcome to this HMS Networks Q2 report. We follow the standard format we normally do. So I will start with a short business update from this eventful quarter, and then Joakim will give a financial summary and a deep dive into the numbers, and then we'll finish up with a Q&A at the end. But let me start with a very quick overview of the mix picture we are seeing in the quarter 2 and remember that we made a big acquisition in April '24. So this also now means that the Red Lion acquisition is part of our organic growth after 12 months. So, we see a mixed picture both on net sales, where we are more or less flat. But behind this is also some currency changes and things. We also made an acquisition in last fall in Germany. So we are more or less flat, but we need to look a little bit under the hood here to see the details, and Joakim will be back on that. Order intake, a little bit the same. We have some organic growth, but it's a bit strange to report plus 8% organic growth, but 6% in total. And this is related to currency effects. And here, we also have some impact from M&As, but we also need to show a little bit more details on this and we'll come back to it later. We see a good development on the EBIT. So we are proving a little bit. Adjusted EBIT margin is 21.4%, slightly under our long-term target of '25, but an improvement since last year. The highlights of the quarter, at least in my book, is our very good cash flow. Cash flow of SEK 201 million for the quarter, very good improvement and this also is a good result of that we manage the company. We manage our inventory and all the cash flow items. And we have also a fairly high debt in the company. So it was very nice to see that we are maintaining a strong cash flow. And this results in a growing EPS of SEK 2.52. I think for the year-to-date numbers, the first 6 months, this -- they look a little bit different because there, we have some acquisition effect in quarter 1 from Red Lion. So I think I will not move into these details. They are mostly old data. Too many clicks here. From 1st of January, we operate in 3 divisions. We have our largest division, IDS, Industrial Data Solutions, representing 46% of our business, focusing on industrial automation, but going towards customers for machine building, system integrators, end users, and we have a mix of direct sales, distribution sales and e-commerce. Then we have our -- well, actually original business with Anybus, Industrial Network Technology, INT, representing some 30%. And here, we also go for industrial automation, but primarily focus on device manufacturers and direct sales in our design model. And finally, we have 24% of revenue from New Industries, which is a combination of companies or business we have, where we see good potential, but they need to grow for the future before they can be their own divisions and we have building automation and vehicle communication here. So let me just see if I can click right this time. So for the business update, a few highlights. We will be back on the order intake. We see good growth, but there's also a currency effect and we need to look on the bridge to really understand this. And net sales is behind last year. There are some -- we see quite not perfect market, quite weak market and uncertain market conditions. We also have some smaller things that is affecting our shipments in June here, We are changing ERP system in the acquired Red Lion to be fully integrated into our systems. A lot of work and this delayed some invoicing, but it also is an important tool to make sure that we can improve our business, improve our margins and operations for the Red Lion business. We also continue to invest in our production facility in York. The ambition here is that our manufacturing facility in Sweden and in U.S., they will be sister factories, and we can quite easily change products depending on volume and customers between these 2 as a complement to our network of EMS partners in Southeast Asia, Eastern Europe and North America. Look on the divisions, the IDS division, stable development on order intake. And we have some delivery issues there, we are also seeing that some of the larger project orders are not coming in quarter 2. We reported this in quarter 1. That's good, but we also believe that this is one trend in the market that there's a big uncertainty. So small projects are executed, but large projects are delayed and more wait and see for these investments. INT division. Here, we have talked a lot about inventory correction in the last couple of years. This is now more in balance. And of course, the German automotive business is not great, but still we see some positive signals from that market. It will take time before it's improving, but we see some good signs there. New industries, our smallest division experienced some hesitant market in building automation and some headwinds in this. It's a smaller business, but there we see some, both on order and invoicing that is not great, a mixed picture, I would say. Let me just -- this is a crowded picture, but let's try to just dive into understanding the flows. Tariff is a big topic. And our expectation was that we should have more data on this and is still quite uncertain. But if we look on the 4 elements related to U.S., first, we have manufacturing in EU, in Europe. And this represents some 15% of group revenues, and this is finished goods. We expect this to be tariffs of 10% going forward, who knows, but that is at least our assumptions. And number two, we're manufacturing in the U.S. -- sorry, we manufacture also in Europe, sell to -- ship to U.S., but it's end destination is Canada and Mexico. And here, we can do some activities to make sure we don't get tariffs on this because it's not destinated for U.S. This is less than 5% of our group sales. We estimate this to be 10% of tariffs as well, but we have different activities there to try to mitigate that potential cost. Number three, China and Asia, we buy some components from China and Asia to our U.S. manufacturing. And here, we expect higher tariffs and this -- who knows, but 20% is our guess, but we're also seeing some indirect cost here for U.S. suppliers that they are American companies. We buy from them, but they have part of their raw material from China. So we also see some side effects of this. And finally, number four, we are doing some products in the U.S., and we ship to China. This is a very small piece of our business, it's less than 0.5%. So this will not really impact us. So our tariff strategy in this uncertain world is, first, short-term increase, making sure that we can increase prices to our customers to more or less cover this. We decided to not make price increases on the order book, but we have made price increases on all new orders coming in, in the last couple of months. Midterm, of course, we have manufacturing capacity around the world. And the idea is also to make sure we invest more in the U.S. and build more capacity in U.S. to mitigate this. We expect this tariff problem to remain for the foreseeable future, but it's only our speculation. All right. With that, I would like to move over to Joakim for our financial update.

All right. Thank you for that, Staffan. And let's dive into the order intake, which I think might need some explanation. It's a bit of a tricky quarter with a lot of currency effects, and we also have an acquisition that is with PEAK-System that we need to account for. Maybe we start on the bottom left on that graph, and let's try to understand the percentages. So what we report is a plus 6%, SEK 816 million. And organically, this is actually 8%. And what might not be super intuitive is that the FX effect is actually larger than the acquisition effect, and that's why we have this bigger organic growth. The SEK 87 million in FX is, of course, the normal order intake affected orders received in the quarter. But it's also from a recalculation of the order book, which impacts with minus SEK 41 million. So if you then go to the upper left graph and you look on the trend series, you see that SEK 816 million is a bit of a drop compared to previous quarters. And it's maybe not as drastic as it looks, given the currency effects here. So if you add back that SEK 41 million first, and then you also account for the high currency effects on the orders in the quarter, that will look a bit more solid, that development. Still, it's a bit down compared to the trend we've been seeing in Q4 and Q1. And the main reason we see here is that those big project orders that we have received over Q4 and Q1 that has been very strong, we don't see the same pace of that in Q2. One reason could probably be the tariffs. And then we believe that we received a lot of those orders also in the previous quarters. So I think maybe that clarifies a little bit. On the positive side, we can see that Europe is improving. It comes from fairly low levels, but we see continued improvement in the pace in Europe. I mean that's a significant market for us, so that's very important that we see this development. I'll come back to it when we look at the INT numbers. It's even more clear. We can also note that APAC and especially China is developing extremely well, and we're more than 30% up in this region, and China for INT is becoming a really strong market. It's surprising it is going so well, but we're happy to see that. And if we then move over to sales, we don't see exactly the same situation. We see a more steady curve on the sales development. We reached SEK 843 million, which is pretty much flat in relationship to previous year. Organically, we're minus 5%, and we also see that the organic development is about the same as the FX effect and then the acquisition of PEAK pretty much makes up for that drop. And here, we're also meeting a pretty good comp in Q2. A lot of the businesses, we're doing quite well. We still had some order book to deliver out for the INT part and also IDS had a pretty good quarter. We also see the effect of the go live from our ERP system. We went live on 1st of June, where we have been running a bit slow in the first couple of weeks in the U.S., which is normal. We had the same situation 2 years ago when we made a change in the big manufacturing site in Sweden. And this is something that we're going to get back on. We're back to a decent pace already, and we will recoup on this in the second half. So that's not a big worry. But the Q2 numbers is a bit lower because of this. We also were seeing some component shortages for some of the switch products. So that's also something that we expect to solve in the second half and make up. It's not a huge volume, but that could have been a bit better on the sales side. So looking at the book-to-bill, we're at 1.01. And with a normal sales level, I think we would actually have been lower than 1 in book-to-bill. Going forward, we think that sales and orders will probably go pretty much hand-in-hand. As you've seen, we've been building some order book now for the last 3 quarters and we expect to be able to utilize that. Now let's have a look on the different divisions. If we start with IDS, starting with order intake, we see organically, we're down 2% to SEK 382 million -- sorry, reported down 2%. Organically, we're plus 10%. So you see it's a pretty big difference here. And we have the majority of the sales here in the U.S. and in U.S. dollars. And that's, of course, why this gap is becoming so big. So all in all, I think the base business is doing quite okay. And again, remember, you see here, in Q4 and Q1, the product orders that we received, that is pushing that up a little bit. So it's maybe a little bit better than what it looks like at the first glance. On the sales side, we are weak. We're down 14% reported. We're down 7% organic. And as I said, some of this we caused ourselves. And that is also the main reason why the adjusted EBIT is not so good, SEK 65 million and 17% margin, which is lower than where we should be. And again, we think this will be corrected over the coming quarters in the year. Then INT, the most positive development within the divisions. We have an order intake that is up 5% reported and 15% organic. And I mentioned before, the continued recovery in Europe as the main explanation. And we also see that some of the larger accounts, that have been placing very few orders for a long time, are now starting to place some orders again, meaning that this inventory reduction period is coming to an end. And this is extremely important for us to be able to continue to show a good development here. Also on the deliveries, we reported minus 1%, SEK 269 million, but organic were actually plus 6%. So we're starting to see the trend in the right development. And of course, there the currency situation makes it a bit difficult to compare. But all in all, this is doing fairly well. We do SEK 75 million in adjusted EBIT, a solid margin of 27.9%. And again, you see especially the development in APAC and China that is really strong, where China is almost at double levels compared to Q2 2024, which in itself maybe wasn't the best quarter. But still, this is an interesting market still for this assortment, and we see that we are still highly competitive in that region. Then going over to New Industries. We will be facing a bit of a more tough quarter. So on the order intake side, I should also say that this is pro forma numbers, including now the PEAK-System numbers all the way also in the comparables. So you see that we are reporting 11% down on orders, 4% down on sales. On organic, this is only 4% down on orders and flat in sales. There we've been seeing a bit more hesitation and we kind of have been seeing a bit of -- especially on the building automation side, we've been seeing a trend shift from April. We're a little bit surprised that it's being that big, and we don't have any good reason other than the tariffs that has caused some hesitation in the market. And we have to wait and see if this comes back. This is, again, a little bit strange. And also on the vehicle side, we are seeing a bit of a tougher market at the moment with the German car industry as a main driver. And I mean, all in all, we do flat in sales, so we hope that this will improve when clarity comes just on the tariff side. And also I should mention on the order side that we did have some pre-tariff orders in Q1 on the vehicle business that is causing Q1 to be a bit higher and Q2 to be a bit weaker. So if you maybe took some SEK 10 million, SEK 15 million and change from Q1 to Q2, maybe you've got a better pace, and then you would be flattish on the order intake as well. So let's look at the profitability out of all this. And we do an adjusted EBIT of SEK 181 million, 21.4%, and I think overall, if you consider that we are down 5% in organic sales to still be able to improve the margin over Q2 last year, we need to be fairly happy with that, with what we have. It is not our best quarter, especially not on the delivery side, and that may be the main reason why we are a couple of percentage points from our EBIT target. We also have a tough situation on the gross margin, 61.8% versus 61.9%. And then you say, okay, that's not a big change. But as you might have seen, we have been a bit higher in between those periods. Q2 last year was also, for various reasons, a tough quarter on the gross margin side. So we see a bit lower margins than what we normally would expect. Two main reasons for this. One is the tariffs where we've been seeing tariff costs coming in the quarter. And as Staffan mentioned, we did not increase prices on the order book. So we have decreased prices for new orders which caused a bit of a delay in getting that gross margin effect to balance out. So we're not too concerned about this because we're going to get it back probably from Q3 onwards already on the tariff impact. But then we also have the currency situation where we do have some impact on the cost of goods sold as well. And this is, of course, also something that probably will continue a little bit even if the euro has come up towards the last couple of weeks that might help a little bit. If we look on the OpEx, we see, again, an organic reduction of a little bit 1% compared to last Q2. And you might also have seen that we are slightly down compared to the first quarter this year. So we are keeping OpEx pretty tight, and we really want to see that Europe really comes back in a stronger pace before we have a couple of initiatives like that, that we would like to do, but we're holding those for a little bit. And then I also want to point out that for what is worth, the net R&D is also impacting the quarter by SEK 10 million compared to second quarter 2024. So the comparison is fairly okay when we compare it to the same quarter last year. EPS small improvement to SEK 2.52. Net financials, a bit softer than the last time. And here, we have a currency to thank for that. Also the interest base, the interests are, of course, a bit lower than it was 1 year ago. Let's look at the cash flow that we really like, SEK 201 million. Second time, we're above SEK 200 million. And we have the decent results to thank for that. But also the reduction that we have on the inventory side that we've been talking about this before that we should continue to reduce inventory and now we made a good reduction here in the second quarter, and we think there is a little bit more to take over the last 2 quarters for the year as well. We also see that receivables are coming down. So we're doing a good work in collecting, which is extreme important when we run with a high leverage. So a bit more focus on this than we normally have, and it's good to see the results. And then go over to the debt situation and the leverage. We're having just over SEK 2.8 billion in net debt at the moment, out of which about SEK 2.4 billion is interest bearing. And we see a reduction pretty, given the strong cash flow that we're coming down in interest-bearing debt. And it also means that we're reducing leverage, which we kind of like on these levels. We said that we're going to move to around 2.5 at the end of the year, which we still think is a good admission. And you see net debt divided by adjusted EBITDA is reported 2.97 and adjusted for pro forma from the acquisitions and pre-IFRS 16, 2.92. And here, we have the 2.92 is actually down from 3.05, 2.97 is down from 3.10 in Q1 2025. So we see a continued reduction, good to see and this makes us quite comfortable that we're going to be able to reduce this as we want. Then to sum up before we let you ask your questions. Three things that we would like to highlight. All in all, decent organic order intake in a pretty challenging environment. We still have to say 8% organic order intake growth. The base business is developing quite solid after all. We maintained a book-to-bill of over 1% in constant currency, so we're happy with that. And then maybe the most important thing for us to see that the INT division continues to recover. Europe seems to be coming back slowly. Also, the bigger customers are placing orders. We see good development in APAC and China. And finally, I think the cash flow, it's very important to see these circumstances. And we continue doing what we should on the inventory side and converting good to the cash. So with that, operator, would you open up for some questions?

[Operator Instructions] The next question comes from Viktor Högberg from Danske Bank.

So just thinking about your customers being a bit hesitant, tariffs and geopolitics side, you mentioned some regulations. Could you go into that, just what you're referring to? And also seem to be, and you continue to be cautiously optimistic on the full year, is that more tilted to Q4 with Q3 just slightly better? Or what do you see in terms of facing? Third question, gross margin and mix. So FX aside, what kind of mix impact do you see from recovering Anybus deliveries in negative gross margin effects, this is for the rest of the year?

I didn't get this with regulations. Viktor, what do you mean with the regulations?

If I didn't misread, I think you mentioned regulations as one thing that helps your customers back. Sorry, my bad, I missed that you talked about tariff regulations. Just regulation. So let's skip that question. Sorry about that, my bad. And let's go to the gross margin instead maybe and the phasing of the recovery that you've seen for the rest of the year.

All right, that seems to be my territory. I'll take that one. So what you might have seen, Viktor, was that the order intake was quite good on the INT side in the quarter, the sales was not that strong. So the mix effect is not that big in the quarter. And when we come down to these levels, the gap towards the PEAK and the rely on margins are not so big, so we don't have a huge effect actually on the mix as such. Looking forward, when we see those order intake is converting to sales, there might be a bit of a push down on the gross margin. On the other side, as we mentioned, we think that the fact that we don't have an upside on the tariff price increases, but we had a full downside, that will probably more than compensate for that. And now we don't know how the future will play out. But since the euro has come up a little bit compared to where we were in the quarter, we think that could also maybe help a little bit. So I think we're quite positive towards seeing better gross margins than what we deliver in the second quarter looking forward, if I put it like that. And then you had the last question that I -- sorry, I forgot that one. Can you just repeat that?

The basis of you remaining cautiously optimistic and the phasing of it tilted towards Q4, maybe end of Q4, I would assume.

A lot comes down to at least what we believe that we need to get some clarity on how these tariffs will play out. And hopefully, we'll get that fairly soon. And I think that will probably ease up some decisions when we get that clarity. So I think the fact -- the clarity is probably more important than if it's going to be 8 or 10 or 12 for Europe to the U.S., but we need to know what -- so I think that goes for a lot of companies. So I think once we have that clarity, we probably believe that there will be a small uptick throughout the year.

All right. So we move on with more questions.

The next question comes from Erik Larsson from SEB.

I have a couple of questions. So we could continue on the gross margin side here. Is it possible to quantify the impact from the tariffs on the gross margin? Like are we talking up to a percentage point or is it less?

It's about a percentage point, yes.

Okay. And then I'm just curious if there were any material differences in order intake comparing like April to June, for instance.

It's been a pretty stable trend throughout the quarter. So no big differences.

All right. And then the final one on OpEx. I saw you had a small organic decline in OpEx. So I'm just curious about the balance here because I assume your plan is to increase costs as demand returns. But just would there be a more pessimistic scenario, can you sort of hold on to this level or even take it down further, if you must?

You want to take that one, Staffan, or should I?

I think what we've done here, we started this new organization in three divisions here from 1st January. Part of this was also to become more efficient and more customer focused. So I think what we see in the reductions we're doing, that's an effect of this new organization. If things continue as it goes, we will be a little bit hesitant to add new costs. But at the same time, we just started this new organization. We are also reluctant to cut more at the moment. So we think we have a good organization. We need to get more traction on this. So I would expect this to be more on this level going forward. However, of course, if we see a significant drop, there's always cost to take out, but it's always a balance about short term versus long term. So right now, we have no plans for other costing changes, rather that we are waiting for an uptick and then ease a bit of the holdbacks we have.

[Operator Instructions] The next question comes from Gustav Berneblad from Nordea.

It's Gustav here from Nordea. I thought I'd just build a bit more on sort of what Erik was asking here regarding April to June. I mean, would you say that you saw a drastic change in the communication with the customer from Liberation Day then? Or how would you describe sort of the overall communication with your customers?

Yes, I think that is the beginning of this period. It's been a lot of uncertainty, and it just seemed to continue, this uncertainty. Some customers maybe get used to it, but we think the tariffs is creating a situation where smaller projects are continuing as normal, but larger projects are on hold due to this uncertainty. So we think that Liberation Day was a starting point for an increased uncertainty. But from that level, it's just been pretty much the same, I think.

Okay. Perfect. And then regarding sort of the price increases that you have implemented? Should we expect them to fully come through in Q3? Or should we expect sort of a mismatch also slightly early into Q3 as well?

I think almost everything should balance out in Q3. It might be a little bit of a gap left but no materiality in Q3.

Okay, that's clear. And then just the last one here. I mean, regarding sort of your comment on pre-ordering related to the vehicle business, as you say, some SEK 10 million to SEK 15 million here in Q1 that maybe we should have pushed into Q2 instead. But is that all the pre-ordering you have noted in Q1? Or have you gotten sort of more perspective now in Q2 that there might have been more pre-ordering elsewhere as well in Q1?

Not that we know of. And then, of course, we're not interviewing every customer exactly what they have done, but I think it's pretty -- the big difference, if you look in pace, if you take INT, it's improving. If you take IDS, then we have a couple of pretty big project orders. And if I take them out, I think the business is developing about in the same way. So I think there is no big reason for suspecting it from our perspective.

I think it's also important to add that many of these customers, they have come from the last couple of quarters with quite high inventory themselves. So even if it would make sense from a cost point of view to make some preordering, I think a lot of these customers have all said, okay, we are not wanting to build up more inventory at the moment. So we had a few customers and distributors in this vehicle communication, but beyond that, we haven't seen so much of that effect. I think it's a reluctance of customers to build inventory. That's the background there.

Perfect, that's very clear. Sorry, just one last one here. You also comment on the investments you're making in the production facilities in New York and Pennsylvania sort of scheduled to roll out here in H2. Did you say anything regarding the impact on the margin? You say it will be positive here going forward, but did it impact Q2 margins specifically?

Maybe I can take that one. So we've been -- some of the investments are in place. And as you might remember, Gustav, we've been seeing a bit of an improvement in the rely on gross margin, partly from this, but also partly from pricing and other things. And going forward, we think that we will probably not see the effects in this year. We're probably going to need the rest of the year to get everything in place. And then from Q1 onwards, we will see. We did not say -- I kind of saw that question coming. We did not say how big the margin would improve, and I think we're going to hold that for a bit to promise too much. But of course, we see a bit of an improvement, but we'll come back when we know a bit more how everything has worked out for us.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you, operator, and thanks, everyone, for attending this quarter 2. We will work hard in the coming quarters to make sure that we get back on growth, but let's also hope that the market uncertainty becomes a little bit more clear going forward. And both me and Joakim would like to wish you a very nice summer and look forward to be back here for the next quarter. Thank you. Goodbye.