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

All right. Good afternoon from a snowy Sweden on this cold February day. So welcome to this meeting. We will run an HMS investor briefing for about an hour. And we've been doing this a couple of times. We've had a -- sometimes we have a pretty high demand for one-to-one meetings, and we don't have really the time to take all of them. So instead, we do these briefings where we take a few people together and talk about the company. This is primarily for you who are fairly new to HMS. So I will do like maybe a 20-minute introduction. I will cover the financials for 2025 briefly as well. And then we will open up for Q&A for the rest of the session. And we -- so we have 1 hour in total and feel free to ask questions after a while. So for the first part, you will be on mute and then I will open up for you to be able to ask questions. So I will start with the presentation, and we will then run this introduction, financial summary and then Q&A. So HMS, we have today since reorganization since a year ago, we have now 3 divisions in the business. We're in the Industrial ICT business, Industrial Information and Communication Technology. If we start with the first division, the Industrial Data Solutions, which is about 46% of our sales in 2025, we have a pretty wide offer within connecting, secure and diagnose your Industrial Data Solutions and also visualize the content. And we do this through remote access and remote data as we call it. So you can actually connect to machine remotely. You can take the data out and show in a nice dashboard wherever you want in the world for your machines. We also have this local visualization on the machines with HMIs, human machine interfaces, where you also can design your automation project in the software that we provide. And then we also provide a wide range of different switch solutions, switches and routers for industrial applications. In this business, we go to market both directly towards different machine builders and some end users, but primarily, the majority of the sales goes through distribution and system integrators to then reach the end users or machine builders. So it's a bit of a multiple approach to go to market. Then we have the second part of the business, second division, Industrial Network Technology, which is where HMS started from the beginning. So here we have a wide range for connectivity solutions for industrial machines, and we see a pretty wide range of different type of networks in the OT environment. And we work with about 30 different standards to connect these machines wherever you are in the world, whatever type of standard you have chosen to work with, we can connect your solution so you can communicate on the industrial network. What you see in the picture is a bunch of industrial robots. And this is our largest specific customer group, robot controllers for various industrial robots. This is 31% of sales, kind of different go-to-market compared with the Industrial Data Solutions division. Here, we are almost directing 100% of the sales towards the device manufacturer or machine builder to design these solutions, and then we have business for a long time once this has been done. And the final -- the third one and the final division is New Industries, which is a bit of a combined division for some smaller entities. We have one business within building automation to also connect especially heating and ventilation and air conditioning systems to the building automation systems. So it's a similar type of solution that we offer in the Industrial Network Technology, but niche for building automation. And then we also have a niche business within -- primarily towards the vehicle industry where we connect different test systems with the vehicle between a factory and vehicle. And also, if you go to a repair shop, you typically connect and diagnose the vehicle with our equipment. This is 23% of sales and a combination of direct sales to OEMs and also going through system integrators and distributors to these customers. If we then go -- move forward, we launched in end of 2025, a new strategy, 3 divisions, 2x revenue and 1 company, 3-2-1 grow. And you see in the middle, we have done something with O, and this shows our 6 different strategic elements that we have. And of course, as all companies these days, we also want to do our part for the planet. And we are striving to be an industry leader on sustainability, and we'll go to our targets shortly. But in principle, we want to follow the science-based targets initiatives and work towards getting to a net-zero CO2 emission towards 2050. Then we have on the upper left, if you go to the inner circle, we have our Win-Grow-Keep strategy. And we've been quite successful in maintaining customers over a long time to keep customers. We see now in the last couple of years that we would like to win a bit more accounts. And we are also targeting now until 2030, slightly larger customers. And I'm going to come back to this and explain how we do this. But what we're doing, we're making a big reorganization internally within the sales organization and also building completely new incentive models with a lot more focus on winning and growing targeted accounts and not so much focus, of course, a lot of focus, but not so much incentive on maintaining customers that we already have. We do that through the whole team of the company, not just through the sales entity. And then we have -- on the upper right, you have mergers and acquisitions. So we come from the last 10 years, we've been having a strategy to grow about 50-50 through M&A and organically. And that's pretty much what we have done. And that strategy continues to be in place. So we would like to grow half of the growth through M&A. And what is a little bit new with the new strategy until 2030 is that we're also pushing this down to the divisions. So we now want the 3 different divisions to make bolt-on acquisitions into a larger extent than what we have done before. If we move to the bottom left, we have portfolio evolution in the middle. And we've had a quite successful growth over the last decade with some 16% CAGR. And of course, that's something that we would like to continue. And we believe that we need to do -- we have a couple of really big development projects that we just kicked off for both for the IDS divisions and for the INT divisions, where in both divisions, we are trying to come out with an offer that can target a little bit larger customers. And we're doing that in the IDS division by going into a better dashboarding within remote access and remote data. So we can, in a better way, add on services for analyzing and understanding what data you're seeing in your industrial application. And here, we're also planning to increase the Software-as-a-Service revenue with a subscription model to get these nice software features for the future. And we also say as a consequence, we should move the recurring revenue from today to about 3% to 10% in 2030. And in the I&T division, we are about to -- during the year, we launched a new solution for connecting devices in a cheaper way for really high-scale applications. We're talking tens and hundreds of thousands units per year. So that's something new to us to be able to do that in a cost-efficient way. And then on the bottom right, I think that's something that all companies have in one way or another, working with operational efficiency. We're through a period where we've been investing a lot in our IT infrastructure, putting the same ERP system and CRM system in place for the whole organization. And going forward, we have a target to grow sales faster than what we grow our OpEx. And we also would like to improve our gross margins to 65% from today's 63% by working smarter with our contract manufacturers and how we do things in our operations. And then you see also circling around all this, you have people, which is, of course, super important also for HMS. And we say that we would like to have happy and high-performing employees, and we think that will generate loyal customers. So pretty simple in a sense. And we think it's an environment that is changing really fast at the moment and to reskill and upskill our employees is on top of the agenda and also to make sure that they are happy staying with HMS. Then let's have a look at our current strategic targets. We have divided this into 3 pieces for the planet, people and growth. On the planet side, we have a net-zero target for CO2 and we have now applied for science-based targets, and we're going to follow that direction, basically following the Paris Agreement. And then you might be familiar with EcoVadis, who is rating different companies, how well they perform in a wide range of sustainability aspects. Here, we have an ambition to be top 5 in our industry. And we used to be top 5 before, we moved up to the large corporate section. And now I think we are like top 6, top 7. So we have some work to do. We're still fairly good, but we would like to become a bit better. On the people side, we think that, again, the people will generate loyal customers. We have a target to be on 50% on customer Net Promoter Score. And we have been there before. Right now, we're down a little bit due to not the best delivery accuracy over the second half of the year due to high demand. And we are confident we will build this back and make sure that we -- our customers are really happy with us. We have an internal index that we call Employee Engagement Index. This is maybe more a bit of an internal KPI. We strive for having 80 in this engagement index, and we are on a good way to reach that as well. We also have a target to have a diverse team. And the first step for us is to have 30% female managers. We set a target for 20% female managers of 2025 that we set back in 2020. At that time, we were at 14%, and now we are at 27%. So it's really been working very good to have this target and having everybody driving for the same objective. We have a bit to go to 2030, and we're also convinced that we will get that done in time. If we then take the more financial part on the growth side, we have put a financial target in place to grow to SEK 7.5 billion by 2030. And at the same time, we should deliver 25% EBITDA. And we -- over time, we're going to give between 30% and 50% in dividend to our shareholders. That's the plan. So this is some quite ambitious targets and that's something that we always would like to have, and it's going to be really exciting to work towards this for the coming 5 years. If I then very briefly summarize a little bit what I said before, so trying to make it a bit more concrete in terms of targets. So really important on the portfolio evolution. And the way we're going to measure this is we would like to see that more than 50% of the organic growth between '26 and '30 comes from new products, which is a fairly high number in our industry where it's pretty long cycles and the price will be in place for a long time. So that's -- but that's something we think will be a key and able to achieve this growth to this SEK 7.5 billion. We are working with AI as everyone else and trying to figure out how that will be implemented in the best possible way, both in terms of being more efficient in how we do things internally in our processes, but also how we get the best features across in our products. Exactly how this will benefit our customers in 2030, we don't really have that figured out yet, but that is one really key strategic element to get that in place until 2030. And then I mentioned 10% ARR will be an ambition with more recurring revenue. And that's also something that we think will be a big driver to improving the gross margin going forward. We also have a strategy to come closer to our customers and have more direct business. Today, we are at 43%. We would like to come to 55% in 2030, also a driver of gross margin. Of course, a bit more risk in building up this organization. You need to take the investment before you'll get the revenue, but that's something that we think is the right thing to do given our fairly sticky offer. And then 50% of growth from M&A, we already talked about. If we then go to a bit more the internal perspective, how do we work with this? And this is a really important perspective, if nothing else, for our people. And again, we said that people is really important. We have a very strong company culture. We still have a quite entrepreneurial spirit, maybe not the best processes everywhere, but we have a pretty good team spirit and people really want to drive and we take decisions locally, and that's something we think is super important to keep high engagement of the employees. So that's something we want to continue. And we also have a target to have the most engaged employees in the industry because we think that, that makes all the difference. And that's why we work a lot with this engagement index and do a lot of activities to improve that. And to be able to improve it, we need to have really strong leaders, and this is also something we run a lot of internal developments and programs and exchanges to improve our leadership. And we put a target in place. Also we have an internal metric of leadership index of 85. I mentioned this Win-Grow-Keep sales strategy to get more new customers in. And we also have a target here to -- this is maybe a bit difficult to relate to, but to have 6% of the last 12-month sales should come from customers that is won within the last 24 months. If we can do that and continue to maintain a low churn and the current customer base, we have a good chance of getting this SEK 7.5 billion growth. We've been trying to calculate backwards to see what we need to achieve. And this is pretty much where we ended. We talked also about lowering OpEx in relation to sales. So I think this was a short introduction to HMS, our strategy. And a few words, I'll try to keep it to 5, 6 minutes on the financials, and then we will open up for questions. And the recent development in Q4 and start of the year '26, we've been seeing a good improvement in Europe that has been slow for us for maybe 2 years or so, you can say. And also Japan is going a little bit better now in Q4. In Japan, we've had a lot of inventory built up with our customers, and that is now starting to be phased out and we can get back to growing nicely in Japan. Then a little bit surprisingly, maybe North America has been a bit weaker than what we've seen throughout the rest of the year. Throughout 2025, it has been very good for North America. It was a little bit softer in Q4, but we're not so concerned about this. We think the pipeline looks fairly well for 2026 going forward. And then, all in all, we're going to show you in the next slide that we had, again, a record net sales for the year, driven by IDS also for the quarter and especially sales were strong in the North American region, also due to really good order intake throughout the rest of the year before. We also got the validation from science-based targets initiative. So we are now on track to become one of the companies in this nice community, showing in a very good way how we improve and reduce the emissions. We also managed to get an acquisition done in Q4. So we signed the agreement in November and to acquire Molex Industrial Solutions division and pretty much a part of that business that did not really fit into Molex, perfect fit with our I&T solution. And we do -- today, we do the slaves on the network that will be answering questions. And Molex has also been providing the masters that are asking the questions to the network. So this will be a great fit for us to offer a more comprehensive offer to our customers. And with the deal closed now to 2nd of January, so it will be a full year effect in 2026. Looking at the order intake, you see it's been a little bit bumpy. We had a really good Q4 '24 and Q1 '25 where we had a lot of project orders that's also been driving the good sales in the end of the year. And even if we are actually -- we report a reduction of order intake of 4% organically, it's actually up 3% due to the currency. The Swedish krona has become a lot stronger versus the U.S. dollar, especially, but also versus the euro, which is impacting this a lot. So we think with a pretty tough comparable from Q4 '24, we're quite happy with the order intake for the quarter and especially happy that Europe is slowly but safely. It's not going as fast as we thought at the start of 2025, but it's moving in the right direction. And we see in North America, we had temporarily, we believe, a bit of a slower order intake in Q4. And then to net sales, fantastic growth. We managed to deliver out on the backlog and 23% growth in Q4, and we managed to turn the year positive by 3%. And then you might say that, okay, that was not very good, the 3% organic growth for the full year. And the main reason for the low organic growth is that we had a really tough comparable in the first 2 quarters that we delivered out on a huge backlog in 2024. So we kind of knew that would be a really difficult year to get any growth given the tough comparables from the first half from built-up inventories at our customers that's been reduced. So we're quite happy that we managed to get back to growth, and I think we have a much better position going into 2026 being through this built-up demand position that affected the first half of the year. And here is North America that's been delivering strong over the year. And Europe has been a bit weaker, but we see a bit of an improvement now towards the second half of the year in Europe. So that was positive to see. Also here, we see a massive impact from currency effects, both in the quarter and for the full year. And then going into profitability, we had a very nice ending to the year, 28% adjusted EBIT margin in Q4 with SEK 268 million, took us to SEK 911 million for the year and a margin that is in line with our financial target of 25.5% for the full year. Gross margin is developing stable. We're quite happy with that. We had a dip in Q2 due to the tariffs. That has now been compensated in terms of price increases. So we do 63% gross margin for the year and for the quarter happened to be exactly the same. And with a good cost control, we're only growing OpEx by a couple of percent. And we are starting, though, to see a bit of a more impact from the currency also on the EBIT. Before we've been having some really good hedges on high dollar rates, and now that is being faded out, and we have weaker hedges coming in, which is, of course, we're going to see a bit of a hit from this on the EBIT side. We've -- maybe I should say that as well. We have about 40% of sales in U.S. dollars and about 40%, a little bit more 45% maybe in euros. And of course, then reporting in SEK, that will have a big impact when the SEK is getting stronger versus those currencies. Finally, I would like to show you also one of, I think, the most positive messages when everything comes together, how we have handled the debt situation for the last year. We made 2 big acquisitions in 2024 of Red Lion in the U.S. and PEAK-System in Germany, which took us to 3.4 net debt to EBITDA in the end of 2024. And now we're down to just over 2 just a year later which puts us in a good position. We are now at a stage where we can actually start looking at acquisitions again. And we also signed a new financing agreement in Q4 to have us ready to continue that journey. So I'm actually going to stop sharing now. And I'm going to ask you if you have any questions, then just raise your hand, and I will give you the word. And we do kind of like in a queue if you just raise your hand.

All right. So I take Matthew first here. Let's see if I managed to allow your mic.

All right. Yes, can you hear me?

Yes, I can.

Yes. I was just kind of curious on the impact of the German fiscal stimulus, kind of what your exposure is to Germany specifically? And how much, I guess, that impacts the outlook for kind of the end market customers that you serve?

Yes. So I think we have a fairly big exposure to Germany. I believe it's around 17% of the group sales goes to Germany. So it's our second largest market. The U.S. is the largest. Very difficult to answer your question precisely. I think we -- what we hear from Germany, I think normally, if you compare to some other markets, they are not always the most optimistic when you talk to customers. I think they are a bit careful in how they interpret different macro things and use. But we've been hearing a little bit more positive throughout the year 2025, and we've been also seeing it in the numbers, even if we were down from fairly low volumes end of 2024. So every quarter, we are seeing a bit of a gradual improvement, and we expect to see that as well for 2026. I don't want to go into what percentages or how much the stimulus could impact us positively. But we see a lot of -- I mean, we are through basically all types of industrial customers. So we have a generic offer. So I think everything that's been invested in the manufacturing space in Germany will be positive for us. So that is one trigger that could also continue this improvement in '26.

Perfect. And just one other quick one, if I may. I was just curious, obviously, there's a huge bow wave of kind of AI-led CapEx. Is that crowding out any industrial CapEx given, I guess, just you kind of work in data centers, maybe the same power providers? And is that constraining any growth for your industrial end market customers?

Yes. I think during 2025 and maybe also towards the end of 2024, we won a lot of more projects for data centers, both in the IDS business, but also in the New Industries in the building space to cool these big facilities. So I think it's sort of a new potential vertical for us, and we are exploring what more we can do. And it's been playing out really well for us in 2025. And obviously, that is something we'll have a lot of CapEx going forward. So that's something that we would like to figure out and tailor the offer even better towards. All right. I will then -- I have to hand up for Aujla. Sorry if I mispronounced that.

No problem. Just one on my side. I just wanted to see if you've seen any changes in the competitive environment, especially on the lower-tier gateway side. I know sort of Chinese competition has been mentioned in the past, particularly in relation to EvOne and the EvOne line. And has there been any changes or developments on that side?

That's a very good question. It's -- in China, we don't sell a lot in China. We have a lot of problems with the firewall. So it's -- we basically -- we do -- I think we have a few cases, but it's mostly used as an on-prem tool. So we've kind of almost given up that market for the time being. And if we look outside of China, we see a lot of new entrants. And I think we had -- what did we have 8% growth organically on that offer in 2025. So I expect that we are losing a little bit of market share actually. And we have a few competitors that have a little bit more modern offers than what we have at the moment. I'm quite transparent here. But with the developments we are about to launch throughout the year, we hope that we will kind of retake the first position as having the best offer in the industry. And it is a quite interesting space. It's also -- the potential is quite big, but it's a big barrier with the cybersecurity that a lot of companies do not dare to kind of connect their factories fully since it becomes a bit of a higher risk of being hacked. And if that can be solved through us or through others, that would be a great step in opening up for more potential in that market. Any other questions? We have plenty of time. So feel free to ask what you would like to know.

Just to clarify, sorry, on that point on the EvOne, was that -- were those comments directed just on sort of the gateway side or sort of on the broader business as well and the competition?

I think on the -- so the EvOne solutions are sold as a gateway, and it's -- for that specific offering, we see a bit of increased competition. And on the gateway side, I can't really say we don't see a lot of -- in the -- let's say, out of China, we don't see a lot of competition coming from China. What we see is a lot of companies being reluctant to go with, especially when you have this information transfer, be a bit reluctant to go with Chinese suppliers. In the Chinese market, though, I think the local players in China, they're doing a good job. And we kind of -- our strategy in China right now is to be very focused on where we have the best competitive edge. So we are kind of giving up a lot of potential to focus on what's -- where we have the best edge and it's without -- within the INT solution, where we're one of quite a few players. And we also see a lot of success with international companies being present in China having their manufacturing in China. And I think they kind of feel it's safe to buy from a Swedish company. I hope that kind of gave some more light on your question.

Yes, that's perfect.

Matthew, did you have another one?

Yes, I did have one more. I was just curious, you talked about, I guess, kind of resuming the M&A strategy. Can you give us a bit more color on, I guess, what are the kind of range of multiples that you look at? I know when I think I look back at Red Lion, it was maybe a bit lower growth than you've been historically. So are you targeting cost synergies, revenue synergies? And what is it, I guess, when you roll companies into the HMS group that you're kind of targeting?

Yes, I'll try to cover all of those aspects. So first, we talk about the multiples. We prefer to be -- I mean, normally, we look at companies with a good solid profitability, good gross margin and a decent growth. And then you can end up in a fairly high multiples around 8x, 9x, 10x. I think we've been between 8x and 10x in most of the things we've done. I think Red Lion was 11x, but we also saw a lot of synergies, which I think we managed to get out both on the cost side, but also on the sales side. And just to give that as an example, and sorry for bragging a bit here, but we -- when we took in Red Lion in the beginning of '24, we were looking at some 19%, 20% EBIT, and that is now 24%, 25% EBIT, both from investing in the manufacturing to improve the gross margin, but also taking away basically one layer of management, the top management layer is basically out. And we've also done some review on how we discount things. So we've been giving a lot less discounts to distributors that are not promoting the offer actively. And then we've been giving better discounts to the ones who are really investing in marketing campaigns and holding more on inventory on their own. So I think this more -- how do you say like distributor portfolio management has been a big part in getting to those improvements. So even if we were looking at an 11x multiple, I think now it's -- after 1.5 years, it's down to a decent multiple. And what we are targeting is -- I mean, we don't have it needs to be this, it needs to be that. We think it needs to add value to the customers that we come with this addition to the portfolio. And obviously, we see that when we go after these smaller companies with maybe EUR 20 million, EUR 30 million revenues, then there is a lot to do on the sourcing side. If we can consolidate with our volumes, we typically get down the prices a bit. So that we always try to do. And in some cases or in most cases, you could say, we also integrate supply chain and get some synergies on that side. But what's really driving is that we can get a better customer portfolio and then we can also later get sales synergies. And we're always careful to kind of look for those sales synergies and being able to justify the acquisition. We need to be able to justify it on its own merits more or less, and then that will be as a bonus. That's kind of how we try to think about it. I hope that's helped a bit.

Yes, that's really helpful.

All right. Anyone else that would like to? I think I'll do like this. I just -- since we don't have too many, I'm going to allow the mic for all of you. So if you feel that you want to ask, you can just open up your line and ask a question. I should all have the possibility. Even you, Sandra, if you have something? No more questions? I'll give it another 30 seconds to think. Otherwise, we close the call for today. All right. Then I thank you all for listening in and taking a chance to learn a bit more about HMS and hope to see you soon again. Thanks a lot for listening.