HMS Networks AB (publ) ($HMS)

Thank you. Good morning, everybody. Welcome to this quarter 1 call. It's me Staffan Dahlstrom, CEO; and Joakim Nideborn, calling in from a crispy and sunny spring day in Halmstad. I think also this report is quite crispy and sunny, and we're very pleased to present 3 sections, business update, I'll do that, and then Joakim dive into the numbers, and we end up with a Q&A. But if we look on the quarter 1 here, we are very pleased to see a fairly good momentum. We have good organic growth on sales, up 15%, a little bit of headwind on the weak Swedish currency at the moment. Joakim will talk more about that. But also order intake is organically growing double digit. And this combination of double-digit growth on both net sales and order intake, we are really pleased to see that, and we feel that the market is fairly strong, and it's a broad good market, we feel. We're also happy to see that we are improving our profits on the EBITA level that we follow from the year -- from this year. So EBITA margin, 27.2%, better than we expected. I think we're seeing stable development on gross margin. We have kept OpEx on a flat level. And of course, this gives a good EBITA margin when we have good net sales growth. Cash flow continued to be strong, and this gives us adjusted EPS earnings per share at SEK 3.78. If we look on the last 12 months, I think it's only one thing I would like to highlight, and that is the cash flow from operations, where we almost make SEK 1 billion in a year, and we are very happy to have this, and Joakim will talk more about our debt and how we see the covenants and things like this. But as I said, market is fairly strong. North America, after a dip end of last year, we said that was temporary. It was strong development. We also see that China -- that's a smaller market for us, but growing well. In China, we also saw some boost effect where we felt that some Chinese customers, they were concerned about lead times. But otherwise, we see a balance between order intake and invoicing to a large extent. Also Europe, that's been quite slow and Japan continue to slowly improve. So positive signs. So it's broad and positive. SEK 1 billion in order intake make us proud. Of course, we are worried about the situation in Middle East. For us, this has not a direct impact to a large extent. It's mainly our business in building automation, where we have a fairly decent business in the Middle East and Saudi and Dubai. That's a lot of real estate projects there. There, we've seen a drop in order intake in March. But all in all, I think Middle East is less than 2% of our revenue. But of course, we are worried and we follow this, but it seems like our industrial customers and industrial markets are almost getting used to this kind of turbulence and changes, and they keep on investing, and we see a fairly stable market. We continue to invest in product development, part of our new strategy in all our divisions, and we see this on a little bit higher R&D expenses. We also work a lot with different pilot projects and use more AI. But we are not implementing AI on full scale in our operations yet. We are more in the exploration and test phase where we test and try with our engineers. And the ambition here is to be able to do more with the current resource we're having. We're also very happy to see that the asset acquisition we did from Molex's industrial communication from 1st of January got a very good start. We integrate this business with their 2 development centers in Canada and France very well. We also integrated the supply chain. And the customers have welcomed this, been very positive. Some customers also placed orders for the entire 2026. So this is also a little bit boost on the order intake. But I mean, this is not a big acquisition, but it's very positive to see the smooth integration and how positive this has been. And just as a reminder, on the next slide, this was a fairly small acquisition. We got this from Molex. And from their point of view, this was too small and too strange for their large sales organization, and we did not pay a big amount of this. And we said that we hope this will add more than USD 10 million annual revenue. Quarter 1, I think the order intake was SEK 140 million. So yes, we are -- it's true. It's more than USD 10 million annually. So I think this is better than we expected. So all in all, this is a good addition to our INT division, where we feel that their product complements our technologies and our products. And it's very positive with a positive customer feedback that we have a lot of common customers and they feel that, okay, now when HMS takes over, we are ready to invest in this technology and commit to it. So all in all, a very positive asset acquisition. With that, Joakim, some numbers.

Yes, some numbers. And I'm going to start with the order intake as we normally do, which you saw was very pleasing. We did just about SEK 1.1 billion in order intake, a 19% growth or 10% organic growth. And you see we also have 10% organic growth for the last 12 months. And Staffan touched upon it already. One very big contributing factor to the strong order intake was the Molex acquisition and the fact that we got many of these full year orders. So we're very pleased with the underlying business as well. And in that number of SEK 1.1 billion, we do think we have around SEK 130 million where customers have been placing orders that they normally would maybe do throughout the year, but now placing everything in Q1. And underlying, we can see it's really all divisions and all geographic markets that are doing well. So we see a broad-based strong demand. And with everything happening in the world, we were quite happy to see that the customer is still investing and placing orders. Maybe what sticks out the most for us is the INT division. I'll come back to that with an organic growth of 25%. And we've been talking about this for maybe some 12, 18 months that we thought we would see this pickup. And now we're maybe a bit later than what we believed, and now we're seeing that business coming back on a really broad base also now in Q1. If we move over to the sales side, we're also continuing the growth. And you see on the graph there, it's a nice continued development, SEK 971 million and a 9% growth, which is actually organically 15%. And now it's the second quarter where we have double-digit organic growth. And if you've been following us, you've been seeing that we had a more challenging situation throughout 2024 and first half of '25. And now we feel that we're back on the right track with all the inventory levels have been normalizing out in the supply chains. Also very good to note that we do have a book-to-bill of 1.16. We've been saying that we believe we should have more than 1 this year to continue the growth journey and to place the foundation for future growth. So that's -- 1.16 is a very good number, especially when we show this 15% organic growth on sales. What's behind also here, it's quite broad-based. We see our 4 largest markets are among the ones that are performing the best. So in order of size, we have the U.S., the biggest market, Germany, Japan and China, all of them are contributing very well to this development. And then going into the divisions, we're starting with Industrial Data Solutions, the largest one, and now 40% of the group profits. And here you see on the order intake that we report a negative 3% in development. Actually, organically, that's plus 5% due to the massive currency effects from Q1 2025 until now. As you might remember, after Q1, I think it was in April, especially the U.S. dollar took a big hit versus the Swedish crown, and that is a big impact on the bridge, of course, when you compare quarter-to-quarter. Net sales, a good number. The Q4 number for 2025 was exceptionally strong, the SEK 481 million and now SEK 418 million as we do in the quarter for us is not bad, a 13% organic growth. And I think this also comes down to good margins of 25.4%. So we've been able to build this -- the margin in this division quite well from around 20% to 25% if you take 18-month period. And here, the North America is the biggest market. That's also what is performing the best. It's a little bit slower for us in IDS in Europe and APAC, still okay. And to mention one big driver, we've been seeing the data center vertical performing very well, winning new business in various applications for the data center business. And just to mention also in -- we are meeting on the order side, a very tough comp in Q1 2025. So both in Q4 '24 and Q5 '21 -- sorry, Q1 '25, we had some big project orders that we did not really have now in the beginning of 2026. So we see a strong underlying development. Then over to Industrial Networks Technology, a fantastic quarter with a 25% organic growth in orders and 23% growth on net sales. And here, you also see on the green bar in the left-hand side graph, that Molex business coming in with SEK 140 million. So the reported growth is now 73%, a very strong add-on to the business. Of course, this order intake pace is not sustainable. And I think Staffan said it, it is basically our customers placing orders for the full year. So I think what you can expect is maybe more the pace that you see on the sales around the SEK 40 million on a quarterly level. And as Staffan also mentioned, this has been turning out a bit better than we expected. We didn't know exactly what to expect given that it was some older products and some customers that have been announced with end of life, and it seems like the business is still going very strong here. Integration is going well, and we see difficult to pick a lot of markets that are performing good or bad. We see the very key markets in Central Europe and Japan is driving. That is -- those are really big markets for INT. So that's very good to see that we are back to see good growth in those key markets. And then finally, New Industries, also a solid quarter for New Industries. We have a 7% organic growth on orders and 8% on net sales. So pretty much in line with our financial long-term targets and also good profitability with over 27% EBITA margin. Here, we saw a good development in the Vehicle Communication business, both in Europe and North America. On the Building Automation business, we had a good start. The first 2 months were quite good. And then in March, we saw a massive slowdown in orders from the Middle East, which has been impacting the numbers a little bit. And again, for the group, this is not a big impact. It's less than 2% in the Middle East of the total sales. But for Building Automation, it's 20% of the business. So that is -- with a big slowdown, that is, of course, visible for that part of the business. Then going over to the results. And first, I just want to make you aware that we are now reporting a new main profitability metric, EBITA, which was SEK 264 million and a 27% margin. So this is our long-term operating target for profitability. And this is where we have a 25% target to reach 25% of EBITA. And the difference compared to before when we showed adjusted EBIT is actually a bit more difficult for us as a company to live up to. It's the same in the fact that we are taking away the excess values -- amortization of the excess values, but we are not making any other adjustments. So all the integration costs, M&A costs and this is actually burdening the EBITA result. Also, amortization of activated R&D cost is impacting the number. I hope that was clear. Otherwise, you have to ask. And what we can see then, SEK 264 million, 27% margin, very strong start of the year for us and good to see that we are above the financial target. It's really a strong top line and cost controlling that is behind the number, so nothing strange. Looking at the gross margin, we were slightly down compared to last year, a big negative effect from currency. And also, I would say it's a good product mix within the divisions, but the fact that INT is growing a lot and taking a bigger share of the whole is reducing the group margin a little bit. And I think we've been talking about this before that when -- if and when INT starts to come back to a good old form, that will put a bit of a pressure on the margin. On the other side, we have been rather successful with the price increases and also the volume, of course, is good in the quarter, which is mitigating. And all in all, with the mix that we have, we're quite happy to be able to present 62.4%. On the OpEx side, we came in a little bit short of what we believed we would do. And it's -- we're a little bit behind on some of the plans. We are investing in some certain areas of the business, both in R&D, also adding a team in artificial intelligence to drive that development within the group. And it's a little bit behind the schedule, but we will be there and recoup. And then we also have salary increases coming in Q2. So looking ahead, we will have a little bit of a higher cost level. Just 2 more things I want to mention here. One is the R&D, where we are, as Staffan also said, we're now investing in both in INT and IDS in the new generation of products. which is increasing the pace of investment in R&D and activation of cost, and this increased to SEK 27 million from SEK 15 million last Q1. And so SEK 12 million more inactivated R&D, which is, of course, you could say, a little bit helping the result. On the other hand, you see the FX effect. We had some really good currency hedges in 2025, which has been wearing off towards the end of the year and now into 2026. We are having -- we still have hedges, but it's at lower rates than what we used to have before. And so we see a pretty big impact on EBITA of the 31% -- SEK 31 million from the FX rates. If we move on further down in the profit and loss, we come to the adjusted results -- adjusted EPS results. And here, we have SEK 3.78 as adjusted EPS, a pretty solid number. We're happy to see interest costs coming down from SEK 34 million a year ago to SEK 20 million now. It's a combination of, of course, reduced debt, but also better terms in the financing agreement, which is keeping that down a little bit. And if you want to see the reported EPS, we're at SEK 3.24. And here, we are just adjusting for the excess value amortization of the acquisitions. We continue to show a good cash conversion and the cash flow is solid with SEK 250 million. And behind that, we're reducing inventories a little bit in Q1. We're tying up quite a bit more in our customers, good invoicing in the end of the quarter. March was a very strong month in invoicing. So we tie up some SEK 37 million more in working capital in Q1. And for the year, Staffan mentioned already SEK 940 million on good track to that SEK 1 billion mark that we would really like to reach soon. And then if we look at the net debt situation, continue to move in the right pattern. We are reducing a bit more since Q4, and we're now down on net debt to EBITA, if I look at pre-IFRS 16 basis of 1.87. And of course, that puts us in a good spot compared to 3.36 a year ago. I think we're quite happy with that reduction. And it also means that we have -- we can put some more efforts into the M&A agenda again, and we are building that agenda now in the divisions. And it's going quite well in looking at new targets and building that pipeline. So just to summarize before we hand over for questions, takeaways from the first quarter. What we would like you to remember is the order intake, solid over SEK 1 billion for the first time for us. Organic growth in sales, 15%, second quarter in a row with double-digit growth on the net sales side. And then we also would like to be clear with these preorders of about SEK 130 million that you can not expect to come back in the coming quarters. And then INT, we need to lift out INT, a very strong development here with both over 20% organic growth in both orders and sales and a good start to the new acquisition in INT. The macro situation is still uncertain. I mean we are happy to see that the underlying market seems to be working well enough anyway. And Middle East, even if it's a bit of an impact on the building, not a lot, Building Automation business, not a lot for the whole group. What we also do see, I'm not sure if we talked about this before, we do see lead time for certain semiconductors coming up again, for instance, memories, also some price has been coming up a bit. We are not impacted by the worst latest geometries, but still it's a bit of a push upwards in pricing. And we are trying to now place orders for more or less the full year to make sure that we have the material we need to be able to continue to deliver. And then finally, profitability and cash flow, quite well, both cash flow, cash conversion, good and the underlying profitability is slightly better than our long-term targets. And we are continuing to invest in the business now in R&D, in AI, and we are very happy to see the continued development of the year. With that, I would like to hand over to operator for questions.

[Operator Instructions] The next question comes from Jesper Stugemo from Handelsbanken.

Congrats to the very strong results here. So 3 questions from me, if I may. My first one is related to the increased order placements you saw among Chinese customers here given the disruption in supply chains. It sounds like a prebuying. Do you expect a similar pattern in H1 or full 2026 as we saw in the pandemic years in terms of boosted orders? Or how should we view this?

We'll start with that. I'll say, Joakim, I think we list here SEK 130 million on order intake as a little bit of boosted. But I think we are much more into a balanced situation. We see some concerns in some Chinese customers due to geopolitical things. The memory is a bit worrying. It's not that we are using the same memories as the AI market, but it's the same factory, the microns of the world. So I think the fact that they have full schedule also affect this kind of industrial component that we buy. But we don't really see that this is a big trend. So it's mainly related to some customers in China. And of course, this with the Molex acquisition is a onetime effect. We bought this asset without order book and some customers were really happy, so they committed to larger time orders. So you say, Joakim, do you see this as a big trend?

No, I think we've been discussing that a lot, Jesper. I think it's been something we've been also challenging the different business owners in the company, how they see this. And I think we -- what we say in the report, we believe that about SEK 130 million was maybe placed a bit early. But otherwise, it seems to be a quite solid market, and we've also been seeing other peers reporting strong numbers for the first quarter. So it's -- we're happy to see that the investments seem to continue.

Okay. Very clear. And a follow-up then on the memory prices here. How do you work to secure your volumes to deliver to the customers? Any risk here? And also on inflationary COGS coming up and potential workarounds to not lower the gross margin here?

Yes. So very relevant question. And what we've been doing is we've been placing orders for the rest of the year. We haven't taken all the volume yet. We will probably take volume a bit earlier than what we normally would do. So I think you can maybe expect that we build a little bit of working capital for -- throughout the year. I would maybe have expected that we could reduce before -- if you asked me half year ago, I probably think that we could reduce working capital throughout the year. Now that might be challenging. And I think that's pretty much what we can do. On the pricing side, so far, it seems like we've been covering what we need to cover in the yearly increases. If that view changes, we will, of course, act as we always do to protect the margins.

The next question comes from Viktor Högberg from Danske Bank.

Just on the EBITA margin potential. Of course, we know that costs are not fully ramped up yet, but the organic margin potential looks higher than what we picked up at the CMD was saying that maybe, I don't know, 27% as an organic potential by 2030. You're already at that level. Just what are your thoughts on the organic potential if we would exclude the M&A impact, which we know will probably be dilutive?

I mean we don't really -- we have a target 2030. That includes the M&A impact. We are talking about most of the M&As we look at will have a dilutive effect on our margins, gross margins and net margins. So we look on the combination. But of course, the more organic growth we are able to generate, the better it will be for our margins, I think, because there, we have a higher leverage. Joakim, any comments from you? It's really difficult.

I think we try to be humble. I mean, 25% is a pretty good margin in itself. And now we've been having 3 good quarters in a row with slightly higher margins. But we also see that we need to continue to invest to be able to get organic growth. So we think that we don't want to save ourselves to a higher margin and miss out on potential growth. So I think that it's always a balance. But we think that 25%, maybe some quarters we will be a bit better, but it's -- that's pretty much what we're trying to steer against.

Okay. Fair enough. And also on the gross margin, given your expectations now on the growth in the respective segments and different profiles, balancing this with FX and price hikes, do you see a change in the gross margin profile today versus what you saw at the CMD in September?

Not necessarily. Not a lot, I'd say. It's been -- I mean, compared to then, I think we've been seeing even weaker U.S. dollar and euro versus the SEK, which is, of course, not great for our margins. But I think maybe that will do a percentage point or so. But I think we have some good things going on. So we think that we should -- we don't want to change the long-term target for sure. I mean we set a target of 65% to 2030. We will not be there next quarter, but we think that that's still relevant with what we're doing.

The next question comes from Erik Larsson from SEB.

First, a question on OpEx. You talked about ramping costs here and perhaps lagging a bit. But at the same time, it's only up 3% here in Q1 organically, if I understood correctly. So maybe if you could just speak to how steep this increase could be in the coming quarters would be helpful.

Yes. I think I don't expect it to be super steep, but we're probably going to add a couple of million per quarter. I think you can expect that when we're ramping up. Normally, Q2 and Q4 are a bit more heavy for us in terms of marketing investments and traveling and different customer events. So I think that you can probably expect to add on. But it's -- we will have -- it's going to be slowly but safely increasing a few percentage points from where we are today. That's pretty much what we believe. So I think we are in a good place and we will do some smart investments, but not go crazy.

All right. Great. And then on data centers, I think the last time, at least, that I remember that you mentioned the larger order was in Q4 '24 or something. So could you give some more backdrop on how this vertical has developed over the past year? Because now it seems to have been a good driver.

I think we see this in different projects that we see for INT, they are selling some gateways. We see in Building Automation, they are connecting the ACs for cooling. And we see -- we don't see so much of the switching business for network infrastructure we got for power conversion in Q4. So it's a quite broad mix of automation projects that are related to data center. As I said before, we are not part of the compute in these centers. It's about incoming power, the cooling or heating and these kind of things, automation systems around it. But we see broad automation projects with our system integration in the U.S. that they are involved in this kind of automation projects in data centers.

Okay. And then a final question, if you could just explain more about the improvements you see in Europe. Is it broad-based? Or is it specific -- any specific driver?

I think we see 2 different things on INT. We see a pickup quite broad-based on customers who don't have inventory anymore and also customers who work towards automotive business and it's not great, but it's not too bad either. And then we see some verticals where automotive in general is not good. Maybe it's not getting worse. But other verticals are pretty good, infrastructure and automation in general, electrification. That's starting to see some momentum in Europe, we think.

The next question comes from Simon Granath from HMS.

It should be ABG, of course. Congrats again on the strong performance. And we have previously been discussing that there have been some discrepancy in recent quarters between the larger and smaller projects with larger projects being a bit on a pause. Are you seeing any change on the latter, either in terms of orders now or in terms of customer dialogues?

No. I think we're still waiting for some larger orders. I would say we see more of small and midsized broad-based orders and not too much of this larger project order that we got end of 2024.

And then only one follow-up more. And that is another topic that we spoke about at the CMD, and that was on the potential upgrade cycle for Anybus to meet upcoming security requirements. Are you seeing that play out?

Very good question. We're doing some initiatives in security, and there's a lot of new regulations, and we try to get our arms around how to monetize on this, and we have a team working on this with some products. In general, we see a lot of customers who want to talk about cybersecurity and this, but we can't really see that there's a -- if you look at our revenue, it's not a big part of our revenue, and we're still trying to find our way in this cybersecurity landscape. So I can't really see that we have cracked the code there yet. But there's a lot of customer interest. But right now, it's more interest in education and consultant services and not really a product business yet. So we are still working trying to find our ways there.

The next question comes from Joachim Gunell from DNB Carnegie.

So just 2 questions from my side. The first one relates to end market momentum in some of your verticals. So you commented a little bit on the data center opportunity and to your point, it could be any other industrial building, right? It's not necessarily the service and res here. But you also comment a bit about semicon manufacturing. To what extent do you see that as a growth driver? And oil and gas, are you seeing customers in that or more broader energy end markets become more opportunistic I mean where -- I mean, CapEx investments going there?

Well, if I start, and this is a little speculation. We see that we have customers in semiconductor. They're highly successful. There seems to be a lot of investments, broad-based, not only AI, but most of the customers we have is more on the machine side in semiconductor doing all these vacuum things and these kind of things, that seems to be a very strong momentum. On oil and gas, we are speculating that with the challenges we see now in Middle East, wouldn't that drive more investments in other areas of the world to be in where they have oil that this would be more investments. We haven't seen it yet, but we're speculating that there might be a good market opportunities in North America, in other parts of Europe, in other parts of Asia, where you could explore more of the oil and gas resources they have there to complement the Middle East market. But we haven't seen it yet. We're just speculating about it.

Understood. But in terms of exposure in the IDS division, the energy footprint is quite sizable, right?

Yes, it is.

And then just finally...

Just to comment that, Joachim. We have -- U.S. is -- North America is the big market. So the exposure is mainly related to North American oil and gas.

That's clear. And I mean, we saw here, of course, with the Molex order activity that yet another acquisition for which you paid fairly low price tags are playing out the way that you hoped for. Now that we see cash flow take your net debt levels to, call it, acquisition territory, can you just comment a bit about your appetite and, call it, self-confidence when it comes to pursue more M&A towards the latter part of the year?

I think we have a pretty good confidence. And I think the reason is probably that we are a bit selective. So we want to continue to be selective, and we are looking at a couple of things at the moment. So we hope that we're going to be able to get something done this year as well. we will be as active as we can, run as fast as we can. And now we have 3 divisions that are all looking into building their pipelines and managing those pipelines. So I think we have a pretty good foundation.

[Operator Instructions] The next question comes from Jesper Stugemo from Handelsbanken.

Yes. Sorry, I just have a follow-up on this SEK 130 million in early orders. Maybe I missed that, but how much of this was translated into sales in this quarter?

Nothing has been translated into sales of that SEK 130 million. So the point is that we will be -- normally, we would have received those in Q2, Q3 and so on.

And Joakim, the major -- the larger part of this SEK 130 million is related to this Molex preorders and part -- the other part is related to the Chinese customers. So that's the 2 things we have there.

And some of the panel meters...

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, everybody, for joining this call. We are just getting ready for our AGM here in Halmstad, and we are very happy to see a strong quarter -- solid quarter. And we feel that the market is fairly stable. It's not great, but it's -- we feel that things are falling into the right places. We're very happy to see good progress on the acquired units from Red Lion, PEAK-System and now also this Molex business we acquired from 1st of January. So things are moving in the right direction, but it is an uncertain world out there. But as I said, we are impressed by our customers' robustness and their willingness to continue their plans despite geopolitical things and trade things. So we are fairly optimistic about the coming quarters. So stay tuned and look forward to talk to you next quarter. Have a great Thursday. Thank you, and bye.