MilDef Group AB (publ) (MILDEF) Earnings Call Transcript & Summary

Today, it's going to be myself, Bjorn Karlsson, CEO of MilDef and Daniel Ljungren, EVP and CFO, who will present the Year End and Q4 of 2021. And again, a warm welcome, and thank you for joining us on this briefing and also on the journey that MilDef is on. We will talk about a few different things. I'm going to start to talk about the MilDef's universe. For those of you who do not know, the company is too well from before, we'll quickly go through that. And then I'll try to ask the 2 questions that we get asked the most from this report in a 2021 summary, go through some of the business highlights from the year, and then Daniel will give a financial overview, and then we will look forward a little bit on 2022. And of course, we'll save time at the end for the Q&A session. So before we begin, most of you have seen this before, this is what we do in MilDef, we digitalize the world. With the stakes of the highest, with the requirements of the toughest and when technology has game changing potential, and if we look at the pictures at the bottom of the screen, we will see a few examples, where our products and services are being used, from the left-hand side, we have a picture from Mali, where peacekeeping UN operations, including Swedish military is using MilDef equipment to stay safe. We have a field hospital for COVID-19 using our equipment. And we have ships in some of the toughest environments on earth. Our products are also underneath the water and the surface. And we have a picture of a forest firefighter. This is -- these are examples where MilDef products and services are protecting to critical infrastructure of our societies. We have been doing this since 1997, and MilDef made its IPO on June 4 of last year, one of the significant events of last year. We are now about 200 employees across 5 countries. Our core markets are, of course, the home markets in the Nordics, the rest of EU and selected NATO countries. And our customers are governments and security and defense companies. Revenue wise, it's about a 50-50 split between these 2 types of customers. The portfolio we offer is a mix of hardware, of software and of services, all within tactical IT. We expand this company through organic growth where we reuse the potential in our portfolio, especially from an international perspective, but also taking part of the growth in the Nordic home markets. We are expanding through partner networks across these countries where we do not have our own presence, and we are expanding through M&A activities. And I'll get back to that a little bit when we look at 2021 and some of the things that happened there. Our products and services span all of the domains on land, in air and in marine environments. The cyber domain does not stop anywhere and our products do not stop anywhere either. So we can go everywhere, whether that is in the heat of the desert or in the call of the Arctics, our products will still work. And the portfolio has been expanded a lot in 2021. What used to be more of a pure-play hardware company is now a mix of hardware, software and services, which means that our customer can come to us for turnkey solutions. We can offer effect rather than products, which is also good from a long-term perspective, if we look at profitability and margins. And looking into some of the numbers, we will start by looking just briefly at the fourth quarter of last year. So we start with revenue. We ended up with a little bit more than SEK 200 million, a pretty tough comparison with last year. As you may know, there's been a pandemic going on a couple of years. And in 2020, that pandemic caused our fourth quarter to be huge because of the delays that happened early in the year. So a pretty tough quarter to compare with, we are also pretty happy with the SEK 200 million. It was a hectic quarter. There were some difficulties when it comes to components and logistics, but we think that we manage to fulfill most of our promises in a really good way. But of course, this has an effect. The lower revenue also have an effect on the adjusted EBITDA, which drops from SEK 87 million down to a little south of SEK 34 million and the same on the margin. Worth mentioning on the order intake, which looks on the picture as it's also dropping, but some of you will recall that we had a rather large order worth GBP 25 million in the fourth quarter of 2020. So if we compare apples-to-apples because this order from the U.K. is now starting to be delivered across the next 10 years, which is a good thing for us. But if we take that out, which was an extraordinary thing, we see that we are more than doubling the order intake in the fourth quarter, so rather strong quarter on order intake as well. And if we look at, on the operating cash flow, of course, there's an effect of the profit, but also that we are adjusting a little bit our warehousing strategies to make sure that we have critical components for deliveries in 2022 on some of these components that we see that there could be a shortage of. If we expand this to the full year and look at the full year, we see it's an all-time high on turnover. We've also made a lot of investments for future growth. I'll come back to that a little bit. But one of the things that are hugely important for this company and makes it possible for us to accelerate a little bit more than perhaps the competition is M&A activities, which we believe that we are specialized in doing in a good way. We completed 2 value-adding acquisitions. I'll talk more about them. We completed the listing on Nasdaq Stockholm, one of the reasons we're sitting in this meeting today. We had a sales growth that ended at roughly almost SEK 470 million, so it's an all-time high and a healthy increase from last year's, which was also the biggest to date, which was at SEK 399 million. The adjusted EBITDA falls back, and I'll talk about that very shortly why that happens. It ends up at SEK 32 million versus the SEK 70 million, almost SEK 73 million of last year, which also means that the margin drops, which is below also our long-term financial targets. And again, the operating cash flow is impacted by the results and despite some of the warehousing strategies. And finally, we want to mention that the Board will propose a dividend that is the same as last year. And there may be some questions on that in the end. And if there are no questions, ask them anyway, and I'll spend some time to explain why we think that this is a good thing to do. But this is one way to visualize on some of the changes that impacted 2021. And we talked about some of these in the 2 latest quarterly reports. The first one, which I guess everyone is familiar with, is related to component delays, semiconductor components was -- there was a global shortage in 2021. Some companies have been hit very hard. And we have also quantified how much delays we see going into 2022, and that is roughly SEK 50 million that are orders that will instead be delivered in the first half of 2022. We also saw that some of the pandemic effects also impacted our customers. Some of the lockdowns, some of the illness caused our customers to be out of office, needed some extra time to place orders, and it complicated their operations. The third one is related to strategy. There is an increased spending in defense across the world, including where we are active with our sales operations. But the customers need also a little time to adjust what is now an increased spending from the spending before, which means they need to look a little bit into their strategies. So there is a short vacuum before things start to happen. So we see that these 3 things combined to have an impact on the revenue for 2021. And that, of course, also has an impact on the profit for 2021. But again, I want to stress that these delays are delays and not lost business. They go into 2022 and beyond. So they are still part of the MilDef journey. If we talk a little bit about some of the most important events during 2021, acquisitions have to be mentioned. And we started in March of 2021 by acquiring Norwegian company called Sysint, the mix of their operations in IT consultancy and in software development. And this software is a little bit extra interesting for us, because it holds great internationalization and export potential. The acquisition has gone really well. The company is performing really well. It has strengthened our positioning on the Norwegian market, and we have started working with this software called OneCIS on the international markets and expect to move that forward in a good way during 2022. We also acquired a Swedish company called Defcon on July 1 of last year. This company works with integration services on the Swedish market. Also a successful acquisition and the integration has gone very smoothly. And it has created some synergy effects on the Swedish market, where our position is now really -- it's aligned with our own strategies, but more importantly, it aligns with our customers' strategies, and we look forward to taking an even more active part on the Swedish market going forward, to a large extent, with the help of this acquisition. The company has also now changed name and it's called MilDef Integration Sweden. U.S. market, this is our biggest potential for growth. The U.S. market on defense spending is by far the biggest in the world. This year, I think they are around 760 billion -- USD 700 billion, so it's pretty significant. We saw a big COVID-19 hit from the lockdown in the U.S., not as digitalized perhaps as the Nordic countries when it comes to doing business. And last year, we saw that this starts opening up again. There's some high potential B2B business, which is where we work with some of the global defense companies on the U.S. market, some of the biggest factors in that market. We also entered the government contract vehicle, which is a new thing for us that offers the potential for new revenue streams on the U.S. markets. So a positive outlook on that. We made some significant business, and we look forward to do more in 2022. And which was recently announced, we have now launched MilDef Finland, which kind of completes our presence in the Nordic countries. Even though we do not have an office in Denmark, we are close enough that we work very intimately with the Danish customers. So this addresses the Nordic markets in a good way. And to lead MilDef Finland, we have recruited a former Colonel just recently retired from the Finnish Armed Forces called Eero Valkola and his and other people's presence in Finland will address our current customers, new customers in that market. But also importantly, this addresses the whole Nordic collaboration, which is also a very important part of MilDef strategies going forward. So lots of positives on the things that we have done, if we look into the business highlights, the IPO, of course, hugely important for us, the acquisitions, hugely important for us, launching Finland also very important for us. And what we believe is a pretty stable situation. Some of the delays, of course, we think that they are unfortunate, but we see that they are still in the order book. We are working actively with them. And we'll get back to some of this, but I'll now let Daniel take over and talk a little bit more about our financials.

Thank you very much for that, Bjorn, and hello to everyone in this call. I would like to try to give you some additional information around the financials and don't try to repeat too much that Bjorn already spoken about. If we start with the net sales, we see this all-time high year, where we ended out on SEK 469 million increased net sales with 18% year-on-year. Of course, we are happy to beat our long-term financial targets in the top line growth. Of course, we had higher ambitions when it comes to the organic sales, which in this year decreased with 14% year-on-year, giving an impact on the adjusted EBITDA margin where we ended the year with 6.9% and that is below our current financial target, and of course, below our ambitions as well. There is some explanations around this heavily impacted, of course, by this delayed deliveries we had in the Q4 related to the component situation. Key component for us is that the gross margin. We continue to stay on a healthy level, mid-40% somewhere we ended the full year 2021 on 45%. And we hopefully, we can continue to keep those margins and even increase them here in 2022. A major explanation as well for the drop in the EBITDA margin is that the operating expenses has increased year-on-year with 15%. We have invested a lot of over the P&L in personnel, et cetera, to secure that we can continue to grow and that we still have our positive outlook for the upcoming years here. Unfortunately, we see that the top line didn't really ended out where we wanted to be this year on the organic sales, and that's impacted the EBITDA margin, of course. If we go to the next slide, we will just show you a current picture over how we look on the financial side, when it comes to the net debt, our cash position and our financial position. We ended 2021 with a cash position at SEK 169 million. We have a really strong equity asset ratio of 70%. We still have an unutilized revolving credit facility of SEK 50 million. And in 2021, we really increased our efforts in the M&A activities in 2021. We added 2 significant acquisitions, and they add to the top line with SEK 250 million in annual revenues. All in all, if we summarize this, we still think that we have a really strong balance sheet. We are in a strong financial position. And that gives us an opportunity to continue with our increased M&A activities. And with that said, I will leave the word back to you, Bjorn, for ending the presentation.

Thank you, Daniel. I want to talk a little bit about our expansion strategies, maybe spend some extra time on the M&A strategy, but also give some highlight bullets for the outlook of 2022 and how the year has started and what we look forward to. And I'll start by showing you this, which is our way of visualizing the potential that we have for accelerated growth. And we'll start with a market that is growing by roughly 5% per year, which is something that we've historically been able to beat by a very healthy margin, and we also do so in 2021. And it starts with our own operations. It starts where we have our own subsidiaries working with local sales. And if we look at the left-hand side, what we're doing organically, we have -- as I mentioned before, we have now expanded also into Finland, but we have the Nordic home markets, which are super strong. We have a rather special position here, protected by some framework agreements and also a presence since 25 years on these markets, and they are expanding, and we are in a very healthy shape here to expand more. We have the U.K., which is now recovering from the Brexit. First, the Brexit depression and then the COVID depression and I know there are some people from the U.K. Otherwise, I might have said that they are always depressed, but I will not say that today. And I will instead say that we are in the U.S., which I talked about as well, where we see even more potential in the portfolio we already have to expand on that hugely large market. So that is basically what we do with our own resources we already have. But during 2021, which we also talked a lot about before the IPO, what was our portfolio expansion, where we go from being more of a purely hardware vendor to delivering hardware, services and software. And the acquisitions have really expanded our portfolio, and we can use some of that on the local markets and some of that we can internationalize and we can export, and we can reuse the sales channels we have and the partner networks that we have as well. So these are both supporting the organic growth of the company. And the third part is acquired growth, which, again, we made 2 such acquisitions in 2021. We have deployed an M&A model. We have an organization in place that works with it. We always have ongoing M&A discussions with interesting companies. We have made an inventory of the markets that we think are the right markets to grow on. So we have a very healthy backlog of companies that we do work with and that we analyze and that we have a relationship with and we also have a corporate model in place to manage those acquisitions after the transactions to make sure that we can stay up to speed with more acquisitions going forward. We have a greenhouse model where we integrate the companies into the MilDef's ecosystem and networks, and we have full speed ahead when it comes to finding the right acquisitions. We are also very careful to not make an acquisition just to make this look good on paper. We look for companies that can add to what we do. With the right people, the right culture and customers who think that these are great companies to work with, and we expand from that platform. So we're pretty picky with the companies that we bring on the MilDef journey. But we work with this a lot, we believe that the model is really strong, and we have an organization in place that has proven that they can manage this type of work in a good way. So as I said before, we consider ourselves to be at least on the way to become a specialist in this area, and we think it is important for the future of this company. If we just look at 2022 and some of the factors that we think are important to look at, first of all, we see that we have a quickly growing order book. It's now at more than SEK 730 million. That creates a platform for us that we can use to grow. We saw that the order intake in the fourth quarter was strong. Again, if we look at the total numbers, we see that they are actually falling back from the previous fourth quarter, but that was related to this order we talked about in the U.K. of GBP 25 million, which is now starting to be delivered. So I don't see that as a negative at all. And also, if we take that out and compare, we are doubling the order intake in the fourth quarter. So that gives us a pretty good position to work forward with as well in 2022. We do see that the component market continues to be challenging. There are a few factors that happened there as well. Delays, of course, and some price increases, yes. But maybe what is most concerning is that is uncertainty on lead times. Is it 2 weeks or is it 52 weeks? There are some challenges in there, but we also see signs of improvements. There has been a global effect from a lot of companies changing their warehousing strategies, which means that they go from empty warehouses to full warehouses. This is putting a stress on everyone who is delivering and manufacturing these components. We believe that this is a short-term effect. We believe that the capacity is there, and it's also being expanded. So we see this as a short-term problem. We will see some of this in 2022, but we'll probably not talk too much about this in 2023. Number 4 is our continued focus on value-added M&A activities. I talked about it before and I will talk about it again. And we also see that the new platform that we have from entering the capital market is not only expanding our financial muscles to complete these transactions, but there are also the platform where we can go to find the right companies to talk with. So we see that this is increasing a little bit in its pace. And last but not least, we do see that there's still untapped pointed potential in the portfolio that we have. We have an organization in place to sell it, and we have the right technology that is needed for all of those modernization programs taking place, and we intend to really utilize and unleash that potential on the markets where we operate there, especially the U.S., but it's also true for many other markets. So these are some of the things that we aim to do in 2022, some of the fundamentals that we see are giving us a direction where to go. And also, this gives us a humble confidence that we can continue to do good things and expand from this platform during 2022. And with that, we open the floor for your questions. Erik go for it.

Erik Golrang with SEB here. I have a couple of questions. Firstly, on the SEK 50 million in delayed deliveries pushed into the first half of '22. Is there -- do you expect additional sort of new delays on top? Or do you see sort of a full recovery and then back to normal for the full year? Or will you recover some of that delayed sales and then there's going to be new delays potentially lingering into the second half of '23 -- or sorry, of '22 and into '23.

That's a good question. And there is still some uncertainty on that because of the component situation I mentioned with the lead times. We will -- I mean, I think we'll recover some, but we are not yet sure what will happen as we move forward in the year. So I mean, that question will continue to be relevant and difficult to answer with precision before probably the half year turn or so of 2022, when we will know the details, and we will understand how these dynamics on the component market plays out. I mean this is a $100 million questions you're asking for a global industry. So it's difficult to predict fully. We see for this SEK 50 million that we have the -- they are well covered, and there was nothing will happen on that. But what happens with the order intake that we will have on the first half of 2022, still a little bit of uncertainty.

Okay. Then on the -- were there any delays related to the DefCon acquisition or that business in Q4? Was that impacted by component shortages as well?

There was some impact on that as well. So part of those delays were related to the traditional hardware sales and a smaller part was related to DefCon as well because of, yes, component shortage, and that in turn also had an impact sometimes on our customers' ability to deliver their platforms for integrations to us. So there was a little bit of impact on that as well.

Which brings me to my next question, there was a slide showing that you acquired SEK 250 million in sales through acquisitions. And if I add up the contribution in '21, it was about half of that. So does that mean that for -- because I guess you'll have Defcon then in the first half being annualized, that there's around SEK 125 million in sales growth from acquired entities coming into the first half year to get to EUR250 million in total?

I mean this is -- of course, you can take this Daniel or avoid a trick question, Daniel, and do the math only.

Yes, sure. I can at least try to answer that one. The SEK 250 million reflects the full year for the 2 acquisitions. I'd say both Sysint and Defcon and since we're not consolidating the 2 companies for the full year, we don't have this full effect on SEK 250 million in 2021. But in 2022, we hopefully will see plus SEK 250 million from these 2 acquired companies.

Okay. And then a final question from me for now at least. On the -- on Slide 9, where you sort of outlined the various impacts on sales and profit here. Should we read those as proportionate to each other, i.e., I look at sort of the bullet #3 there, the strategic delays, it looks quite a bit bigger than the component related delays, which in itself were quite meaningful. So you add all these things up, you get to pretty big numbers.

Yes. I mean we've tried to not quantify these precisely. So you shouldn't read too much into them because what we have quantified precisely is, of course, the SEK 50 million delay. And so we've tried to not make this -- don't count them pixel by pixel, it's difficult to be exact on the precision with these. We see that they have impacted things. And we see that some of these discussions, some of the orders are coming in, as we said, with some delays and some on the strategies have been finalized and are now turning into -- yet to orders or discussions or prospects, and we see them coming through our CRM systems, but we try not to quantify them with precision.

Okay. And I actually have one more, and I have to try it. And you talked about sort of the gross margin development and hinted at a similar level for '22 or maybe a bit better. You also covered what's happening on OpEx, and I guess we'll see an annualized effect on OpEx from the acquisitions in the first half, but underlying operational expenditure, how do you see that developing in '22?

I can take that, Erik. I think we were pretty much starting to flat out a little bit. When you're doing -- when you have an IPO, you're like this in '21, you always have some extra cost. And of course, we had just for some direct IPO-related costs. But you also have other costs relating to being a public company. And I think we have grown into that cost in 2021. And hopefully, we can see an operating expenses not increasing so much that this had done in '21. Of course, we will keep to add on some staff, et cetera, for continued growth, et cetera. But I think we have a good position to start on hoping to hold back a little bit on the cost side.

Thank you, Erik. Leaving the floor open for other questions, feel free to type them in the chat or just speak freely. I have received one question that was -- I also mentioned it briefly when it comes to the proposal regarding the dividends on the same level as last year and talks about, well, what was the reasoning behind that? And I cannot, of course, speak for the Board, but the reasoning regarding this is that we see some of these delays that happened are just over -- it's over onetime nature. We see that the market trends that we've talked about before are the same. The platform that we stand on is stronger than before. We just think that it -- or the Board thinks it makes sense that the share owners of this company also get some payback on the investments. And again, the fundamentals for the company remains the same. So that is the reasoning behind that. There's also a question here, I see regarding additional acquisitions, and what kind of space do we have left for acquisitions? And I think that Daniel talked a little bit about this when he showed the financial numbers that show that there's still a lot of acquisition power in the form of cash. There's also extra room if we look at our long-term financial targets, if we look at the potential for debt on that. And if you combine that with our -- the work we are doing and the organization we have in place for M&A activities, we believe that we are well set for 2022, where if the right companies come along, we will be able to close transactions that have a significant impact on the development of our company. Do you have one more question, Erik, or I see you have raised your hand.

Can I squeeze out 2 actually.

Yes, go for it.

Could you say something about the sort of customer reactions to those delayed deliveries? And then secondly, you talked about the U.S. market and you're obviously quite optimistic, but the actual sales trend has been negative now. So I mean, what are we waiting for there for -- to hit an inflection point where you can start to expand in the U.S.?

Yes. So let's start with the customer reactions from some of these delays. And I mean this is a global issue from last year. So the understanding from the customers has been really, really good. And we have had a good dialogue to make sure that we deliver what is most critical in the best possible way. We've been transparent since day 1. And for those of you who recall, we've been kind of posting our status to our customers for a long time regarding lead times, potential delays. It's been a very healthy dialogue, and we've been able to also help our customers to minimize the impact of these delays. So pretty positive, good understanding, of course, helped by the fact that this is a global issue and everyone basically understands what's going on. So that has been a positive dialogue all in all. And the second question related to the U.S., I mean, again, the COVID-19 situation in a country that relies to a much greater extent than we do on physical meetings, including when you are trying to sign any kind of contract. I mean, they were heavily impacted. There was a lockdown. Some of our industry customers have been unable to deliver their international programs because of the lockdowns. I mean factories have been without any workers in them. So we believe that this is kind of a 2-year hitting the pause button on this market. We have kept our team in place. We have expanded the team a little bit. We have looked into some new strategies. I mean -- and your question is relevant. When is the inflection point? I mean -- it's difficult to say. I mean the potential is fantastic. We need to be very strong to seize the moment and take it. Will that be -- will this year, I hope it will. We will spend time there. We're able to travel again. So I'm going to spend some time there myself and the rest of the team. Hopefully, that will also have a positive impact, but we're at least getting closer to that inflection point. And we are also looking into the U.S. again as when it comes to our M&A targets. We had to pause that as well, because of our inability to travel before. So at least we are increasing the focus, and I think we're doing the right things. And when is the time, well, that's -- we'll have to see. But I think we will see a positive impact in '22, for sure. Thank you. The chat is silent, but maybe someone else in the audience? All right. Well, we are running out of time here. So I'll just, again, thank you so much for joining this call. We feel, again, humbly confident and very positive about the future. We have put the right people in place. We have recruited people and organizations into the MilDef network. Some of these fundamentals that I talked about are even stronger than before, and we thank you so much for being part of the MilDef journey. We hope you continue to be a part of the MilDef journey. And we are here also after the meeting for any questions you might have any discussions you want to have, and we are happy to talk with you. Thank you so much for joining us, and I wish everyone a fantastic day, and we will talk soon again. Thank you, and goodbye.

Thank you very much. Bye-bye.