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

Thank you, ladies and gentlemen. This is a bit early but I just wanted to welcome. There are many people arriving already to this meeting. If you may help me in the wonders of the digital world to keep your mics muted until we open up for the Q&A. Please help me with that. We will take off in a few moments with Daniel and Viveca disclosing more about the acquisition of roda computer GmbH. So stay with us for a few more minutes. We are still admitting some lovely guests to this special investor call. So I'm idling a little bit further, maybe 30 seconds and then we'll launch this meeting when we have all people from the lobby entering the room. Okay. Ladies and gentlemen, a very warm welcome to this special investor call with MilDef with a very special focus on MilDef's acquisition of the German company, roda computer GmbH. This call will be presented by our CEO and President, Daniel Ljunggren; and CFO, Viveca Johnsson, and we expect approximately 30 to 40 minutes to be sufficient for the presentation and the following Q&A. A friendly reminder to please help me keep your mics muted until we get into the Q&A for stating question. You can open up your mics in the Q&A or you can write your questions, even better, in the chat or raise your hand, and I will moderate the lineup of beautiful and intelligent questions. Also for your information, we record this meeting. And again, a very warm welcome to the presentation about the acquisition of roda computer GmbH. So with no further ado, please take away Daniel Ljunggren and Viveca Johnsson.

Thank you very much, for that Olof, and good morning to everyone, and thank you for joining this call today. We are here at this extra investor call today due to the quite exciting news, we think, that we announced yesterday that MilDef will acquire German company, roda GmbH as Olof mentioned, and we are now an acquisition that is really expansion MilDef strategic and an important journey on the defense market in Europe. So Stay tuned here. We will deep dive into roda but I will give you some brief overlook of MilDef universe before we deep dive into roda GmbH and the target around that. MilDef founded in 1997. We did an IPO in 2021. We are today, excluding the roda acquisition, more than 300 employees in 9 countries. Core markets where we do business is the Nordics, selected EU and NATO countries. We found -- we find our customers within defense, government and critical infrastructure, mainly like loin part of the revenue is coming from the defense sector. Product portfolio, what we are offering the customer is our hardware, software and services. History matters, we say, and we will just give you a brief overlook of the acquisition history of MilDef so far. Started off 2011 with a small acquisition of Terralogic Ltd in 2011 and up till our IPO, we did 2 additional acquisitions but we have really increased the pace of the M&A again after the IPO, and that was 1 of the big why for MilDef after entering the stock market. This was to get hold of -- be able to raise capital for doing strategic and very good fit acquisition that fits MilDef very well, so to say. And this is now our fifth acquisition since the IPO. It's also the, by far, the largest one. It's a transformative acquisition in a large acquisition assets. Here is what we have done since the IPO. We acquired a Norwegian company called Sysint in 2021 and '21 also added on Defcon, a Swedish company that is today MilDef Sweden. 2022 was the Handheld acquisition. And this year, a small acquisition in the U.K. that adding some extra edge on the display portfolio into our global portfolio. And now we are taking on the acquisition of roda. The acquisition of roda is more of a market presence acquisition. It's more about getting the sales force, the German sales force is down there, the network in Central Europe, their existing framework agreements and building a stronger MilDef for the capabilities within roda. So it's more getting into a very attractive market that we see in the Central Europe in the DACH region, especially in Germany. So this acquisition is less about product portfolio, more about sales channels, existing framework agreement and long-term customer relationships. By that said, I would like to give you roda at a glance, so to say. The company was found in 1987. So it has more years than MilDef has operating, they are today around 115 employees totally in the roda. They have 2 production facilities, and they have an HQ in Lichtenau with the Southwest of Germany. They have a subsidiary in U.K., Westek Technology and a small subsidiary in France, roda SAS. '23, their financial highlights, they did EUR 71 million in revenues, EUR 11.5 million in adjusted EBITDA and roughly around EBITDA margin around 16%. What they are offering to the customer is quite what we are doing as well. So this acquisition also would say is right in the middle of core business. We have known roda for many, many years, more than 25 years. We have worked closely to them with -- together with them where we have a long-term relationship. So we also know that this is a good culture fit between the companies. Today, they have the exclusive rights of selling the MilDef Crete Inc. products on Central European markets. So on selected offering there, you can see that the mobile segment, the notebooks, tablets and handles are a main driver for roda's top line but they also have some own products on the display side. They also have been acting as a partner from MilDef network solutions, servers and networks, products and power suppliers that is developed and manufactured by MilDef. To give you a little glance of what -- how roda looks from a top level perspective and breaking down their revenues. You can see starting that it's -- we break it down by geographic area. You can see that the footprint in Europe is the main lion part of the revenues, it's Germany, Switzerland, Australia, DACH region and some other countries in Central Europe as well. It's mainly where they're having their net sales. Also, the pie chart there around the nondefense and defense, this is a pure defense company, and I really like that as well. This is right into the core of MilDef what we have been doing for more than 25 years. So it's a really good fit. We stick really tight into the core business of defense. And that is something that we have seen as very beneficial for this acquisition. If we take the customer split, you can see that it's almost 50-50 between business and government and business to business, they have some really beneficial framework agreements that they are selling to the German MOD Bundesministerium, but they also have a quite big portion selling directly to defense industry companies. You know you have the big platform providers down in Germany. Rheinmetall, for example, 1 of those examples. And a contract set up in the end there, you can see that framework agreement is a little bit more than 50% of the revenues is sold by existing framework agreement and the rest is outside, this mainly to the industry then. But it also flesh and blood and people, and unlike MilDef, it's the people who is doing it, it's people as the main assets. So I took a picture here, the roda management team. This is the roda management team that has operated this roda company for many years, very experienced team, so to say and this team will be the same team going forward, the sellers, 1 of the founders, for example, has acting as a more or less a senior adviser to the company in the last year. So we will stick with the same management team, the Managing Director, Frank Scholz, as you see in this picture, will continue, and I see it is a very motivated roda management team, and they're really looking forward to be a part of MilDef and to continue the journey within MilDef umbrella. The strategic rationale, what we see behind this is absolutely because clear when it comes to moving MilDef from being very strong in the Nordic area to become more of a strong European player within our tactical IT niche, so to say. Also unlocking market access, we have today in some territorial breakdowns between us, we have -- they have unlocked some markets. And now we will get full access to the DACH region and other Continental European countries as well. And those countries are heavily investing in defense right now. So it's -- I would say it's a perfect timing to get in and having this central European footprint. We also see synergies, of course, of cross-selling and also purchasing because we have MilDef Crete Inc. in Taiwan, who will be even a bigger supplier for the total together, MilDef and roda but we also see good opportunities there to maybe get better prices and volume discounts, et cetera, and things like that. But when it comes to synergy side, we have also said it's very important for us to make an acquisition, this is a good deal for MilDef here and now as it stands. So we are not here to sell a lot of hopes and dreams on future synergies. We hope that there is, and we think that there is, but we think that we have done a good integration here and really get this to a good multiple as well, and that's very important for us as well. We will -- the last bullet also have a very experienced and senior team in place in Germany and we know since we have worked and have a long relationship with roda, we know that this also will be a strong culture fit between the companies. A slide showing if we do the combination together, how should that look on 2023 year's number. We will see that, as I said, this is a quite large acquisition, transformative acquisition. On top line level, we are not doubling, but quite close to that. We're moving from SEK 1.1 billion to almost SEK 2 billion. So that's a quite big portion we are taking on here on top line. Profitability-wise and EBITDA, and EBITDA margin is quite similar to where we are, slightly better than MilDef. I would say that roda is more of little bit different character as a company, slightly more as a reseller, and it's not fair to say that they are a pure reseller because no 1 is in this industry. So it's more -- still a lot of knowledge and a customized and project-based sales, so to say, but they don't have a heavily R&D spending that MilDef has. That is probably what's the difference between the 2 companies. But -- so they operate with a little bit lower gross margin but also less OpEx as well because they don't have the full R&D spending. Main geographic footprint, of course, today, MilDef, more than 50% of the revenues from MilDef is coming from the Nordics market. It's our home market. It's our strongest market. By this acquisition, we also can see that we're really adding on the Central Europe. MilDef today, prior to this acquisition has a footprint in Europe but now we really have a significant footprint in Europe and become a strong European player. Employee-wise, we will move from 300 or something to almost starting to reaching 500 employees. So we added more than 120 colleagues yesterday. I was just also to give you some flavor on what we see on the German market. And I said, it has been a very attractive market and why do we think that. The Germans has, for many years for reason, underinvested and underspent on the defense. so they are really announced that they need to catch up and they have said that they will go up to 2% GDP and even beyond. And the German economy is quite big. So in an absolute number, we are talking about a lot of business opportunities in the upcoming 5 to 10 years on the European German markets. I know that there is some tricky situation with the German government right now but I think they will sort out that. And the long-term picture is that they absolutely need to be ramping up their defense spending and increase their defense capabilities. If you look at pie charts on the right side, you can see that MilDef today, Europe is 20% of our total sales. And if we do this move, we will be -- around 50% will come from Europe, excluding the Nordic region. So I think would be a good balance between the different geographic areas. I also want to address the bullet #3, you see here that on German market, we have some of the biggest global platform providers in the world. So we also think that with German sales forces, we can have this account to grow and grow them maybe bigger, having the network and the presence on German market. We think that those kind of accounts will be able to grow even with a higher pace than we are doing today. Some summary of the acquisitions. We have, of course, now entering into a binding agreement to acquire roda, the seller or the former CEO and Founder, Martin Bertsch and Wortmann AG, a German company and MilDef Crete Inc. And we have -- the deal is EUR 70 million in cash and 1.4 million MilDef shares on a cash and debt-free basis, and that corresponds to roughly 8x EBITDA, that's what I mean. I think we have got a good deal here. The negotiations have been hard but it was very important for us to get a low multiple and buy the company on good multiples here and now. The acquisition is expected to, of course, have a positive impact on our EPS, and we'll have it quite directly after the acquisition is closed. Acquisition is expected to be closed here in Q1 in 2025. There will be some regulatory approvals as needed in our business. For example, you need a foreign direct investment regulations. So we need to seek an approval for the German government, the France government and the U.K. government. But that's quite normal in our industry because we ended the defense sector. So we hope that, that could be somewhere around 2 months before we can get to the closing point. But somewhere in Q1 next year, hopefully, we can close it. We have also estimated the integration cost, and we see that there's roughly around SEK 5 million to SEK 10 million over the upcoming 3 years. On the financing part, of course, we need to finance this quite large acquisition. And as I said, in cash it's EUR 70 million. There's also an earn-out of EUR 4 million probably coming up quite quickly here in beginning of next year. And also, we have used our own shares with 1.4 million shares. To be able to finance this, we have committed to taking up a new term loan with our bank, SEB, on EUR 45 million. And as some of you have already maybe seen in our news flow, we closed the direct right issue yesterday and taking on SEK 500 million. So there will not be this bridge, this cost-driven called bridge to equity. Those -- that right action is already done, and now we don't need the bridge to equity facility. Of course, we have looked into net debt situation and see where MilDef will end up post this acquisition. And we can see that we are below our target of 2.5. We -- when we ended Q3 standing as it is today, it was 1.4, and the acquisition will not make us over 2.5 in the net debt to EBITDA. And by that said, I think we will move over to Q&A phase. And hopefully, you're keen about to learn more about roda computer GmbH and MilDef and roda together.

So thank you, Daniel, for that crisp and short presentation. The first question -- I say, please state your questions in the chat or do like Tom at Pareto. He raised his hand. So please go ahead, use your voice and state your question, Tom.

Can you give us any sort of indication on the 2024 expected sales and margins for roda?

We can say like this time, we haven't given up the numbers anywhere else, so we will not have a clear picture of it. So we will stick with the 2023. But what I can say is they continue to grow the business, and it's -- '23 is not a peak year. So they will continue to grow the business. That's what we can say here and now when it comes to the '24 numbers. I understand that all of you are keen to understand but it will hopefully come in into Q1 when we released our report where we can add on how to look for an order back perspective and things like that.

All right. But compared to '22, they grew, what, 40%, 50% in '23, right?

Yes, exactly. They had a big jump there. And my take is that this ramping up of military spending has gone quickly on German markets. They have feel that ramping up quicker than MilDef because I think in the Nordic Country in Sweden has taken a longer time until it really impacting the defense industry. So they made a quite big jump in '23, and we will think that, that is the new level for roda.

All right. On the sort of consolidation and costs here, are you expecting to consolidate R&D moving forward? Are you going to keep the 2 entities separate?

That is a question that needs to be valued now when we can come on board and really starting to work deeper together. The roda R&D spendings are quite low in numbers. So I don't think it will be really a major questions. But of course, we will try to see if there is some synergies around that.

And production facilities will remain separate?

They will remain separately, and we are trying to see over that landscape exactly how we can be -- the most efficient company we can be. But here and now, the 2 production facilities will remain as it is.

Right. And just a final 1 on the U.K. market here. You said roda had a -- made an acquisition in the U.K. as well. Can you give us some more detail on that?

It's a company they called Westek Technology Ltd. It's a company that are doing slightly same products that MilDef are doing. They are exporting quite much outside the U.K. And then we are now in the phase of starting to learning them a little bit more and understand their business and their customer trying to see exactly how that should fit. But I think you should also keep in mind that Westek in this transaction is a very tiny piece. So the main target here for us has been the German entity and the German business, and that is more than 95% of the total roda business.

Thank you so much, Tom from Pareto. Next in line is Gustaf von Sivers for from Calgus. Please go ahead, Gustaf.

Congratulations on the great acquisition. The gross margin, you said were low and also you mentioned that you're a bit of reselling. Do you have any ideas or looked into like selling your products instead of them, which I guess then would have a higher gross margin? And that's the question.

Thank you very much, Gustaf. Excited, that is absolutely 1 of our big synergies we can see going forward that we can selling our type of products with quite high margin and high technical heighten is, you need a little bit different sales mind instead of being a pure reseller. So we think that we can addressing that, and we think that we can increase the share of MilDef products in German market going forward. So that is one of the big rationalities behind this to get access with their sales network, their network in total in German market and their existing framework agreement and starting to see if we can push for more high-margin MilDef products.

And you don't talk anything about cost synergies, so that's nothing you've been thinking about?

We don't think that is a major play here. There can be some cost synergies, but we don't think that, that will be the main play going forward. And that is also why we have been very important for us to get a good deal here, and now we're buying this on 8x EBITDA. So we are not coming here with a lot of synergies that needs to be release because we're going to be a good deal but we will look into if there is something more, but I think cost synergies will be quite small in the total deal.

Thank you so much, Gustaf von Sivers from Calgus Fund. Next question comes from Johan and you can see it in the chat also, Daniel, but it sounds like how does the seasonal sales pattern look for roda Computer? Are there seasonal effects? Is the sales distribution between quarters more even than for MilDef?

I would say more even. I'm probably addressing that MilDef is quite Q4 heavy, and we have a lot of our sales coming in the fourth quarter. Roda has not a similar pattern as we have. By that said, also that he rode working in the defense industry also has a volatility quarter-by-quarter. So it could be that some individual Q4, for example, has been very high. But I would say that it's not a clear seasonal pattern that we see in MilDef. So it will hopefully help us also to be more even in the different quarters.

Okay. Thanks for that question, Johan. Next question goes to [ Karl Noren. ] Please state your question.

Yes. I came in a little bit later to the call. My question is regarding you only comment on the 2023 numbers. So I was wondering if that was a specifically strong year. And do you expect top line to grow here in 2024 versus '23 for roda? That's my first question.

Exactly. Thank you very much for that Karl. 2023 was a big jump for them. I know that they were struggling as well with the component shortage in '21 and '22, similar like MilDef did. And as I also said, I think the German market has more taken care of the quick ramp-up of defense spending. We see -- when we see going forward from the 2023 numbers, we think absolutely that they will continue to grow. I will not give you exactly the numbers of the pace that we think that they will grow on and the management team and roda has, of course, also done their best guess and estimation, and we have looked in trying to make the best confirmation of that as we can. But we think that this will be a growing market. And we think that roda is in a good position to continue to grow their business.

That's good. And just a question also on the margin. I mean they're doing quite a good margin for being a reseller, I guess, of 13%. So just comment a little bit on the historical performance in terms of margins would also be interesting in what 1 should expect going forward.

Yes, absolutely, Karl. As you can see, the gross margin, as we talked about earlier, is lower than MilDef and that is due to that they are acting more as a reseller but also that -- that also means that they can operate with much, much lower OpEx, and that is creating the profitability and higher profitability than MilDef has. And we don't see any big need or, et cetera, for adding more OpEx on roda Computer. I think they addressed exactly as they should be and they can take on more. But they don't need that kind of big OpEx to be able to delivering the revenues that they are doing. So that is a little bit different from MilDef. We are different strategies. We are working more with creating high value from our own IP and roda has been working more with selling third-party products and increasing their customer relationship on German market. So it's quite different there exactly how we have been working as a company.

Okay. But 30% should be pretty much quite normalized over time for roda?

I think, so if it just is going on like this, and we also talked about we will try to add on as much of higher-margin MilDef products into that top line as well. And hopefully, that could give a big impact on gross margin going forward.

Thank you, Karl, for that question. I repeat again, please state your questions in the chat. I see no more questions at this time or raise your hand. And if I miss any raised hand, which I hopefully do not, you can just shout out. Otherwise, I think we are getting closer to the final approach to land this. And there was someone who wanted to say something.

It's Gareth Rudd at Chelverton here. Just a quick question on roda. Can you give us a feel for the length of order book at roda?

We will not do the order backlog here and now, that will be announced when we are adding on the order book after closing into the MilDef account. So unfortunately, I will not give the order backlog number here and now for roda GmbH.

Thanks for the question, Gareth, with the Chelverton and thanks for taking part of our journey. I have a question in the chat from Andy Karesa. How big part of roda revenues are such that MilDef has matching products to replace with own products? Good question.

Thank you very much for the question. It's quite a low number when I commented that what kind of products roda is selling that could -- we could replace with our own. So hopefully, we can complement their sales when they are selling that they continue to sell the products that they are selling today but also complement that with products from the MilDef core portfolio, so to say.

Thank you for that question. I see a raised hand from Tom. Did you raise it again, Tom? So please go ahead.

Just wondering if we can have sort of similar visibility in roda's sales pipeline as you guys have with the CV90 for example. Is there anything we can start tracking now that they're part of your team?

Thank you, Tom. I think that if you look deeper into the defense industry in Germany, if you look deeper into the digitalization project, this is ongoing there and also adding on the big platform providers and how they are doing and what kind of orders they are and order backlog they are having. I think that will set the tone, so to say, for the market condition that roda is operating in right now.

Sounds good. And can you give us any details on the balance sheet and cash flows of roda?

We can do -- I can do a quite high level description of that. And also, when we're talking about the balance sheet, there have been no debt at all. They're also working with a smaller balance sheet due to this more type of reseller characters. So they are working with a quite slim balance sheet and also operating with quite good cash flow due to the operations that they are doing. So I would say that I think that both balance sheet and cash flow-wise, also will be a positive impact on MilDef.

Thank you again, Tom. We are well north of 60 participants in this meeting, which is lovely. I see many big owners, and not only big owners, but small owners, valuable owners. And I see some very knowledgeable analysts on the call as well. And here he is, I was going to say, another 1 after Tom, Hugo Lisjo, please go ahead, from Carnegie. Muted, Hugo, you need to unmute.

Sorry, do you hear me?

Right.

Do you hear me now?

Yes.

Perfect. To be honest, the multiple seems low, what's the catch?

That's a really good question, Hugo, and of course, multiples are low. As I said, we have been very keen to making this a good acquisition based on as it is today. But I also think that you need to take in consideration the long-term relationship. There is a founder of roda that wants MilDef to be the buyer. We have had an exclusive process with roda. He wants someone to taking care of his -- what he has created, his legacy and the staff that he has a good relationship with. So I think that also contributes to what you're calling a low multiple. I think you're on mute, Olof. I see that you're speaking and saying something to the audience.

Sometimes it's good to mute me, Daniel. You know that. We're 33 minutes past the hour. I see no more hands in the air. I see no more chat questions. So maybe we are at the final stage of this Q&A, and this presentation, this very special day. So if you want to summarize and wrap up a little bit, Daniel, and then I'll close the show.

Yes. Just give it that last final thank you all for calling in, and thank you for your interest in MilDef and your questions around this roda acquisition. Now we will start the hard work, first, closing the deal that will take a couple of weeks and then the hard work that working together that one plus one will be more than 2 in this case. So take care, we will be in touch.

And of course, Daniel, since I asked them to finalize their questions. We have another question from [indiscernible]. And that is -- and that's the final question, then will close the show. Will MilDef products distribute through roda, will they be rebranded as roda? Or will they remain MilDef branded?

It's a really good question. And that is 1 of this question that we have said that needs to be sorted out post signing. So that is something that we will now deep dive into. When we now have the signing in place, we also can go deeper into the 2 organizations and talk and discuss how this brand should be going forward. And we have keep this information on a very tight little group to be able to avoid leakage, for example, so now we can start this process. And so I don't have the final answer today exactly around the branding but we will deep dive into that now when we have access to more people within both organizations.

Thank you, everyone, for that Q&A session. Many, many good questions. This has been recorded. We will also publish this on the MilDef Investor Relations website as soon as possible. So thank you for following today's special investor call. This will be all for now but I'm sure we will revert to the topic many times in meetings to come. Reach out any time for more information about the MilDef journey. Have a fine day. Stay safe.