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

Well, good morning, ladies and gentlemen. Welcome -- a warm welcome to this investor call with MilDef, with a special focus on MilDef reporting on the fourth quarter and year-end 2024. And all you friendly people out there, if someone wants to give a holla and say, "We read you loud and clear," that would be lovely. So who is the daring person that can say that the audio is fine? That would be lovely. So please just...

Audio is fine.

Thank you so much, sir. This call will be presented by Daniel Ljunggren and Viveca Johnsson, our CEO and CFO. We expect approximately, as always, 40 minutes to be sufficient for the presentation and the following Q&A. A friendly reminder to please help keep your microphones muted. And we open up your microphones, and you can do it yourself, when we're getting ready for the Q&A. Or you state your question in the chat, and I will moderate the lineup of questions. Also for information, we record this meeting for a later publication on our web. Again, a warm welcome this beautiful morning to the presentation about MilDef's Fourth Quarter '24 and Full Year of '24. So now please take it away, Daniel Ljunggren and Viveca Johnsson, and remember to help our audience understand where we are in the presentation by stating the number on the slide.

Thank you very much for that, Olof, and I also would take the opportunity to say a warm welcome to all of you to this conf call of the fourth quarter from MilDef. I will jump directly into the highlights for the fourth quarter. It's -- we are very proud to announce that this is the strongest quarter in MilDef history. There is a lot of all-time high in this report. Components like order intake, for example, exceeds SEK 700 million for the first time in this company's history and sets the tone for the 2025. Also all-time high when it comes to the net sales. Order backlog is record high as well, above SEK 2 billion at the moment when we closed 2024. And we also can see that we have a book-to-bill ratio on a rolling 12-month basis. That is 1.5. So that also indicates that there will be some future growing potential for this company. So it's a quarter that is strong. And that is, of course, also very much up to the strong demand across our product portfolio that we see on our main geographic market. Mainly the Nordics and the European market is really, really strong right now. So that is one really important puzzle pieces when it comes to what we see here in the order intake, for example, in the fourth quarter. Also a big highlight for the Q4 was when we announced this acquisition of the German company, roda, that really opened up the Central Europe for future growth. I would talk a little bit more about roda in the end. So let us save that for the end, so to say. Also announced from our side in December is that we -- with this background, with this strong demand in the defense sector, we have now taken a strategic decision to fully focus on defense. We think that, that will serve MilDef best over time. So that is something that we have addressed here in the fourth quarter. And we think that defense ramp-up is here to stay for many, many years out. So full focus on defense. We think that will serve MilDef best. Also here in the fourth quarter, we can see that it's a continued stable development of the OpEx. We're adding on 5% more OpEx than comparable quarter, fourth quarter in 2023, but I think that is a low number compared to the growth and the order intake growth. All in all, I think that MilDef is very well positioned for taking advantage of the opportunities that we now see that is offered by the Nordic and European defense ramp-up. If we just deep a little bit deeper into the real numbers, we can see that net sales is SEK 418 million in the fourth quarter, increase of 18% compared to Q4 last year. And it's purely organic. And I said, it's a record-high number. And for the first time in this company's history, we exceeded SEK 400 million in net sales for 1 quarter. I think that the net sales growth and also the order intake really confirms that we have a relevant offering and a high level of customer confidence. What really stands out here, I think, in the fourth quarter is the record-high order intake, increased by nearly 90%. So we have also announced a lot of important strategic contracts in the fourth quarter, and it's all around in the MilDef portfolio, both from hardware integration projects. And we also now, in the fourth quarter, see a breakthrough of the software order in Sweden. And continue here on Slide 2 is that we look down to the adjusted EBITA, and we see an increase. We end fourth quarter 17% in EBITA margin. And as I said, an OpEx of plus 5% compared to Q4 2023. This is something that we have worked really hard within the company to increase the operational efficiency, but it's also showing that scalability of the company when the top line grows like we have in the fourth quarter. A quite high top line, it's really scale on the profit as well. Last bullet around the fourth quarter is the free cash flow. It's now the fifth quarter in a row where we increased positive free cash flow. And that is very happy about and also demonstrating the initiative that we have done around the operational efficiency and that this kind of initiative really are paying off. Final summary of the Q4 recap, so to say. We have been a very busy Q4. On Slide 3, for example, we see a couple of things that we have announced in the fourth quarter. We started with a Dismounted Soldier launch in October, the big trade show in U.S. called AUSA. And then also that we continue with announcing a lot of important strategic orders from different customers. BAE Systems was a really great customer in the fourth quarter. And we also have this OneCIS to the Swedish Navy, that is -- I think, is a great potential for the future. And as we said, we announced this transformative acquisition of roda computer, and I will come back to that later before we close this presentation. We also, with a really high successful rate, did a direct share issue, and we raised SEK 500 million to be able to finance the acquisition of roda. And in December, the final one here, we made a strategic announcement around really putting all the effort we can into the defense sector, and that is, of course, due to the strong demand we see in the defense sector. With that said, I will leave the word over to Viveca for some more long-term trends financial-wise and also deep a little bit diver into -- deeper into the financial numbers. So please, Viveca.

Thank you, Daniel, and good morning, everybody, on the call. My favorite slide is, as always, to zoom out a little bit and have a look on our long-term growth in terms of sales. We're starting on 2015 and working our way up to 2024, which is why we're here today to talk about the 2024 results. 23% growth per year, with an acceleration from our IPO in 2021, with 37% growth per year here on Slide 5. 2024, a little bit slower growth than we have seen in the years beforehand, but this is sales. We'll come back to orders, which is our future sales number. But turning from Slide 5 to Slide 6, we will be talking about the full year of 2024. As I said, it was a bit slow in '24 on the sales side. It was primarily the first half of the year, where we saw a dampened sales compared to 2023. Looking at the second half of the year, this was much stronger, and second half compared to second half '23, we are looking at a 15% growth, which is more in line with what we will be looking forward to in '25. Order intake, SEK 1.8 billion. We finished the year with a streak of large order in the Nordic countries, which Daniel went through just recently. And had I done the previous slide on growth order intake, we would be looking at 45% growth instead of 37% since the IPO on order intake and almost 50% in the year. Profitability, EBITA, we continue to build for the future, of course. We are adding resources, competencies, employees. But we have managed to secure our profitability while building for the future. Our EBITA margin has developed from 12.2% to 12.5% on a whole year basis, and absolute development is about 7%. Finally, on this slide, I would like to highlight the importance of our free cash flow, which is almost SEK 120 million higher than we saw in the full year 2023. This is, of course, both with underlying activities in our operational business from a day-to-day activity, or constant struggles, if you will, and as well as a consequence of our restructuring program, where we have also handled some inventory positions in that. Turning to Slide 7, we are looking at the order intake, and this is really a thrill to look at. We are on almost 50% growth on a rolling 12-month basis. SEK 1.8 billion with a number of interesting and strategic orders in -- especially in the second half of the year and also finalizing the year very strong. This strong order position in 2024 gives us a strong backlog positions when we will turn to Slide 8 to see that on 55% growth. So here we are now exceeding SEK 2 billion in what we have to deliver for the future. As I said, order intake is very important for us to continue the momentum here. And as Daniel mentioned, we have a book-to-bill ratio of around 1.5, which is clearly indicating a strong future in the MilDef universe. The future is divided in a number of years on Slide 9. 2025, we are looking at some SEK 1.1 billion already, and that position is around 37% higher than the same position last year for 2024. But we see also that we have longer contracts already now with deliveries for 2028 and going forward from that, which is indicating long strategic contracts and our customers' strong belief and confidence in the MilDef ability. We will move further on to Slide 10, net sales we spoke about. This weaker development of the first half of the year. It's landing also on a mere 4% growth, which is, of course, below our long-term targets, but we are comforted well by the strong order intake in that ability to deliver sales for the coming years. Gross margin-wise, we are developing according to plan. We are moving from a full year of 48.3% to 49% in 2024. The fourth quarter was a lighter margin due to the mix. We had a lot of delivery on framework contracts that we have a little bit lower margin on and sometimes the deliveries of those lumped together in 1 quarter. And then we see a little bit lighter margin. And I've said that every time we spoke about this, that there will be ups and downs in the margin, but we are continuing around 50%. That's our target on our margin. And speaking of margins, we will turn to Slide 11, our EBITA. We have a pickup of around 7%, as I said, 12.2% to 12.5 percentage. It's not a massive development in terms of profitability. Normally, we see high net sales development, we see high EBITA development. So the weaker development in sales on the full year is indicating a somewhat slower EBITA development. However, EBITA has picked up more than the sales. So we have 7% here, 4% of the net sales. It's also interesting to think about the operating expenses in relation to order intake given that we are growing as quickly as we are. We need to build our capabilities for the future to be able to deliver and to secure our promise to our customers. And just for those doing the fun math of operational expenses in relation to sales, you should do it in relation to order intake as well. And then you will see that, that number would have developed from 2023 of around 37% to '24 with around 26%. So things are happening, and we're gearing for the future, but the scalable business model is here to stay. I will finalize the finance block on Slide 12 with working capital and net debt. Working capital has, in the fourth quarter and the full year of 2024, developed very well, and it's primarily the inventory position that we are seeing movements within. This is, as I've spoken about during the year, a consequence of our initiatives in our daily business with the modularization of different product groups, but it's also a consequence of the restructuring program, where we are picking up our responsibility for some inventory in Handheld group and handling that within the framework of the restructuring program. We will be focusing on defense and security sector going forward, and we are streamlining also our inventory position to suit that ambition. Net debt, a dramatic development in the quarter, if you will, and you should be expecting a similar dramatic development in the other direction for the next quarter. We did a rights issue of shares in the fourth quarter, and the pursuits of that are primarily due to be used in the closing of the acquisition of roda, which we're expecting here in Q1, but currently, they are held on our accounts, which is, of course, nice to see every morning on the bank, but will be even more nice to welcome the roda acquisition into the MilDef Group. Daniel, I hand it back to you.

Thank you very much, Viveca, for taking us through the numbers. I promised all of you in the beginning that I will come back to the acquisition of roda and give you an update on the process of the acquisition of roda. I would like to start on your right-hand side, to just give you the recap of the acquisition rationalities. As we said when we announced the acquisition that MilDef will become a leading pan-European player within tactical and rugged IT, that we are going from being the strong Nordic player to be a strong European leading player in our small niche, so to say. Also, of course, unlocking market access to the DACH region and other Central European countries. That is really interesting markets, really attractive markets, markets where they have announced an increased defense spending. So that is the market you want to be on. We also have synergy, potential in cross-selling and purchasing. And finally, we think that there is a strong cultural fit between the companies, and we're also getting hold of a very experienced and senior management team and whole organization within roda. Short -- around the process. We are, as you know, between signing and closing, and we have done this regulatory filing for getting approvals in 3 different countries: Germany, France and U.K. And that process is running according to plan. Happy news that we can already announce now that 2 out of 3 is already approved. So U.K. and France, we already received an approval from. Also that we think is very positive here that is that the authorities has really announced MilDef and roda together being a very important player in building a stronger European defense. So that is why they're really looking in to see what kind of commitments MilDef and roda can give to the end customer. So that are where we are right now in that phase, and we are estimating that this will be closed here in Q1. Best guess is somewhere around beginning of March or mid-March, something like that. But we will come back, of course, and tell you exactly when the closing process is over. Future outlook before we open up the floor for some questions. I will just start with this slide on Page #16, and this is not we're going to go deep into. It's just to give you a flavor of what type of trends we see on the market. And this is hopefully no news for anyone, but it has been announced, really increased defense spending in MilDef's core markets, European and Nordic market and also in our home market, Sweden. So there is a very positive trend, and we can see that there has been underinvesting in the defense for many, many years, and now they're trying to catch up and pick up, and there will be a lot of business opportunities going forward. So this is just to set the scene for the final slide on Page 17, which, of course, this sentiment of the markets give us a positive future outlook. And why is that? Number one is that we see these market activities, and we see that they will expect to remain strong for many years to come. We think that this will be a 5, 10, maybe 15 years up ramping in defense spending. Also, a broader market trend is in MilDef's favor, and that is that there is a great and significant need for modernization of the current tactical IT solutions. So it's more and more defense spending, but it's also that they will spend it on things that are in MilDef's sweet spot, and that is the main driver behind the future positive outlook. And on top of that, we also expect and anticipate that this increased defense spending will further boost demand because there will be increased defense spending going from '25 and forward and just complementing the underlying trend. And the final piece here is the acquisition of roda that really transform MilDef from a Nordic leading -- to a European leading player within tactical and rugged IT. So that is hopefully something we can see that 1 plus 1 when it comes to MilDef and roda will become corresponding to more than 2. So hopefully, we can see a very strong and successful acquisition going forward. And that's all for us. I think it's time for open up the floor for the questions.

Absolutely. Thank you, Daniel, and thank you, Viveca. 20 minutes past the hour. We open up the Q&A session. Please state your questions in the chat or raise your hand. I think that Tom from Pareto is the first gentleman to fire off. Welcome, Tom.

Just a question on the order intake or the sort of unannounced order intake. Can you give us any more details on that? Is it from existing customers and the profitability level of the order intake here in Q4?

Mainly from the existing customers -- and thank you for the question, Tom. Mainly from the existing customers, quite much spread around in different customers and different geographic areas. Mainly -- if there is something, it's the Nordics, I would say, has had a very strong fourth quarter when it comes to the order intake. The profitability, I will not announce that in the order intake as we normally don't do that. So -- but it was a strong underlying trend. We had some really big announced orders, but the underlying trend on some small orders was also really good in the fourth quarter.

And can we expect that to continue on similar levels, maybe not as strong as Q4, but the sort of similar bump that we saw at the beginning of the year? Can we expect an additional bump here in '25?

Good question. It's always tricky when it comes to quarterly numbers and quarterly order intake. There is a lumpiness in this kind of business. So it's hard to say exactly if ups and downs. But the underlying trend, I would say, is here. And I think that we are now entering into some kind of new phase in the defense ramp-up where it's really starting to impact in the more minor players in the defense industry. The big players have seen this already for 1, 2 years ago. But we now think that we are in this what we have called before the third wave where we can see the small defense industry is starting to getting impacted by the defense ramp-up. So that could be something that can shift the landscape going forward in underlying small orders, order intake, so to say. But I'm not really sure there will probably be some lumpiness going forward as well regarding order intake on a quarterly basis.

Perfect. Just a final one on delivery capacity. Are you expecting any further CapEx investments to meet the demand here in '25?

We are, but nothing big. We are totally -- we are all the time adding on some kind of capabilities and resources, but there is no big planned CapEx in 2025. We have already announced this new facility up in Stockholm, and that is ongoing and should be ready to move in, in autumn in 2025, but besides that, nothing that really stands out.

Thank you, Tom from Pareto. So we turn page and move to Erik Golrang with SEB. Take it away, Erik.

I have 5 questions. You stop me if that's too many. First one then on the gross margin. You say you had big deliveries within framework agreements that had a negative mix impact. Probably my memory is off there, but I thought frameworks were good from a profitability perspective. So what exactly is it in the product mix that's negative?

Most frameworks are with a very good margin. And it depends on which framework we're talking about and what products are to be delivered on and to what country, what customers and so on. This was a little bit older framework agreements that we have had in our books for some time. And it was the end of some -- one of them. And this was with a little slightly lower margin due to the high volumes of them. But you are correct that normally framework agreements are with the good margins. So it's an unfortunate mix that 2 of them went out with a large bulk in Q4.

Okay. Then if you can -- appreciate the update on roda and the time line there. But can you say anything about their operational development in -- towards the end of last year, particularly when it comes to demand and order intake?

Thank you, Erik, for the question. I will not go deep into exact numbers, but what I hear and expect from roda is that they will continue to -- are seeing a high demand on the markets, still continue to grow the business. So that is the update we have around 2024 for roda. They are a little bit slower than we are to really getting the numbers and the year-end process done, so to say. But we have a slightly ballpark figure where they're ending up, and we see that they continue to be on a strong demand, a strong journey.

Okay. Then in terms of the backlog, the duration of that and how that plays into the timing of sales growth in '25. Is it -- should we think of the year as sort of evenly distributed in terms of year-over-year growth progression? Or is it more of a back-end loaded year if you have to guess a bit?

If I had to guess and if I had to give that information since we normally don't, but there is nothing that is deviating materially from previous years in the timing. Of course, we are hoping to -- the larger we get having more even stream over the year and not have these very large deliveries towards the end of the year, also to protect our organization from operational overload. So that's an ambition that we are working with, but we don't see any major deviations from previous years' patterns.

Okay. Then on costs, you highlighted quite a bit lower OpEx growth compared to what we've seen. Do we need to recalibrate this a bit? Is 10% underlying OpEx growth too high of a figure now? Or what should we expect?

I think you should be thinking about it in terms of absolute numbers is probably a decent and probably a slight increase. But in relation to sales, it will scale quite nicely during '25.

Very good. And then the final question, which I guess, is a follow-up to the previous one on investment needs. You said no big investments. I think total CapEx to sales was about 1.7% last year. Is that a fair figure for '25 as well? Or will it come down because of a bigger top line?

The top line development will, of course, drive it down. But as Daniel mentioned, we are adding this new facility in the Stockholm area, which will come into play in -- towards the end of the year. So that is coming in, in absolute numbers.

Thank you so much, Erik Golrang with SEB. I see no raised hand at present time, and I see no questions in the chat. But if I just held long for a little while, I can just say that it's not only an all-time high in many of the numbers that Viveca and Daniel presented. It's also an all-time high in numbers of participants in this meeting. So thank you very much, ladies and gentlemen, for joining the MilDef journey and for being, in many cases, co-owners of the MilDef troop. So Damian Kemp raised his hand. You're warm welcome to state your question.

The roda acquisition gives an indication of where MilDef sees itself heading. Are there more acquisitions in the pipeline? Is there more of an effort to -- if not acquisitions, then are you looking at strategic tie-ups? How do you expect to develop what you've seen as your company's future?

Thank you very much, Damian, for that question. And I think that the M&A activities is always on MilDef's radar, and sometimes, it's closer, and sometimes, it's more far away to close anything. We are always looking for finding 1 to 2, maybe strategic, really good fit when it comes to the acquisition. And when we think that roda will be a really good fit here in 2025. But we will continue to look after potential targets that we think really can benefit to the MilDef journey. So we need to come back and say when we really have something crispy on the table, but the radar is always out there, and we're looking for -- find acquisition that we think can be -- strengthen MilDef offering or new geographic markets.

Thank you, Damian. That -- any more questions, Damian? Or you're happy there? Okay.

That was a great answer there.

Thank you, everyone, for participating in this call, and I do the same thing again. So maybe there is another question, or Daniel will soon summarize and say goodbye. As always, you can follow the MilDef journey in many channels. LinkedIn, today, you can see a long interview with Daniel Ljunggren, our CEO and President, on Dagens industri. You'll see a long interview of 7 minutes with many cool comment. Also be able to follow an even longer interview with Carnegie on video today published by Carnegie today. So there are ample opportunities to follow the MilDef journey. And if no more questions are being stated, we thank you for your participation. We hope that you keep in touch. Don't be a stranger. Stay in touch. Follow us on the many channels, and have a beautiful day wherever you are. In Stockholm, the sun is shining. It's a fantastic day. So we hope your day shines on you. Take it away, Daniel.

Thank you very much, Olof. And finally, closing is just thank you all for being part of the MilDef journey and having interest in the MilDef journey. And stay tuned, we will talk about MilDef again when we come up with the Q1 here in April. Take care, everyone. Have a great day. Thank you very much.