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

It's 10:00 on this Thursday, the 16th of July, and we have a presentation of the Q2 numbers out of MilDef coming out of this morning. So welcome to this investor call with MilDef with a special focus on Q2. This quarterly call will be, as always, presented by Daniel Ljunggren, President and CEO; and Viveca Johnsson, CFO. We expect approximately 30 minutes to be sufficient for the presentation and the following Q&A. [Operator Instructions] Also for information, we record this meeting for later publication on the MilDef website later today. So now with no further ado, please take away Daniel Ljunggren and Viveca Johnsson. And remember, to help our audience where we are in the presentation by stating the number on the slide. Please, Daniel.

Thank you, Olof, for that introduction, and a warm welcome to all of you that are here in the high peak summer period in Sweden, joining this Q2 con call for MilDef. These are the areas that we will try to cover today. We will have some highlights for the second quarter. And post that, we will have some more clarifications on the financial side, and then we will have a summary and, of course, in the end, a Q&A session. But let's start with Slide #3 then and look at the highlights for the second quarter. Q2 was a strong quarter when it comes to the delivery execution and with a high operating leverage, indicating that our investments and efforts into increased delivery capacity has now really started to pay off. Net sales grew by 64%, purely organic, and operating profit EBITA grew with almost 300%, which is, to me, a clear evidence of the operating leverage and the scalability in the business model that we have stated before. If we continue, we saw a good market momentum with continued high demand across the entire MilDef portfolio. The demand for advanced military IT solution is increasing, and we have an offering that clearly meets the requirements set by the customers. The slightly lower order intake in the second quarter compared to the same quarter last year should be seen more as a reflection of the volatility between individual quarters. The gross margin was clearly improved here also in the second quarter. Total gross margin ended up on 51.9%, and we can compare that to 46% in the same period last year. This was an increase that was driven by a profitable sales mix in the second quarter, more specifically driven by a higher share of sales that is related to software and solution in the second quarter. And those items is bearing a higher gross margin than our traditional hardware business. The gross margin level here we saw in Q2 cannot be taken for granted as a new normal. The gross margin will continue to vary across quarters depending on our products and customer sales mix. We also had -- when we closed the Q2, we had a record high order backlog, indicating good chances to continue our long-term net sales growth. The backlog by the end of Q2 was just above SEK 4.2 billion. And by that is we have grown the order backlog with 32% the last 12 months, and this is despite that we have performed a top line growth, net sales growth of 91% in the same 12 months. Also, of course, worth highlighting is the strategic framework. A very important milestone was that we secured this new 7-year strategic framework agreement with Swedish Defence Material Administration, also known as FMV. This agreement has a potential value of up to SEK 1.5 billion. And also when we signed the contract, there was a first call-off order was placed in connection with the signing. I think that this agreement will accelerate the implementation of MilDef software, the so-called OneCIS, into the Swedish Armed Forces. OneCIS is today already used operational-wise in several other countries and also within the Swedish Navy. Our investments also into additional delivery capacity are still at a high level. At the same time that we are delivering growth and improved margins, we also invest to be able to meet the future long-term customer demands. The investments we have made so far mainly consist of onboarding more coworkers and increasing our production areas. The already announced expansion of our current site here in Helsingborg in the fortress is progressing very well. We expect that new site to be operational not later than the autumn 2027. And by that, we will double our production capacity in Helsingborg. Also worth mentioning is that there is still some challenges in the supply chain for electronic components, both in terms of lead times and price levels. We, of course, continue to take proactive actions to secure access to the critical components. Mainly this is done through a range of activities such as the inventory buildup of critical components, close collaboration with suppliers to ensure deliveries, and also a frequent dialogue with our customers regarding the price absorption of the increased prices. And finally, of course, also worth mention, going back to the volatility in the order intake. Post Q2 here, we received our largest order to date, an order value of plus SEK 550 million, an order that consists of hardware and that we estimate deliveries during next year in 2027. And by that said, we will move over to Slide #4, which contains the key figures for Q2. And if we take it from your left hand to start with, the net sales ended up on SEK 630 million, and that is a growth compared to Q2 2025 with 64%. And that growth is pure organic and it's also an all-time high number for individual Q2. And also next one, lower down in the P&L, the adjusted EBITA, of course, SEK 99.7 million, showing a growth of almost 300%. The adjusted EBITA margin is 15.8% and we compare that to 16.5% (sic) [ 6.5% ] and, of course, driven by higher sales, but also by a strong gross margin. And as I said, gross margin was strong here, 51.9% in total. And on the OpEx side, we think that this developed according to plan, increased OpEx with 27%, excluding some nonrecurring items and some unrealized FX losses in the second quarter. Order intake is dropping down a little bit. It's dropping by 17% if we compare to Q2 2025. This decline should not be seen as an underlying trend. It should more be seen as a reflection of the volatility we see in the defense sector between quarters. We also now, as you already know, announced this large order this week. So it could be a little bit variance from quarter-to-quarter. Book-to-bill ratio here in Q2 reached 1.2, and on a rolling 12-month basis, we have 1.4. And also finally, the free cash flow, SEK 7.4 million compared to SEK 32.7 million in Q2 2025. But I would like to zoom out here and look at the first 6 months because the cash flow on an individual quarterly basis could be a little bit up and down. But I think we have really improved the free cash flow in the first 6 months, improved by SEK 208 million in absolute numbers. But of course, the free cash flow is impacted by the increased inventory level, securing critical components for delivery in the upcoming quarters here. And by that said, I would like to leave the word over to Viveca Johnsson, who will give you some more clarifications on the numbers in Q2 and long term.

Thank you, Daniel. Let's take this to a more rolling-12 and long-term view and starting on Slide 6. We're going to do that from the top left on order intake, which is now SEK 3.7 billion, getting closer to SEK 4 billion. And at this point, we're on a 50% growth, which is, of course, happy to see that, but it's also great to see that our backlog continues to grow and the book-to-bill ratio is 1.4. We'll get a little bit deeper into that on the next slides here. Net sales is continuing to develop strongly. And as Daniel mentioned, it's been strong during the second quarter and rolling-12, we are looking at north of 90%. And to deliver that 90% sales growth, we have added around 18% of employees. So we were, at the end of June, 553 souls in the MilDef Universe, delivering these strong growth numbers and also increased profitability, which I will get back to in a couple of slides. If you allow me to zoom out even further, on a 5-year basis here, we have since '22, a CAGR of 41% on order intake, 38% on order backlog, which is, of course, strengthening the thesis that there is a good growth momentum in this company, even if the second quarter was slightly softer due to quarterly volatility. We'll continue on Slide 7, the order intake growth journey. Rolling-12, as I said, SEK 3.7 billion. The growth accelerated with the acquisition in 2025 by roda computers and has now also continued. As Daniel said, in the second quarter, we had 64% growth, and that is all organic. The book-to-bill ratio is coming down slightly compared to the full year 2024, 2025, which is primarily driven by the fact that our delivery pace is increasing. We have built out capacity, as we have spoken about previously, and that is now showing in the net sales figures of the second quarter. We'll move on to the backlog and talk a bit more about what there still is to deliver here on Slide 8. So for 2026, this current year, there is another SEK 1.6 billion in the backlog. This is then before the order that was announced earlier this week. So that is coming in Q3. We'll have to wait patiently for that report. Moving on to '27, there is another SEK 1.6 billion, and if I'm looking at the graph on your right-hand side, that is a substantial improvement to this position compared to the year before, so where we were in 2025 at the same time. So a strong development here in the existing year and especially in the coming 2 years after this one compared then again to where we were last year. There is a slight decline in the beyond 2028, the year 3 numbers, and that is primarily due to that we had last year more of these 10-year delivery contract that is now getting closer to delivery. So that doesn't concern us in a significant way. We focus here on year 1, year 2, year 3, where we're also seeing that is where the customer would like their deliveries. We will turn to Slide 9 to dive into the net sales and gross margin development a little bit more. We have the 91% growth on a rolling-12 basis. This we discussed already. So let's focus on the gross margin, where we are on 45.9% rolling-12 at the end of Q2 2026. This is a growth again after the acquisition of roda computers. We saw that the gross margin declined given that their business model was a bit different from the other parts of the group. We are now seeing that all parts of the MilDef Group are strengthening their position, but what is especially boosting this here in Q2 is the sales mix where we see more software and more solution and integration sales in the isolated quarter, but also in the first 6 months, they were growing well, but especially true for the second quarter of 2026. On Slide 10, you will follow our EBITA. And for those of you who have followed us more than 2 quarters, you have heard me say this maybe 15 times already. But if we have a good top line, we normally also have a strong profitability. And this is again true. So 219% growth on a rolling-12 basis in terms of profitability. We do have in the isolated quarter, in our OpEx, a one-off effect of a redundancy payment on a program where we are now truly focusing on our defense offering and removing the bits that were more focused on other parts. This is, as I said, a one-off cost, nonrecurring, and we don't expect anything more to come, but that is also included in this EBITA number. OpEx is also impacted by adverse FX effects during the first quarter -- sorry, the second quarter and the first 6 months, which is also driving into this. So even if the growth on profitability is fantastic, we are also growing our OpEx to support further growth going forward, and we're doing that in a much lesser scale than we're doing the top line as you will see in these numbers. We'll turn to Slide 11 for a look on the balance sheet side of things. I said last quarter that some 25%, 26% of net sales -- sorry, of working capital in relation to net sales is not a new normal, and I still believe that this is on a lower level and can be expected to increase a couple of percentage points. We have a strong other net working capital with our accounts payable, accounts receivable in this quarter, but we also see an inventory buildup, which is also impacting our free cash flow in the isolated quarter here. Looking at the free cash flow for rolling-12, we are talking about SEK 175 million. So I think we are in a good base there, even if the isolated quarter is heavily impacted here by the inventory buildup to secure deliveries for the second half of 2026. On our right-hand side, net debt in relation to EBITDA, 1.0, nice round number and also a sign of a strong balance sheet. Our sales footprint, rolling-12 numbers, we are seeing some, let's call it, 45% each in Nordics and Europe. They are comparable sizes now, and we have just shy of 10% over in North America. So even growth geographically and a strong growth development, especially in Nordics and Europe. Daniel, do you want to summarize this?

Thank you, Viveca, for giving some more clarification on the numbers. And before we move over to the Q&A session, a short summary from my side. We saw in Q2 a very strong organic sales, 64%, and I also saw a strong movement in the operating profit, almost 300%, indicating this operating leverage and scalability that we have now stated and talked about for a while. We continue to see good market momentum. We continue to see it across the entire portfolio. It's not just our traditional hardware. We also see it on the solutions side, integration side, software side with a new framework agreement with FMV. So high demand across the entire portfolio. SEK 4.2 billion in the order backlog when we closed Q2, indicating that we have a backlog supporting the long-term growth. So we are continuing to invest in our increased delivery capacity, and we have done that for a while as well. We have never been on this high level of investments into increased production capacity. And I think we are having a really good progress right now at the moment, and we can see that in the figures here for the first 6 months as well that we have increased the level of production capacity, and then we have taken it to the new level. But that said, I'm not going to guarantee that we will never have production capacity issues again, because that depends on the strong demand and a strong order intake, and we continue to all the time build out our capacity. And hopefully, we now have a new level that will work for time going forward here. By that, we will open up the floor and we will see if we have some...

If I may ask you to go one slide further, Daniel, we are now concluding the presentation segment of the call, and we're heading into the Q&A session. And we have a lineup of questions from 3 analysts. And if you don't wish to state a verbal question, you can write it in the chat, and I will moderate it. [Operator Instructions] So now we are going to SEB's Jakob Marken and I have opened your microphone, allowed it to be open. So I think that you can open it yourself. I think you've done so. Take it away, Jakob.

Yes. Perfect. So a couple of questions from my side. Firstly, on the recent FMV framework. So firstly, if you can help us try to understand how you see deliveries going under the framework time? And also, as you mentioned, the software part that was partly delivered here in Q2, is the software part done in this framework, you think? Or do you expect more softwares going forward?

Jakob, thank you very much for your question. If we try to give you some flavor on the deliveries over the 7 years contract, it's hard for us, because we don't have the full picture of when the orders and deliveries will be. But I know that the need from the customer is here and now. So that would probably indicate at least that we will see here in the upcoming 1 to 3 year the lion's part of things coming in. I don't think that they should wait until year 5, 6 and 7. I think we have continued to work already now and we will see the most part, I guess, on the first half of this 7-year contract. Software-wise, that was your second question. We have some software revenues now in the Q2 numbers boosting the gross margin, but we will continue to see software revenues related to maintenance and other things related to the software there going forward as well. So absolutely, there will be more software-related revenues during this 7-year contract.

Okay. Perfect. That's very helpful. And on the software part, I mean, you did SEK 31 million in sales here in the quarter. You did SEK 16 million last year, and you also did SEK 16 million in Q1 this year. So is it fair to assume that this SEK 15 million extra is FMV related? Or how should we think about that? Just to get a feeling how boosted the gross margin is?

I would say that the extra part is related to the FMV framework agreement.

Okay. So the sort of SEK 15 million or SEK 16 million that you have been doing for the Q1 and also last year, is that a level where you expect the underlying sort of software demand to be?

I think that is kind of tricky to say. And we will, of course, try to add on more customers and things like that on the software side. So it's not going to be just FMV that is included in the software revenues. We already today cover a couple of the Nordic countries and some other NATO countries as well with the software there. So it's different development from different customers.

Okay. And just on the OpEx side, as you mentioned, the SEK 12 million related to Norway and part of that is not defense related. Is there any other places in the organization that you see a potential or where you want to do similar actions so that we should expect a similar cost in any other quarter or in any other part of the business?

Not at the moment, today. I think that was the final puzzle piece that was not related to defense, more related to other critical society infrastructure. So that was the final piece that didn't really fit the puzzle in a pure defense company.

Okay. Perfect. And why didn't you adjust for it if you see it as a one-off here in the quarter?

Because we deemed it small enough to be taken into the running business, and this was not a large restructuring program. We thought that was the most straightforward way to handle it.

Okay. Yes. Fair enough. Fair enough. And last question from my side on the backlog, as you touched upon a bit, Viveca, on the orders beyond 2028, it's down a bit year-on-year, but it's also down quite a bit quarter-on-quarter, above SEK 50 million here. So just if you can help us understand what happened quarter-over-quarter.

I'm not sure actually, to be honest. But there is probably something that has been pulled back into '28 in the quarter since it's a decline. I would assume that is what has happened where there have been no cancellations. So that is my only outstanding explanation point that it must have been pulled closer. It's not such a large number that I have a deep dive into it, to be honest.

Thank you so much, Jakob Marken from SEB. We go to Danske Bank and Daniel Lindkvist, I believe I have opened up your mic, and I see that you just opened yours. Welcome to state your question, Daniel.

Perfect. So just -- can you hear me?

Absolutely.

Yes. Great. So just Jakob touched upon several of my questions, but just moving on then, I mean, I am one of those living with the model that is in transition from no longer getting the roda numbers. So could you give us some guidance on the development in the core business versus the roda just to help with this mitigation for the future? It seems like the normal pattern of ramp-up of volumes along the year in roda was not in place this year. So perhaps Q1 was a stronger quarter than Q2, and we should expect this to ramp up going ahead. So what can you say about that division?

Thank you, Daniel. Daniel, thank you for your question. As you mentioned, we have now started to not isolate reporting the roda numbers. They are included. They have now been with the group for more than 12 months. We think it was a good idea to not exclude them, especially in the numbers. What we have done at this is showing the geographic top line net sales in a different quarter. And you can find Germany there as well. You can follow some of the development in Germany, even if that is not 100% roda, they are also selling to other countries. Without mentioning too much of the numbers, I think we continue to see a good development of the roda acquisition, good integration with roda. And hopefully, there will be a couple of really strong growth opportunities on the German market.

Okay. Perfect. And then just on the cost side again, are there any other costs in this? Is this recruitment quarter that has recruitment costs as well?

Yes, there is recruitment cost. And as you know, Daniel, who have followed us for a long time, we are not a heavy CapEx company. When we invest in our growth abilities, it's in the OpEx side. It's in people and in the facilities that has been announced, which has extended slightly and will extend further given the press release that went out on the extensions in Helsingborg. But yes, absolutely, that's recruitment cost and, of course, additional salaries that has gone into that, more the latter than the first.