W5 Solutions AB (publ) (EY7.F) Earnings Call Transcript & Summary

Hi, and welcome to W5 Solutions presentation of the third quarter results. My name is Hannah, and I'm responsible for Communications and Investor Relations here at W5 Solutions. I'm joined by our President and CEO, Evelina Hedskog. Welcome, Evelina. Also our CFO, Cecilia Driving. Welcome Cecilia. The agenda for today, Evelina, is going to give you a brief presentation of W5 Solutions followed by the key highlights during the quarter. Thereafter, Cecilia will take over and give you a presentation of the financial development. We will end with a Q&A session. So please feel free to submit your questions via the chat function, and we will answer them one by one at the end. With that, I'll hand over to you, Evelina.

Thank you, Hannah. And good morning, everyone, and welcome to this quarter 3 presentation. So like Hannah said, I will kick this off by giving a brief introduction to W5 as a company. So at W5, our vision is to become the leading global provider of sustainable defense technology. And our mission, what we do every day is that we deliver cutting-edge solutions to empower own and allied forces. That's what we proudly do every day at W5. Our business is divided into 3 different business areas, and I will give you more of an in-depth presentation of them in the coming slides. It's Integration, Training and Power. Our operations sites are located in Sweden, Finland and Norway with emphasis on Sweden, where we have operational sites from Almhult in the south to Pitea in the north. And our headquarters is based in Stockholm. We are right now about 200 employees in the company. And if we look at our customer base, it's a mix between defense agencies and other defense industry companies. And then it's primarily the OEMs like Saab or BAE Hagglunds and BAE Bofors. And the markets that we are active on is primarily the Nordic countries and Western Europe. And since 4 years back, we're listed on First North. About a year ago, we communicated our financial targets and we say that by the end of 2027, we want to have a turnover or net sales of SEK 1 billion and a profitability of 10%. So that's where we're striving. Again, our company is divided into 3 different business areas with 7 product areas. And I will now give you a little bit more information about them. So starting with business area Integration, headed by Gunilla Stomberg. We have 2 product areas there, Systems Integration and Shelters. And within Systems Integration, which is also our site in Solna, we do, of course, systems integration services, but also design and manufacturing of special purpose harnesses, intercom solutions, et cetera. Shelters, that's our site up in Pitea. And our shelters are basically very sophisticated containers for military applications, and they can be used as, for example, command posts or field hospitals. So that's business area Integration in short. Moving on to business area Training, headed by Toralf Johannessen. Here, we also have 2 product areas: Live Fire Training Defense & Security and the equivalent for Sports & Hunting. And in these product areas, we have products, both hardware and software that can be used both for marksmanship training on shooting ranges, but also more tactical training out in the field. So 2 product areas, which are also in this particular case customer segments. Moving on to business area Power, held by Tobias Johansson since 1st of November. And in business area Power, which is also the entire operation side down in Almhult, we have 3 different product areas. So starting with Batteries & Chargers, we come from expertise in battery charging, but have also added battery manufacturing to our portfolio lately and these batteries and charges are designed and developed for the -- I would say, the military requirements. And same thing with Gensets. In the Genset product area, we design and develop both generic gensets for military use, but also more tailorized applications when it comes to gensets that are tailored for a specific weapon system or sensor system according to the customers' wishes. And last but not least, Simulation, also located in Almhult, hence, belonging with Power and not with Training. And within Simulation, our expertise lies within the simulation hardware. So it can be anything from a tank, like you see in this picture to hardware for Gripen Simulator, for example. I mentioned that Tobias Johansson is now the Head of business area -- We have had some changes in management recently. So Joachim Hammersland was earlier heading business area Power. He is now doing a full time as Deputy CEO. And in that role, he has 2 main responsibilities. He is running sales and marketing on group level and also is responsible for our M&A efforts. So Sales and Marketing and M&A for Joakim as Deputy CEO and Tobias Johansson as Head of business area Power since 1st of November. And we're extremely glad to have Tobias onboard. He joins us from having been the CEO of Rottne Industri for 8 years. So he comes with lots of experience that we look forward to enjoy in W5 as well. So moving on to the quarter 3 highlights and key figures. And I think if -- like one thing to say about the third quarter is probably, okay, now we're doing what we said that we would do. We have talked about winning business, building a backlog, and we have talked about the fact that we need to get sales up in order to reach profitability. And those of you who have followed us knows that the order backlog has built up over time, but especially during quarter 2 this year. And now we see the result of that. So net sales is up 24% from the same period last year, and we are finally in the black when it comes to EBIT margin. So I think this is a very positive message. And well, it's really a position of strength now going into the fourth quarter of the year. Order backlog -- sorry, order intake is down a bit from the same period last year. Not worried too much about that. We had, like I said, a very strong second quarter this year. So many big contracts were closed right before vacation. And last year, we didn't really manage that. So we had one very big contract right after vacation, which also gave us then a very good order intake in quarter 3 last year. So going forward, I don't see this as a trend at all. Actually, on the opposite, it's a huge influx of prospects for all our product areas, and we're working hard to turn that into order intake now in the fourth quarter. So we're still aiming at continuously building the order backlog and also having a longer visibility within the backlog. So -- but all in all, very positive results now in quarter 3 in terms of higher net sales and finally, black numbers. If we look into the different business areas, as you know, we've had segment reporting from the first quarter of this year. So we don't have any comparable numbers from last year. However, you can see the numbers from first and second quarter at the bottom of this slide. But just to illustrate that we -- I mean, designing these 3 business areas from the 7 subsidiaries that we had earlier as a sort of organizational concept, the idea was that we would have 3 business areas with more or less the same size and the same sort of outlook in terms of profitability. We are not there yet. And as you can see in this slide, there are different challenges, and it has to do with the different product mix that we have within each business area. So backlog-wise, Power is by far best right now. And of course, that has to do with large contracts over multiple years for very complex design contracts in terms of both Simulation and Gensets, whilst net sales is right now best within Integration. And on the profitability side, we have also Integration showing great results, while Power is still struggling a bit. But this is no surprise. We knew that this would be a tough year for Power. I think the important message here is that it's moving in the right direction, and that goes for all the business areas. So the overall picture is really positive, and we're excited now to move into the fourth quarter of the year and deliver on the backlog that we have there. Before I hand over to Cecilia for some more digging into the details with the numbers, I just want to give you a short glance of, okay, from an operational perspective, what is the key focus areas now then both for the rest of the year, but also maybe a bit into next year. And Integration, like you saw in the numbers, they are doing really well. And there is a big pressure to maybe bring in more orders than we do right now. Customer demand is extremely high. But of course, it's important for us to grow without jeopardizing profitability, quality and delivery precision. So the challenge now is really to expand profitable. And part of that is also to look into slightly new customer offerings that can give us larger serious deliveries and larger contracts. Looking at Training. Those of you who follow us knows that we've had a number of large contracts for the Live Fire Training Defense & Security part of the portfolio this year. And these are off-the-shelf products that we primarily have on contract, which means that we can get scalability. So doing everything we can in order to create this economy of scale with the deliveries that we now have in Training. And of course, some investments connected to this, but we've taken them already this year. So now we -- it's really about getting the scalability from these contracts. And within Power, as you saw, a fantastic backlog, and it's not only that, it's also a fantastic prospect pipeline, huge interest in our products. And of course, this big order backlog gives us the ability to plan ahead. So the attention is really now on fine-tuning the delivery organization, both when it comes to the complex development projects, but also for our standardized projects -- sorry, products within Batteries & Chargers, where we have a little bit like in Training off-the-shelf products with faster turnaround times. So I think that was my last slide. So I'm handing over to Cecilia.

Thank you, Evelina. And I will keep on talking about the backlog and the visibility going forward because on the left-hand side, you see the order backlog splitted by years. And for the rest of the year, 36% of our order backlog is due to be delivered. And of course, there is great to have this visibility for the quarters to come that we have 45% of this backlog already for 2026 and 19% going forward, even further that 2027 and beyond. So if we look at the right-hand side, we have the book-to-bill. And as we previously have said, we would like to, over time, be above 1.2 to have the growth in the company secured going forward. And we have had a positive trend since 2023. And with a significantly high number in the second quarter, still we are in this quarter on 1, and that's a positive sign or even a little bit above that. And so we have a great order momentum, and we see that the demand is still there. And going over to the key figures for the order intake and order backlog. We have so far this year, SEK 522 million in order backlog, which is huge uptick since last year and great for the future. And in the order backlog, it's the same -- almost the same numbers that we have SEK 569 million in the backlog compared to SEK 304 million a year ago, and this gives us a healthy pipeline going into next year. And if we break this down through the business areas, you see that Integration has an order intake of above SEK 100 million this year and an order backlog of SEK 138 million. And Training has had a lot of new orders this year, SEK 200 million and an order backlog of SEK 135 million. And many of those have been -- one of them have been communicated this last quarter and a few already before the summer. And for Power, which is the business area with the largest backlog, the order intake has been very good this year, and we had many of them already in the second quarter. And of course, there are small orders in between that we don't communicate, but still we see that there are many coming as well. And going over to net sales and EBIT margins by the quarter, you can see that we have always had the strongest quarters in Q2 and Q4. Q3 is the summer -- over the summer period, which is very visible in the numbers because this is the slowest quarter and all the vacations from the summer is visible here. So we expect the fourth quarter to be stronger as usual because the second quarter and fourth quarter is always the strongest. But we have also here finally got a Q3 with positive numbers, and that haven't happened since the third quarter in 2023, I think, or if it was even before that. So it's a turning point for us. And if we look into the year-to-date numbers for the group, we have SEK 277 million in net sales, and that's also a growth since last year, which was SEK 256 million. But the biggest difference, I would say, is in the EBIT, which is only SEK 9.8 million negative this year, and that's almost half from last year, not really, but almost. And if you look at it, it's Integration that has the highest sales number and also the highest EBIT. And the Training have a small negative number this year and Power is still growing, and we think that this will sort itself out. It's the biggest business area with most people in it, and we are having -- we have built up and we have prepared for the growth that we see will come in the order backlog. So this will change over time. And over to you, Evelina.

Thank you. Okay. Just to summarize then. So quarter 3 is really about delivering results. We see the top line growth that we've been talking about. We are now transforming the big order intake that we managed to have earlier this year is now turning into top line growth. And with that comes profitability. So back to black figures and doing everything we can to improve even more going forward. We also see continued success on the export market, which is sort of a great proof that our product portfolio is competitive. I think there are many, many more orders to be won on the export market, and we are working tirelessly to find the right customers out there. So again, export market, super important. But I would say that the most important for us this quarter is that we are now back in the black, and it's the top line growth that has given us this position. So priorities going forward then. In the short term, of course, the deliveries in quarter 4, as you saw in the order backlog slide that Cecilia presented, it's very busy days at the W5, and we're doing everything we can to make sure that the customers have what they have ordered before Christmas. And in parallel with that, we are, of course, planning and preparing for next year. I talked about efficiency earlier. Of course, we want to make sure that we have planned ahead as much as we can now with the backlog in place. And of course, in addition to that, also win new orders continuously. In parallel to that, we have a continued focus on M&A. The SEK 1 billion that we are aiming to reach by the end of 2027 will not come only from organic growth. We need to acquire business as well. And this is something I've talked about before as well that we have ramped up the pace in our M&A work, and we are working systematically with it. And it is a big focus area for us going forward. So I think that sums up where we stand today. So thank you so much for listening in.

Yes. So now it's time to start with the Q&A session, and I'll jump right into it. Can you comment anything on the M&A pipeline? Is the number of potential targets increasing, decreasing? Or is it stabilizing?

Well, for us right now, it has increased and maybe it has to do with the fact that we have worked systematically to find the right targets over the year. But of course, it also has to do a little bit about, I mean, what's on sale for the moment. And we work both sort of proactively and reactively. We try to find companies that could fit into W5, but of course, also we're approached by companies who are for sale. So it's a little bit of timing, but it's, of course, also the fact that we have worked with this in a systematic way. So the number of targets that we are now looking at, I would say, is definitely much higher than 6 months ago. And I would say that the quality, the strategic match with W5 is also much higher than targets that we initially looked at.

It sounds interesting.

Yes, yes. It's very exciting.

Next question, what was the main driver behind reaching breakeven in Q3? And is this a level you can expect to maintain going forward?

Well, the main driver was, of course, again, getting top line up. I've been arguing that we do not have a profitability problem. We have a top line problem. And the answer to sort of mitigate that is to win orders. So we've won our orders. Now we're getting the top line up and that also gives a profitability. But looking at quarter 4 then with the backlog that we are to deliver in quarter 4, of course, we expect positive results there as well.

And looking into the sales side, how much of your export sales is generated through sales partners versus your own sales organization?

So sort of transactional sales where we're not in the loop at all, I would say it's a very, very small part of the export sales, and that would probably be primarily on the Sports & Hunting side in Live Fire Training. In other cases, on the export market, we would use local agents that would help us find -- they would open doors for us. They would use their network in order for us to meet the right people. But it will always be with W5 in the loop. So I would say that it's us doing the export sales, even though sometimes we route the contract in another way than directly towards the end customer. But it's dependent on us being there explaining what we do and how we do it.

Thank you. Moving from sales to the financial question. I think it's for you, Cecilia. So how are you working to strengthen cash flow going forward?

Our working capital has increased quite a lot as a consequence of the growth. And of course, we will focus on this going forward and monitor it meticulously because this is always the consequence when we have so much orders that we will deliver in the next quarter, and we have a growing also accounts receivables, and that's a good thing, but it costs a lot of working capital at the moment, but we will monitor that.

Thank you. Moving on. What are your expectations for order intake in the coming quarters? Do you see potential for an increase compared to Q3?