HMS Networks

First quarter

• Net sales for the first quarter reached SEK 616 m (773), corresponding to a decrease of 20%. Currency translations had a negative effect of SEK 3 m on net sales
• Order intake was SEK 473 m (682), corresponding to a decrease of 31%
• Operating profit reached SEK 130 m (211), equal to a 21.1% (27.4) operating margin. Adjusted operating profit reached SEK 133 m, equal to a 21.6 % adjusted operating margin
• Profit after tax totaled SEK 107 m (172) and basic earnings per share was SEK 2.28 (3.70). Adjusted profit after tax totaled SEK 110 m and adjusted basic earnings per share was SEK 2.35
• Cash flow from operating activities amounted to SEK 58 m (155)
  
  

Last twelve months

• Net sales for the last twelve months reached SEK 2,868 m (2,762), corresponding to a 4% increase. Currency translations had a positive effect of SEK 91 m on net sales
• Order intake was SEK 2,094 m (2,889), corresponding to a decrease of 28%
• Operating profit reached SEK 672 m (725), equal to a 23.4% (26.2) operating margin. Adjusted operating profit reached SEK 698 m, equal to a 24.3% adjusted operating margin
• Profit after tax totaled SEK 505 m (568) and basic earnings per share was SEK 10.82 (12.17). Adjusted profit after tax totaled SEK 531 m and adjusted basic earnings per share was SEK 11.38
• Cash flow from operating activities amounted to SEK 422 m (506)
  
  

Subsequent events

• Completed acquisition of 100% of the shares in Red Lion Controls Inc. and Red Lion Europe GmbH as well as certain assets in other jurisdictions (“Red Lion Controls”)
• Launch of cost saving program to reduce cost and streamline organization

CEO comments

A CHALLENGING QUARTER – BRIGHTER FUTURE AHEAD

As expected, the first quarter of the year was weak for HMS. With an order book now back to normal levels, the low order intake also affects invoicing. As we have reported in recent quarters, our customers continue to adjust inventories to normal levels and shorter lead times, which means that our reported order intake does not reflect the underlying demand. We can see some improvements in order intake during the start of April, which is also in line with our expectations.

The quarter’s order intake amounts to SEK 473 million (682), corresponding to an organic decrease of 36%. We can see that the quarter’s order intake was negatively affected by our customers’ inventory adjustments by approximately SEK 180 million. The underlying order intake is estimated at SEK 635 million, which indicates a continued “wait-and-see” market.

The quarter’s net sales amounted to SEK 616 million (773), which corresponds to an organic decrease of 20% compared to the corresponding period last year.

The order book decreased by SEK 137 million and amounts to SEK 641 million at the end of the quarter, which we consider to be a normal level going forward.

Although we see a slight improvement in demand, we are now taking measures to be able to handle a short-term decline in turnover, to protect our operating profit and enable growth investments going forward. We also take advantage of early cost synergies from the acquisition of Red Lion Controls. We are therefore now starting a restructuring program that aims to lower our cost level by SEK 30 million in 2024, with an expected full-year effect of SEK 55 million. The program is expected to affect 45 positions in total, of which 25 are in Sweden. The second quarter is expected to be burdened by restructuring costs of SEK 35 million related to the program.

Our gross margin, burdened mainly by lower volumes and product mix, lands at 62.6% (64.8). During the quarter, we have also cut back on staff in our production to handle the lower demand.

We have already taken certain measures during the quarter to keep our operating costs down primarily by postponing a number of activities. Operating costs amount to SEK 256 million (290) and includes integration and transaction costs of SEK 3 million, related to the acquisition of Red Lion Controls. Organically, operating costs excluding integration and transaction costs decreased by 13%. During the latter part of the year, we will carry out previously postponed activities and will therefore see a slightly higher cost level, despite the above-mentioned cost savings.

The adjusted operating profit in the quarter amounted to SEK 133 million (211), which corresponds to an operating margin of 21.6% (27.4). The quarter’s cash flow from current operations amounts to SEK 58 million (155), which is affected by continued increased working capital, mainly related to our relatively large inventory.

STILL WEAK DEVELOPMENT IN EUROPE, BUT TENDENCIES FOR IMPROVEMENT

Although still week, In Europe we see some improvement in order intake compared to the second half of 2024 and we have indications from our customers that the trend should continue in the right direction in the second quarter, and that during the second half of the year expect to see a more clear improvement.

In Asia, primarily driven by Japan, where we have had the biggest impact from pre-purchase orders, we still see weak demand and continued high inventory levels at our largest customers. Here, we expect to receive new order only towards the end of the year.

What is somewhat surprising is the development in North America, which is taking a small step back after a good development at the end of 2023. The slightly weaker order intake in the US is related to the Anybus embedded products, where we still have a couple of our biggest customers holding inventory. Overall, we still see that North America has the prerequisites for a good development over the year.

THE ACQUISITION OF RED LION CONTROLS HAS BEEN COMPLETED

On April 2nd, we gained access to our largest acquisition to date, Red Lion Controls. The acquisition is consolidated from the first of April. Several activities are now underway to realize the sales synergies that have been identified, but also review other collaborations and cost synergies between the companies. After the acquisition, we have been able to verify several of our expectations regarding products, technology, and company culture. The management of Red Lion has received us as new owners in a very positive and constructive way. We expect the integration to take place during 2024 and well into 2025.

Over the past five years, Red Lion has shown organic growth of 4% with an average adjusted operating margin of 20%. HMS sees good opportunities to improve organic growth by utilizing the joint sales channels in an efficient manner.

The order intake rate for Red Lion in the first quarter has shown growth compared to last year’s second half and we can also see a gradual improvement during the quarter. This is in line with our expectations for the recovery of the North American market. We will report Red Lion separately during the integration period. You will find more information about Red Lion on page 4 in this report.

OUTLOOK

The message has been similar since mid-2023 – In the short term the market continues to be characterized by inventory adjustments and general uncertainty due to the macroeconomic situation. There are still high inventory levels at many customers, but we expect a gradual improvement in order intake in 2024, especially in the second half of the year.

Customers’ willingness to invest in digitalization, productivity improvements and sustainability is high and underlying demand is still considered to be good, although there is some concern linked to how the industry will be affected by weaker consumer purchasing power, increasing energy costs and the difficult security policy situation.

We continue to work with a focus on long-term growth based on a balanced view of our costs. In the long term, we continually believe that the market for Industrial ICT (Information & Communication Technology) will be an interesting area, both in terms of organic growth and acquisitions.

Halmstad April 16, 2024

Staffan Dahlström
Chief Executive Officer

For more information, please contact:
Staffan Dahlström, CEO HMS, +46 (0)35 17 29 01
Joakim Nideborn, CFO HMS, +46 (0)35 710 69 83

This information is such that HMS Networks AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication, through the contact persons set out above, at 07.30 CEST on April 16, 2024.

HMS Networks AB (publ) is a market-leading provider of solutions in Industrial Information and Communication Technology (Industrial ICT) and employs over 1 200 people. Local sales and support are handled through over 20 sales offices all over the world, as well as through a wide network of distributors and partners. HMS reported sales of SEK 3,025 million in 2023 and is listed on the NASDAQ OMX in Stockholm in the Large Cap segment and Telecommunications sector.

Attachment

• HMS Networks Q1 Report 2024