• Net Sales: Decreased by 30% organically.
• Order Intake: Decreased by 8% organically.
• Operating Expenses (OpEx): Reduced by 22% organically.
• Adjusted EBIT: SEK194 million with a margin of 24.5%.
• Gross Margin: 63.5%, slightly diluted by Red Lion acquisition.
• Cash Flow from Operations: SEK205 million.
• Inventory Reduction: SEK79 million in the quarter.
• Net Debt: Approximately SEK2.6 billion.
• Earnings Per Share (EPS): SEK2.51.
• Interest Costs: SEK36 million.

• Warning! GuruFocus has detected 2 Warning Sign with HMNKF.

Release Date: October 18, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• HMS Networks AB (HMNKF) reported an adjusted EBIT margin of 24.5%, which is close to their target of 25%, despite challenging market conditions.
• The company has successfully reduced its organic operating expenses by 22%, demonstrating effective cost management.
• HMS Networks AB (HMNKF) has improved its cash flow, achieving a cash conversion rate of almost 100%, which is considered strong.
• The acquisition of PEAK-System is expected to enhance the company's offerings in the automotive and medical sectors, contributing to long-term growth.
• The new organizational structure is designed to improve customer focus and accountability, potentially leading to better integration and efficiency.

Negative Points

• Net sales decreased by 30% organically, reflecting a weak market environment, particularly in North America and Germany.
• Order intake also saw a decline of 8% organically, indicating continued market challenges and inventory adjustments.
• The company is experiencing significant destocking effects, with an estimated impact of SEK100 million, similar to the previous quarter.
• The Red Lion business reported a 26% decline in sales compared to the previous year, highlighting challenges in project business and inventory levels.
• HMS Networks AB (HMNKF) faces high net debt levels, which could be a concern, especially with the recent acquisition of PEAK-System.

Q & A Highlights

Q: Could you expand on how the current market demand situation differs from historical downturns, and what early signs should we look for that suggest demand is picking up? A: The current downturn is characterized by weak demand in the embedded business, which is cyclic and dependent on customer sales of robots and machines. This is similar to past downturns. We expect a recovery in a few quarters, as seen in similar patterns with companies like ABB. The focus is on winning new customers despite the weak market.

Q: How do you view current cost levels in light of your adjusted EBIT margin target of 25%? Could we see more actions to enhance margins? A: We've reduced costs significantly, including personnel and operational expenses. While we aim to maintain a tight budget, further cost reductions would be challenging. The new organizational structure from January 1 will involve some fine-tuning, but no major cuts are expected.

Q: Can you elaborate on your visibility regarding the destocking impact and customer inventories? A: We have close discussions with larger customers and know some won't order for one or two more quarters. However, visibility is less clear with smaller customers. We estimate a SEK100 million impact from destocking, similar to the previous quarter, and expect a gradual improvement in 2025.

Q: Are there margin improvements in Red Lion due to your efforts, and can Red Lion's gross margins reach HMS's levels over time? A: Red Lion's gross margin improvements are partly due to management efforts before our acquisition and our support. While reaching HMS's pre-Red Lion levels is ambitious, we expect a couple of percentage points improvement over the next two years through supply chain investments and efficiency gains.

Q: How do you manage the higher level of net debt to EBITDA, and what is your plan to avoid covenant breaches? A: We have a solid plan, developed in close dialogue with the bank, to manage debt levels. Despite a weak quarter, strong cash flow and cost savings give us confidence in reducing debt during 2025. We are cautious with acquisitions in the near term to maintain financial stability.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.