Second quarter
First six months
CEO comments
FIRST QUARTER WITH RED LION
The second quarter of the year saw an improvement in organic order intake compared with the first quarter. We are in a relatively weak market situation where our customers continue to work on adjusting their inventory levels and are in a wait-and-see mode to understand how demand will develop going forward.
The quarter’s order intake, including Red Lion, amounts to SEK 769 million (703), corresponding to a growth of 9%. Excluding Red Lion, we see an organic sequential improvement of 9%, but a decrease by 22% compared to last year. We estimate that the quarter’s order intake was negatively affected by our customers’ inventory adjustments by approximately SEK 100 million. Looking ahead, we believe that customers’ inventories are beginning to balance with the current demand, and we expect to see significantly less of these inventory adjustments going forward.
The quarter’s turnover, including Red Lion, amounts to SEK 845 million (703), which corresponds to an increase of 20%, but a decrease of 20% compared to the corresponding period last year.
THE RESTRUCTURING PROGRAM NOW IMPLEMENTED
The restructuring program launched at the beginning of the quarter has been completed. The program, which has realized early cost synergies from the acquisition of Red Lion and optimized the European organization, has resulted in savings of SEK 23 million in 2024 and SEK 41 million in full-year effect. The cost of the program amounts to SEK 27 million and will be charged to the second quarter.
Our gross margin lands at 61.9% (64.7), which we think is a good level considering low sales volumes and the addition of Red Lion’s slightly lower gross margin.
Operating expenses for the quarter amount to SEK 423 million, which includes items affecting comparability related to the acquisition of Red Lion Controls and the restructuring program – totaling SEK 69 million. All items affecting comparability are explained later in the report. Good cost control is important to us in these slightly more uncertain times, and we can see that the adjusted operating expenses are decreasing organically by 21%.
The adjusted operating profit in the quarter amounts to SEK 172 million (154), which corresponds to an operating margin of 20.4% (21.9). The quarter’s cash flow from current operations amounts to SEK 152 million (78).
NORTH AMERICAN ORDERS BACK UP AFTER TEMPORARY DECLINE
The biggest positive impact on the improved sequential order intake comes from the North American market, which after a temporary decline in the first quarter, is now once again developing well.
The European market is moving sideways from the first quarter of 2024 and we have received several indications that the recovery will be somewhat slower than previously estimated.
In Asia, China is showing good development and good outlook. The, for HMS, important Japanese market is slowly moving in the right direction, with a large number of pre-purchase orders placed.
THE INTEGRATION OF RED LION IS IN FULL PROGRESS
The acquisition of Red Lion was completed at the beginning of the quarter and the response from the customers is very positive.
The integration work has been in full swing for three months and the main focus is commercial synergies. In Red Lion’s largest market, the USA, our sales organizations have already held several joint customer and distributor meetings. In Asia, the sales organizations are already merged, and although fine-tuning of internal processes remains, the work has gone very well. Several collaborations have also started in Europe and our existing sales infrastructure is being used to improve Red Lion’s presence in Europe.
At the same time, several integration initiatives are underway within the supply chain and support functions to further support sales synergies and increased operational efficiency, including changing business systems.
This is the first interim report that includes Red Lion as part of the HMS Group. We have updated the report to make it easier for the reader to follow the development of HMS organically as well as with Red Lion included. As the acquisition results in large amortizations of excess values, we have chosen to introduce a number of adjusted key figures in order to be able to follow and evaluate the business. These key figures are described in more detail later in the report.
NEW PRODUCTS
We have launched our first commercial standard product for 5G, the Anybus Wireless Bolt 5G, which addresses a new market for high performance wireless industrial applications. As we mentioned earlier, we assess 5G as an important technology development for mobile applications, for example AGV and Robot installations in Automotive, but it will likely take time before 5G begins to be used on a wider front in these applications.
OUTLOOK
The recovery in demand has taken longer than expected and there are still some inventory adjustments and general uncertainty due to the macroeconomic situation. We expect a gradual improvement in order intake during 2024, especially during the last quarter of the year.
Customers’ willingness to invest in digitization, 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 global security situation.
We continue to work with a focus on long-term growth and a balanced view of our costs. In the long term, we continue to believe that the market for Industrial ICT (Information & Communication Technology) will be an interesting area, both in terms of organic growth and acquisitions.
Halmstad July 12, 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 July 12, 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.
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