Order intake decreased during the third quarter of the year as a result of a continued challenging macro-economic situation with a temporary weak demand. The picture is similar to what we have seen in recent quarters with pending investments by our customers and continued adjustments of inventory levels.
The quarter’s order intake amounts to SEK 677 million (492), corresponding to a growth of 37%. Excluding Red Lion, we see an organic decrease in order intake by 8% compared to the corresponding period last year. We estimate that the quarter’s order intake was negatively affected of approximately SEK 100 million due to our customers’ inventory adjustments. With this, we see that our order book is down to a normal level.
Revenue for the quarter amounts to SEK 792 million (789). Excluding Red Lion, this is an organic decrease of 30% compared to the corresponding period last year. The organic turnover reduction is, as well as the order intake, a result of customers’ inventory adjustments and a weak underlying market.
Our gross margin lands at 63.5% (65.4), which can be seen as a good level as production volumes compared to the previous year has decreased, and due to the dilution effect we get from Red Lion’s slightly lower gross margin compared to HMS previous level. The gross margin is driven by a favorable product mix and a positive development of Red Lion’s gross margin during the period.
We can conclude that the cost saving program announced earlier this year has resulted in the effects we expected and in combination with good cost control in general, the quarter’s operating expenses amount to SEK 343 million (293). Amortization of excess values and items affecting comparability are included with a total of SEK 31 million. Organically, operating costs decreases by 22% compared to the corresponding period last year.
The adjusted operating profit for the quarter amounts to SEK 194 million (226), which corresponds to an operating margin of 24.5% (28.7). The quarter’s cash flow from current operations amounts to SEK 205 million (167), helped by large inventory reductions.
In summary, we put a challenging quarter behind us marketwise. At the same time, what we can control in the short term has developed well with a good gross margin and cost control, as well as working capital reduction, which overall results in a good cash flow.
EUROPE AND THE EMBEDDED BUSINESS REMAIN CHALLENGING
Europe continues to see a weak development, where the important automotive industry is struggling, and we see a general wait-and-see attitude from our customers. Stock adjustments are still ongoing and furthermore, the demand for our customers’ products has in turn become weaker during the year.
In North America, we see, somewhat unexpectedly, a step back where the market continues to be challenging for our embedded businesses and Red Lion also has a weak quarter. However, we see that our distributors have a somewhat more positive view of their demand.
In Asia, just like before, our Japanese customers have large stocks and order intake is therefore still weak. China continues to develop positively, and we have the best quarter since Q1 2023.
Despite the challenging market, we have seen a good development of new design-wins during the year, which shows that there are underlying investments in HMS’ technology.
NEW ORGANIZATION TO STRENGTHEN CUSTOMER FOCUS AND CROSS-SELLING
Since 2017, HMS has had a matrix organization with responsibility for sales in Market Units and product development in Business Units. With the strong organic growth HMS has shown in recent years, combined with the acquisitions of Red Lion Controls and most recently PEAK-System, we see an opportunity to become even more customer-focused, create clear responsibility for results and lay the foundation for further technology collaborations and synergies within the closely related businesses.
With this as a basis, HMS will change the organization from the first of January 2025 into three divisions consisting of Industrial Data Solutions (IDS), Industrial Network Technologies (INT) and New Industries (NI). More about this on page 6 of this report.
ACQUISITION OF PEAK-SYSTEM AND DIVESTMENT OF THE BUSINESS MB CONNECT LINE
On October 1, HMS entered into a binding agreement to acquire PEAK-System, a well-established German industrial communications company that offers both hardware and software for industrial and automotive communications. PEAK-System, together with our Ixxat operations, will form an important part of our “New Industries” division, where we see good opportunities both for cross-selling and technology collaborations between the businesses.
On the same day, HMS entered into a binding agreement to divest the MB Connect Line business, which was part of the acquisition of Red Lion Controls earlier this year. MB Connect Line is a manufacturer of remote access and industrial IoT and security products with a large overlap with HMS’s existing portfolio. The divestment is being made because HMS wants to focus its solutions for remote access, remote data and remote management under our Ewon brand, where we have a market leading position today.
Both transactions are expected to be completed during the fourth quarter this year.
With two major acquisitions in 2024, the focus in the coming year will be to integrate these operations and reduce the financial leverage for the group.
OUTLOOK
The recovery in customer demand has taken longer than expected and some inventory adjustments are still ongoing as well as there is a general uncertainty due to the macroeconomic situation. We expect a gradual improvement in order intake during the first half of 2025.
We continue to work with a focus on long-term growth based on a balanced view of our costs. In the long term, we continue to assess that the market for Industrial ICT (Information & Communication Technology) will be an interesting area, both in terms of organic growth and acquisitions.
Halmstad October 18, 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 October 18, 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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