Well, a late good morning, everyone, and welcome to the investor call with MilDef this beautiful Monday morning. Today, we have a special focus on MilDef's acquisition of Handheld. This call will be presented by CEO Björn Karlsson and CFO Daniel Ljunggren, and we expect approximately 45 minutes to be sufficient for the presentation and Q&A. We are open for longer Q&As if you are.
A friendly reminder is to keep your microphones muted, otherwise, we'll do our best to try to do that. Please open up your mics for the Q&A, or state your question in the chat, and I will moderate the lineup of question.
By the way, my name is Olof Engvall. I'm the head of IR at MilDef. Also for information, we record this meeting, so you do know that now. Again, welcome to this presentation about the MilDef acquisition of Handheld. With no further ado, please take it away, CEO Björn Karlsson and CFO Daniel Ljunggren.
Thank you very much, Olof, and welcome to this investor call on this fantastic morning. We are very happy to be able to talk about this exciting acquisition with you. We will do what we always do on these meetings, and that is to give a very short introduction to MilDef for those of you who are new to our company, and then we will quickly dive into the main topic of today, which is of course, the acquisition of Handheld.
First of all, this is what we do, and this is true. It was true before the acquisition, and it is true after the acquisition. We digitalize the world where the stakes are the highest, requirements are the toughest, and when technology has game-changing potential. This is what MilDef has been doing for a long time, since 1997, so a 25-year journey.
We conducted an IPO in June of 2021 last year. We are, or we were, more than 230 employees across 5 countries. Core markets here in the Nordics, in the rest of the EU and in selected NATO countries. Our customers are government customers but also other defense companies.
The portfolio consists of hardware, of software and services, so we are a full-spectrum supplier of tactical IT, and we expand this business organically on the markets where we operate through partners, across the other markets, that we want to gain access to, and also through acquisitions, which is the main topic of course for today. Our M&A agenda, when we talk about acquisitions, you can see the M&A compass on the right-hand side of the picture here.
We look for a wide variety of things of technology and of companies. Today, we're gonna talk about the company that makes MilDef much stronger when it comes to tactical hardware, when it comes to increased national capacity, when it comes to security of supply, and when it comes to new geographical markets.
We hit quite a few of the different dimensions on our M&A compass. This strategy that we have, and this has been outlined before, we aim to do at least one significant acquisition per year. We have done so in the past, and we will do so this year and also going forward. We have a structured modular model for how we do it, and also a structured model for what happens after the acquisitions.
Today, we are here to talk about the acquisition of Handheld Group, and I am going to tell you a little bit more about this company and a little bit more about this acquisition before we open up for your questions. We'll of course talk about the rationale for this acquisition in the MilDef context.
As it happens, Handheld Group was founded in 1997, so it's a company the same age and maturity in some cases as MilDef. Headquartered in Lidköping in Sweden, with a fantastic partner model serving more than 700 customers in 86 countries around the world, so even bigger international footprint than we had before in MilDef, primarily within what we call critical infrastructure.
For those of you who have now been to Handheld's website and looked at the products or perhaps knew them from them before and wonder about, okay, what is the connection in here? One of those connections that we'll talk about much more about in the future is critical infrastructure, which we believe is a very important segment for MilDef going forward.
Handheld is a manufacturer of rugged mobile computers, and as I said, a great international reach through a partner network with reselling partners and also subsidiaries in a number of countries such as the U.S., Germany, Australia, Italy, Finland, U.K., Switzerland, and the Netherlands. A little bit of overlap with MilDef, but also a lot of new important markets for us.
The product portfolio is mainly consisting of rugged handhelds, perhaps the name indicated so as much, tablets, accessories, and different types of wearables. Very similar, compatible to MilDef when it comes to the corporate culture, the company values, and also the ambitions to serve an international or even a global market with what we call tactical IT, rugged hardware, just as we've done in MilDef for many years.
If we look at the numbers in 2021, which you can also find on Handheld's website, almost SEK 200 million in revenue and an EBITDA level of around 15%. A profitable company will of course add to the size of MilDef, but also to the profitability.
Expecting double-digit growth versus 2021 in 2022, and with retained EBITDA margins. Before we look into the rationale, just some an overview of this acquisition. We talk about the net equity value of SEK 350 million. Maybe instead of me saying all of this, we'll introduce our CFO. I'll give him one slide of this presentation and so take it over please, Daniel, and talk us through this acquisition.
Thank you very much for that, Björn, and hello to everyone in this call. As Björn said, we will look into the rationales of this acquisition and the strategic fit that we see after this slide. Just a recap of what was announced in the press release this morning when it comes to some of the financial parameters.
As we said that initial purchase price amounts to SEK 350 million, which is corresponding to around 10 times what we estimate Handheld's EBITDA to be for this year, 2022. There's also a short earn-out potential where there can be up to SEK 100 million. It's a short period earn-out. It will just for the 2022 and will kick out if Handheld overperforms on their estimated EBITDA for this year.
We are intent to finance this acquisition by using our own cash of SEK 70 million. We are also intent to use some of the existing credit facilities we have in place, where we add an extra debt of SEK 200 million, and we will also use an issue in kind of around SEK 80 million. The issue in kind was set as a 10-day volume-weighted average price, and that was closed Friday last week, and that ended up with 71.02 SEK per share.
We also see a standard lockup on the main sellers of 18 months. Going forward, we can also see that we estimate commercial synergies on the top line to estimate around SEK 50-100 million, and we think that is achievable in a 2-3 years period.
On the cost side, we see less synergies. We estimate them to be somewhere around SEK 0-5 million per year. We also see that we have limited integrations need. Handheld is already a well-functioned, up-and-running company, and they will continue to operate as a separate unit within the group.
We estimate them to be less than SEK 1 million in the short and mid-term perspective. We estimate that this acquisition will have a positive impact on our earnings per share already the year coming here in 2023. With that said, I think, yeah, I leave back to you, Björn, and talk around the rationalities and the strategic fit.
Thank you very much, Daniel, for that. There are some big and difficult words when it comes to this slide, but I will use my own words to try and explain these five things that we think are hugely important. The first one, I think this picture paints something that we believe is hugely important.
We double geographic footprint of MilDef with acquisition of Handheld on some very important markets. If we look at the left-hand side of the screen here, you see USA, where we almost double our size in terms of revenue, in terms of organization.
We have fantastic potential for reusing our channels in the U.S., when it comes to the product portfolios, because we already have a lot of industrial customers in MilDef, Inc., and we also have a lot of military type of business expertise in Handheld. We look forward to having a strong footprint also in Germany, fastest growing European defense market, so security and defense high on the agenda.
We've served this through a pure partner model before, and we believe that we now are able to do much more. We really like that. We like the fact that we now have also some business in Australia, where we've done some business in the past, part of the Five Eyes, so important for us.
We have some additions for these other countries that are important for us. If we look at the MilDef universe, or at least the world, we double the geographic footprint and this gives us fantastic opportunities to grow together on these different markets. That is the first one. The next one, and it's perhaps obvious, is that we complement the portfolio with something that was missing before from a MilDef perspective.
That is with the types of products that Handheld produces that are rugged, that are available at a price point where the ultra-rugged hardware that is highly customized is not strong support for Android, which is one of the growing trends also for the defense.
We believe that the product portfolio from a technology and a product perspective becomes so much stronger. This complements and completes what we were trying to achieve on the hardware portfolio. We use the hardware portfolio also when we sell our services and deliver them, and also our software.
This is important from the portfolio perspective. We also believe it's important that we now gain access to something that we have talked about for at least the last six to nine months when we talk about total defense and the fact that the military defense and the civilian defense is being fused together. We see a lot of harmonization efforts. We see technology needs that is overlapping.
If we look on the left-hand side, we see where Handheld currently addresses the critical infrastructure, which could mean things like medical, health, energy, logistics. And MilDef is primarily military government. This completes the picture. This is the MilDef story that we've been talking about for some time now, and we now have a portfolio where we are able to supply our customers with what they need, no matter from which part of this map they are on.
We think that this is important on its own. Finally, when it comes to how we utilize this potential, we have cross-selling opportunities across segments and also across the company. We are able to reuse Handheld sales channels for MilDef products, and we are able to reuse MilDef sales channels and customers for Handheld products.
Finally, this one just talks about some of the things I've already mentioned. The cultural fit between the companies is fantastic. It comes with a Swedish heritage, but an international ambition mindset and coworkers around the world. It's a truly international company that just adds to what we were already doing before.
I also am especially impressed by the very lean and flexible business model and organization that Handheld has built over these years. I think there are some things that MilDef will learn from Handheld.
There are some things that Handheld will learn from MilDef, and the combination looks very strong. I mentioned it before, but the growing footprint for us is important. The theme for this acquisition, I mean, it's expansion. We expand financially with profitable growth.
We expand on these geographic markets. We expand our portfolios. We expand which segments we are able to address, so on so many levels, and of course, also people-wise and organization-wise.
Finally, on the business operations side, a functioning, well-working organization that is already running, contributing from day one, so we'll now start to seek those positive business synergies that we have mentioned before with limited integration challenges, some fantastic customers that we want to address and try to do even more, and a really nice supply chain and production process with an outsourcing and an ODM model that I think is important also for all of MilDef going forward. That was the quick tour around the Handheld acquisition. I'll just repeat what I said. It's the keyword here is expansion.
All of these things that we've talked about is about expanding our universe and doing that together with a company that is like-minded, that has the same ambitions, and now means that we can have an even bigger view of the world together and try to serve our customers with a fantastic portfolio.
Thank you, Björn. We open up for questions. You are more than welcome to raise your hand, write in the chat, or politely just shout out a question. Erik GolrangHead of Equities was first, so he is first out.
Thank you, and thank you for that, for the introduction. I have a bunch of questions. I'll start with three and then I'll get back in line and see if there are any others. The sales profile from the figures I can find on Handheld, you had 2021 sales, similar to where it was, say, a couple of years ago, which brings us to the topic of growth.
The concern on the other end would be that you say it's growing nicely this year, and there's gonna be sales synergies, but concern would be that you dilute the previous growth profile of MilDef adding a company that hasn't grown a lot over the last couple of years. That's the first question.
Mm-hmm.
It also looks as if earnings have been rather volatile. I'll start with those two.
It's a good question. Thank you for that, Erik. I'll start with the growth part. I mean, a couple of things happened. If we look back in time when Handheld had a great growth journey and then COVID hit, a lot of the revenues come from the US market, and the US market came to almost a standstill when COVID hit.
We felt the same thing with our US subsidiary, and Handheld was even more exposed to those effects. So that took out one year created a year of flatlining, if you will. The next year was also a little bit of a challenge with the component shortage that we have also suffered from, making it difficult to make these deliveries.
It was a pause of a couple of years from what looked like before, and we've talked a lot about this with Handheld's management, the feeling of being on a tipping point where you have a great international reach, but you have not yet been able to leverage it.
We look at that potential, that existed before COVID and before the logistical challenges of semiconductor component shortage. We look at the market that Handheld is addressing that is expected to grow around 8% globally over the coming 10 years, it's a fast-growing market.
Of course, we look at what I mentioned before, the fact that we are able to reuse this for important trends in the security and defense sectors, which is where the synergies will start to come and the complementary technology in the portfolio will start to have a positive effect. I think that answers kind of where we are.
Yes, we believe in the growth. There's an underlying market that is growing. We believe in the company. The positioning on the market is great, and we will be able to outperform the market. That is what we believe. When it comes to the profitability and that volatility, it's also related, of course, to how quickly you can grow the company.
I mean, with this lean organization and the business model, if we are able to grow this company with the same pace that we have been able to in the past with MilDef, it will be a huge contributor from a profitability perspective because it's an even leaner type of organization, so it scales really well, and that's what we're aiming for.
Very good. Thank you. I'll follow up on that one. You mentioned the expected market growth of around 8%. That's interesting. If you could say a bit more about the drivers for that underlying market growth. Secondly, sort of talk about Handheld's unique selling points relative to competition, of which there are quite a few.
Yes, there are many, as you said. If we start from there, when we look into the research and the analytics of this market segment, of course, we'll try to understand some new things here when we welcome Handheld into the family. Handheld is a globally respected brand, but a small player in this industry.
Analysts that have looked into the company identified that the product portfolio is competitive, that the company is reputable and that it has potential to grow also into more segments than it has been active before. It's kind of positioned, I think, in an interesting way because this is a highly competitive market.
From that perspective, I would feel worse if we had a dominant position on the market because then we would have threats all around us. Now we see more opportunities to expand and steal some market from those global players that may not be able to react as quickly as we have.
Basically do what we've done on the MilDef side when we work and try to outcompete the giants. I think we can do the same. I think Handheld is already on a trajectory to do those things. The other thing that I think when it comes to the product portfolio, there are some customization, some specializations for these products that make them very fit for purpose in some of the segments we address.
I think about logistics, for example, where we have one product that at least I don't know that the competition can even do what we are doing because of some innovations and some great technological partnerships. We're trying to have a product offering that is a little bit different, a little bit unique, but also generally competitive. It is a competitive market, no doubt about it.
The trick here, I think, is that we look into those segments where we are active and successful. We try to tweak our products to really fit that segment, and then we go in and compete with what I think is a very competitive price point on the product, and that is based on the lean organization type that we have.
Perfect. Thank you. Then one final one, if I may. You mentioned briefly on the manufacturing setup of Handheld, but can you tell us a bit more about that? Is it similar to yours? You talked about the OEM model. What's the capacity? Couple of comments there, please.
Yeah. I think that from that perspective, I'd say that Handheld is more scalable than MilDef because of the outspoken and clear outsourcing strategy and the use of ODMs and OEM types of setups. You're able to scale using expansion of your supply chain.
Whereas MilDef has used more of a technological partnership model, which means that it's a little more difficult to change and expand because you become dependent on those technological partners. To some extent, I think that we increase the scalability and we get some new tools in our toolbox that we can use also when we try to protect the revenue streams that exist in the hardware portfolio from a MilDef perspective.
It is similar to some extent, but I think it's a clearer outsourcing when it comes to what we now have in our third-party portfolio. When it comes to MilDef's own developed products, of course, we use our own R&D, our own production line. That is completely different from that perspective.
I think that we can create some reusability in both directions because some of the value that we add in our R&D and production lines, we might be able to do the same for Handheld products when we talk about supply chain security and some of those specific requirements in the security and defense space where we have a lot of experience. Vice versa, I think that we are able to perhaps fill our portfolio faster with some new technology that we believe we need to get to the market faster than before.
Thank you, Erik, for those good questions. Please revert if you have more during the session. We are now in the middle of the Q&A session with Daniel Ljunggren and Björn Karlsson about the acquisition of Handheld Group.
Welcome to new viewers of this event. Please put forward your clever questions. Use this opportunity to understand more about this acquisition. I see no questions at this specific time, so I was gonna ask Björn myself a rogue question. What is the focus going 6-12 months forward in making this a beautiful relationship and collaboration?
I think it's a relevant question as well. I mean, the first thing that we do right now is to start to look for positive business synergies, which is a nice way of saying that we've already started this, of course.
We've identified some business opportunities that we can get on the MilDef side, and I think I mentioned some of those before, where we see in the defense space that we need some of these products and that there's a growing trend for the Android segment, for the Handheld segment, that we will of course start to address immediately. We've also identified some players in the partner network for Handheld that are successful also in the space where MilDef is successful and will start to try to leverage those to create new business.
We'll start by making more business together. We'll learn and get to know each other and we'll focus on the positive. We don't talk about, as Daniel said before, we have not looked at cost synergies. We are not looking at reductions. We're not looking at doing something that is making us look back or inwards.
We're looking at the markets, we're looking at the business, we're looking at the technology, and we're looking at together with some new friends, go out there and do more business than we did before. It's simple. It's quite fun for those working with it, and it just creates. It's opportunity-based, it's growth-based, it's expansion-based, I would say. Three of my favorite words.
Thank you, Björn.
Thank you.
Back to Erik Golrang, who came up with a new clever question.
Yeah. Three more questions. First one on gearing, obviously it goes up quite substantially. You mentioned the potential capital raise there at some point, but could you say anything about that? I think the market is not too keen on excess debt at the moment.
Then secondly, from a government's perspective, I mean, if I understand it correctly, you're hoping to use some of the Handheld sales and distribution network to ship MilDef products. How do you make sure that they don't end up in the wrong hands in terms of getting to know your clients? Then the third question is on management here. Will the CEO of Handheld remain in the company or what happens with management?
A good question. I'll start with the last one, and we'll see if I remember the first one when we get to the goal line. Otherwise you can remind me. Yes.
Daniel will remember that one.
Yeah, he will remember that one. I'll start with the CEO of Handheld, Tomas, who I think is perhaps also on this call. He will remain with the company. We've talked for a long time. He will be reporting to me, but he will of course run this company as he's done before. We'll start to look for these synergies together.
This is the next gear and the next level for Handheld. Also to be clear on that, it was we reached out to Handheld to talk about this and to see if those ambitions plan that they have, if we can get there faster together, if we can come up with something more fun together, that has been the whole idea of this journey. That's the way how this happened.
We reached out and we were able to become friends and reach this. That means that this is not an exit strategy. This is a kind of, in the middle of the game, now we make some reinforcement and we go out in a new direction. Absolutely the team will stay on. We hope to be able to create new career opportunities for a lot of people in MilDef and in Handheld and that is the plan going forward.
The second question when it comes to the customers, I mean, we will use our own green lists. We will use our know your customer protocols when we start to reuse the potential in the partner network of Handheld. There's no difference.
We will not create new venues that use different processes or tools. We will not introduce any risk of having our technology reaching someone who it should not reach. The same types of processes, as I said, the same green listing, will be used.
We protect the technology and where it ends up using the same mechanisms that we've already had in place. I do remember the first one when it comes to debt. I could answer it, but I know that Daniel is dying to talk, so I'll let him spend a minute on debt.
Yeah, really dying to talk this one out. If we look at the deal, we said SEK 200 in increased debt. We probably look somewhere around 2.0x for net debt to EBITDA excluding the earn-out, so to say. If we go maximum on the earn-out, we will probably go from 2.0x to 3.0x somewhere.
That is a little bit above our long-term financial target of 2.5x. Then we need to grow into those numbers, and we also add on extra EBITDA in that case if the earn-out will play out, so to say. We think that if we can end up with it somewhere around 2.0x, we think it's a healthy place to be in.
We are adding some debt, but we're also adding very much of a top line and EBITDA to the company. If we also investigate the possibility to increase and strengthen the balance sheet for potentially going forward additional acquisitions or other growth actions we would like to take, but no decision taken there. Let us see what's happened. We are able to do this acquisition with the balance sheet we have today. Let's see what's happened when we go forward.
Thank you.
Thank you again, Erik. We have, still ample time for clever follow-up questions. Every question is a good question, so don't be a stranger. Please, feel free to open up for any sort of question related to the acquisition or the, MilDef and Handheld marriage, communicated this morning. I see no questions in the chat, and I see no raised hands. Is there anything you want to add at this time, Björn or Daniel, for sort of a final approach?
I can also say that if someone now, since we have a few minutes and we're here together, if you want to hijack this meeting with some other question related to Q2 or some of the announcements that we have made after Q2, some framework agreements that have landed and so on, feel free to expand, you know, your questions into that.
I just wanna reiterate and maybe emphasize what I said. Again, I love to watch the MilDef universe map expand and become twice as big as it was before. This company is about growing and doing good, intelligent things, or try to at least, on a lot of international markets. I like the way that we have developed internationally before.
I really like the way that Handheld has developed internationally with the subsidiaries and the partner networks. The fact that we now are more international on very relevant markets for us with the traditional MilDef business, but also with the new Handheld business, I think that that map and that image, it sits in my mind as one of the fantastic opportunities going forward that are not quantified in our synergies and not quantified in the numbers.
Just means that we now have access to business potential, business streams, transactions, partners, technology companies that we want to work with on twice as many markets as before, that we can address with people who, as I said, are like-minded, that can seek to reach this untapped potential in more markets than before.
This, for me, kind of paints the picture what we're trying to do. I also really like the expansion into what we have talked about when we talk about total defense. I think that we make this acquisition now, and some people, some of the questions, and I've seen the light in people's eyes when we talk about what is happening on these markets.
This acquisition is perfectly in line with the trends that some people have not yet seen on the global markets. I much prefer that we are able to address that positively and proactively as one of our core values, to do things proactively and do that with this joint offering. For that, for me, this feels fantastic.
It's even better than if you just look at it. Yeah, that's what we always aim for, of course, but I think it's worth repeating. Did we? I think I saw some question flying by here. Can someone? Because I just see a presentation.
Yeah
If someone reads the question.
We have a question in the chat.
Mm-hmm
about the earn-out. Can you say anything about the earn-out structure? What kind of sales levels to pay earn-outs? Any reason why the earn-out is near term, 2022, and not a couple of years out?
I mean, the model is, it's based on over-performance versus the forecast and the expected outcome of 2022 on profitability level, because that increased cashflow is also what generates the motivation for the earn-out. I think Daniel alluded to some of this when he looked at the transaction structure.
That's the idea, over-performance based on forecast 2022, and also on EBITDA level, so it's profitability and cashflow-generating over-performance. The reason why we make this short is because we see some business potential that we want to seek immediately together.
If we create a long-term earn-out model, it means that the companies will need to operate isolated and separately, otherwise it becomes impossible to follow this earn-out model, and it becomes very difficult to make decisions that are great for the company as a whole, but perhaps not in the short term for one of the companies. We felt that having this short and sweet and try to maximize the growth that we see is a good balance of doing things. When we hit 2023, we do that as one company aiming to do some great things together.
Thank you for that, Björn. Are there any final thoughts on this big communication point for MilDef and Handheld? If not, we are about to land this bird. Daniel, Björn, if there is anything else you want to add. I see no more questions. What do you say, Björn, Daniel, should we close this party and start working on this?
I guess we should. I think we've seen in this meeting some of the questions that can be expected. They relate to how can we make the most of these two different things. After a while when we have talked, one realizes we are not so different.
We just serve adjacent markets with complementary technology, and that's why this is super exciting for us. I think the questions show that, and I hope that the answer showed you that that's the idea behind all of this. Of course, I want to specially thank you to Erik because his questions are always good and to the point, and I think he speaks for many of the people who are on this call with those kinds.
I think that it creates a lot of insights. We appreciate that. I also wanna say thank you to everyone for being part of this journey, for being part of this call, for getting involved with what we do. This is, for us, a personal journey, not just a professional one, so we like to spend some time with all of you when we get the chance, so thank you for that. We are of course also available afterwards if you have additional questions.
Everybody, a great big thank you for following today's investor call. Please follow our journey going forward in many channels. LinkedIn, send us an email, or make a call. We're here to assist you understand our continuing journey. Thanks for participating on a very special day for MilDef and Handheld and our journey to digitalize the world. Have a fine day, and stay safe. Thank you, everyone.
Thank you. Take care.
Thank you.