Incap Oyj (ICP1V) Earnings Call Transcript & Summary

Hello, and welcome to Incap's Q3 webcast. We are here today in Estonia, in Incap's factory in Saaremaa. And I have here today with me the President and the CEO of the group, Otto Pukk; CFO, Antti Pynnonen; and Director of Operations in Estonia, Greg Grace. Welcome. [Operator Instructions] Have a good webcast, and Otto, I will give the floor to you.

Thank you very much, Rose, and welcome as well here to Estonia in this new role for you of presenting in our webcast. It's always a pleasure with new fresh faces. So I will talk a little bit about our quarter results. But first, as you mentioned, we are currently in Estonia, and we are sitting in Estonia on a huge customer event where we have here in Estonia invited all partners and all the customers and all the different suppliers of the Estonian factory, and it's a great event to network and to talk business in that sense. And I hope that on the camera also it shows a little bit of the people. We have over 80 people here watching this here live as well. But if you look at the quarter, again, all-time high quarter for Incap. We keep on growing. We see a steady growth in electronics. And we keep seeing our order book filling up on a very high level. So far, it looks very promising moving forward, and the result has been great in the last quarter. Also, the profitability was very good in the quarter. And I think that this shows that our business model with our decentralized and lean organization is actually working. We are not eating up the money we are earning, but they fall down to the bottom row. We see, though, that we have a strong inflation, and we see costs also going up on the market, both when it comes to the energy cost, but also raw material cost. We work very closely with our customers, as you guys here know, to try always to optimize our production and efficiency and share both cost increases and decreases. And this, of course, is work that we will continue with. But so far, when it comes to new profitability, we have been managed to still do a very good result. And we keep on investing in our factories, both here in Europe, we have done investments and we continue our investment project in India. And I think also we start seeing some effects of those investments that we have seen in the quarter that was. Numbers, I think, speak for themselves. We have increased organically over almost 60%, 56.4%. Also the operating profit increased in the quarter with almost 50%. So I think that the numbers are very positive, and we're happy for the great team that we have and that is keeping -- delivering these numbers. For factory project, it's going on time. We had a little bit challenges as we also perhaps in the news here in the summer, there were heavy rains in India and in Pakistan and in the area, but our construction project is going on time. We still think that we will open as we planned in and start to ramp-up in the beginning of -- or during Q1. And here on the slide, you can see some pictures. So we have in the top there, of course, what it will look like but also what the state is now. So we are above ground and have put up the structural steel and now the sandwich panels will come, and this will start looking like a building quite quickly now once the mushrooms have popped up from the ground as they say in the construction business. Once more, I want to emphasize, we have fantastic people in Incap and it's them who are delivering this result, working closely with our customers and bring value to them. And I think you can't emphasize enough the importance of our people. If you go to any Incap site in the world, you will feel the same entrepreneurial and goal-oriented like team spirit. And I think I've said it before when we have talked that it's sometimes more a feeling of working into a startup than an industrial company coming to Incap because people are different. And we're blessed and happy to have fantastic teams in all of our units all over the world. And as I also said before, come and visit us, seeing is believing. And you guys that are here today and the audience, of course, have the possibility right now to do that. So I think Antti, you are the number guys. So I'll hand this over to you and you can start cracking them.

All right. Yes. Thank you very much, Otto. Let's start with focusing on the latest quarter, quarter 3, we just disclosed the report in the morning. Of course, my pleasure to go through the figures with all of you here. Top line revenue increased almost 50% or actually exactly 50%, up to EUR 70.6 million. Our profitability increased to EUR 10.9 million. That is 15.5% of the revenue compared to previous year quarter 3, it was up by 40.2%. Here, we have collected quarterly results from the past since 2019. And obviously, the trend is pretty self-explaining. Numbers are going up quite dramatically. So all-time high quarter like Otto already mentioned. Then on the right-hand side, we have illustrated also the profitability same time frame, and there's a bit ups and downs. Maybe just in a big picture, for example, quarter 1 2020, when we have a big dip, there was an acquisition. We had some PPA elements that we had to amortize plus then we started to have also the lockdown effects in India impacting the profitability. And unfortunately, the same trend actually applies to 2021 quarter 2, there was also the lockdowns in India. But yes, now the trend is again upwards. And then if we look this stable here, we have collected the main elements of our release. Just maybe adding on the profitability. There was one write-off provision on the material side. That was 400,000. That impacted obviously the EBIT percentage and EBIT in euro. So without this, it would have been 16% profitability. And of course, on the high profitability, the main thing is that we are working very efficient and lean in all the units actually starting from the headquarter level. For example, here in Estonia, we have the whole headquarters visible so for people, and that is quite lean for this size of a stock-listed company. A couple of graphs. We have mentioned and illustrated here on the bottom of the page, inventory value, based on the graph, of course, the numbers show increase. We disclosed also the quarter 3 inventory value, about EUR 90 million. So of course, the numbers are very high. Inventory values are one of the key KPIs that our managing directors in all the units are following. Obviously, we must understand in our industry, scaling up the business means that the inventory values are going up. So the inventory values we have today are the revenue streams for tomorrow. Cash position is in the middle in the pie chart, EUR 4.3 million. In a group level, we have still unutilized bank facility and credit line, roughly EUR 7 million. So that is still very on a solid level. And then eventually, we have illustrated the headcount graph here in the right-hand side, almost 2,600 persons on average in quarter 3. All right. Here, we have a graph illustrating since 2016 annual figures. Maybe the interesting part here is that already at this time of the year, in January, September time, we have basically beaten the full-year numbers of the last year. So obviously, the growth is quite rapid this year. And then right-hand side, we have the annualized profitability figures and in terms of euros, plus the percentage, and it's still in the very strong levels, as mentioned, due to the efficiencies we have here working in Incap. Yes, based on the figures and the transparency for the figures for the full-year, we updated Incap's outlook statement. So we commented earlier in October that our figures for '22 will be significantly higher than in 2021. Then we specified the range in the morning's report and disclosed that we estimate that the revenue will be between EUR 262 million and EUR 270 million in revenue and then profitability EBIT between EUR 38 million and EUR 42 million. And that's the key figures in a nutshell. I'll hand over to Mr. Grace.

Yes. Yes. Probably you mentioned before that as we started off with last meeting that we are focusing in every webinar on one factory. And of course, as we are already here in Estonia, then Estonia is in focus. So we're happy to be here and to have you here live as well. [indiscernible] was calling in and we were not in the factory. But super.

Yes. So welcome to Saaremaa, the Estonia's largest Island, and I'm glad to have the audience here, including the mayor of Saare vald, representing here today. Saaremaa vald, I got it that one. And I would like to start with a video. I think that's the best way to explain a little bit about us. So queue the video.

Incap Estonia is a member of Incap Corporation, which is active worldwide. We are located on Saaremaa island and logistically well situated to enable fast deliveries to Scandinavia and Europe. Incap Estonia is a full-service provider in electronics manufacturing services. We offer state-of-the-art technology backed up by entrepreneurial culture and highly qualified personnel. Incap's factory in Estonia has experience in electronics manufacturing since 2000. The factory has 7,300 square meters of total floor space and customers from global companies with operations from Europe, Asia and the U.S.A. We aim to build strategic partnerships with our customers and long-term relationships with our employees. Our factory in Kuressaare offers versatile technologically advanced and yet very cost-efficient production capacity close to the European markets. Incap Estonia brings together a high level of technical capabilities and leading-edge production technologies with special attention to the efficient ramp-up of new products. If you are looking for a strategic partner, do not hesitate to contact us. Let the electronics invasion be with you.

Yes. So I guess I have nothing else to add. Yes, just to recap, these numbers from last year, we were a little bit over EUR 18 million, 100 employees. And today, we have 120 employees. So that's contributing to the employees on the group that was shown and the growth there. And also the growth is showing in the results. We've been here for 23 years in Saaremaa. And if you notice from the video, it was an L-shape. The first wing on the left was built in 2006 and then 9 years ago, we expanded and doubled the factory with the right wing. And there's still room to grow here on the footprint of the land that we're located in. So today, we have 7,300 square meters of production space. And we focus on the electronics, the PCB assembly and the box build. If we take a look at the investments that we've made in production over the past 5 years, then we started in 2017 with the new SMT line, which was a high speed to improve our capabilities and offer services based on our customers' requests. In 2020, we took on a second new SMT line replacing older lines that we had so that we can continue to offer that high speed in the service that we needed. And those were the lines that we had until a few weeks ago. So in 2022, we have updated our 2 existing SMT lines, so we increased the robots so that they can place instead of 60,000 components an hour up to 90,000 components an hour. And we have ordered a third new SMT line, which is being installed today as we speak. So those of you who are doing the factory tour, will see that actually downstairs. Last year as well, we bought a second selective solder line, so we now have 2. And we bought a new wave solder to replace our existing lines. So the age of our factory and the equipment that's inside of the factory is less than 2.5 years. And so we're very proud to say that we have the state-of-the-art to be able to offer the services and the flexibility. But we've been focusing our investments as well on production efficiency, on the work environment efficiency with led lights, with lifters, with different tools, and that is the focus on speed and automation as we go forward. So what do we do? I mean, we're not just a contract manufacturer. We're actually a strategic partner. We deal with the sourcing and the purchasing as well as the design for manufacturability. We bring our partners together and we help them with the design if they need that, the tester development and all of the solutions that they need through the partner network that we have. We also focus on the PCB assembly, the testing, the box build. After that, we will do the logistics solutions for our customers and after sales if they so need that. So we offer a wide range of services to our customers. And that's what is helping us to grow and to continue to service the customers as their needs are changing. If we look at the quality then, quality is pretty standard and everybody will have hopefully 9001 and 14001. But what we'd like to highlight is that we have the 13485 medical and 100% of our employees are covered by the occupational health and safety, ISO 45001. Corporate social responsibility in ESG. This is really important to us here in Estonia. Today, we have a seminar where we're talking about sustainability and green projects. And I would say that the majority of our products are green, and they are socially responsible. If we take a look, that I'm very pleased to say that Incap holds a silver medal from the Responsible Business Forum for corporate social responsibility in Estonia. We have a gold medal for family-friendly company. And this is hard to achieve when you have a manufacturing because you can't send the moms home when their kids are stick together with the SMT lines. But we are very pleased to be honored with the gold level, family-friendly company. We work together with great student projects. We work with the universities on interns. We have here, the Estonia's first solar-powered car and Solaride, who is also here today. We're very proud of the projects that we are working together with. Last year, we won the award or recognized for the best internship partner in the region. And I would say that despite COVID and the situation, the difficulties with that, we opened our doors to the interns. We see this as a future to guaranteeing us further employees or potential customers that can learn the industry and be really involved and excited about what's going on in electronics today. We support young talents within different community activities as well. For example, on the bottom picture, you see that we did Incap Rocks Guitar Competition. So I would say that definitely the future and the sustainable projects that we have, the top, you have Corvus Energy rack that is actually empowering the ferries that are going back and forth between Saaremaa and the mainland to be a hybrid solution and transporting green. We're very proud of the activities that we're doing here in Saaremaa. If we talk about recent recognition and these are what we have received in the past 15 months. I'll focus on this year that you sold the investments that we're making, and we've invested quite a lot in the past 3 years to improve the production, and we have continued to invest despite the challenges with COVID because we've seen there's a need to do that to keep the competitive edge and the technology advantage. And we work with the technology guarantee as well where we have a rental setup that if we'd like to, we can stop and swap and we can offer our customers the need that they have. So it's no longer discussion about the capacity and capabilities, but it's how quickly you can ramp-up and the new technologies and those solutions. But we've done a lot, and we were recognized. I will point at the awards from this year that we were acknowledged from Enterprise Estonia as Estonia's Foreign Investor of the Year this year, and that's a very prestigious award. So we're very honored to be recognized for the activities. 10% of that is about investments, but the remainder is coming from the social responsibility of the green projects, how much you buy from your community. The jobs that you've created, as we mentioned, we've been growing and creating a new jobs. We're very honored to be recognized. We're also the Export of the Year for Saaremaa for the past 2 years. And this year, we were awarded the Employer of the Year. And so it's very, very proud to be acknowledged and recognized for those. So that's basically Estonia's presentation. Now I think the question and answering is, it's more for these guys, and I can also give some answers if you like.

So let's move on to the Q&A session. Thank you, Otto, Antti and Greg [Operator Instructions] So let me start by adding two questions in one because they are basically the same question. So what makes Incap different to other companies from the same domain? You clearly do something differently since you performed so well. And have you had any effects from the COVID?

Of course, we have the effects from the COVID. We have had the lockdowns, partial lockdown in U.K. factory in the first year because we could continue to work with our medical and outside critical things in the U.K. and India went totally lockdown during almost 1.5 months, but it's -- and both the COVID there. So of course, we also have had impacts. And in the other factors, we were keeping very high health regulations and so to be able to operate and following all advice and so. But it was very tough during COVID there for all employees. And so number wise, I think we managed to catch up on the lockdowns quite nicely in the coming period. So it was yes, momentarily that we were impacted in the numbers. What I think is special with Incap is our operating model. I emphasize that a lot and we have a decentralized model. That means that here in Estonia or wherever we come to, is the teams here locally that create and drive the business. All functionalities that are needed to offer the services to different services to the customers are done locally and or available here locally. On the headquarter level, we have, as Ant mentioned before, 4 persons. And so we were not top heavy at all. If you look at our sales margin or gross profit, we are not standing out there compared to our peer. I think pricing is a quite hygiene factor in our business. So the prices that we offer are very similar to those of our peers, but we own our money down in the P&L where you normally have big blocks of overhead costs and central functions. And it's as simple as that. So our model gives us that advantage.

Then next question. Otto, could you describe me the ramp-up of the third factory in India? And what type of impact it will have on revenues and costs next year?

As I mentioned before, then, of course, the investment in deferred-factory is driven by demand. And we expect we will start to ramp-up in Q1, and we are currently on plan, so it looks positive. And we will fill up the factory during next year. So there will be an impact on, of course, on the numbers next year. So we expect that, that is a part of our growth strategy in that sense for next year. Let's see how well we succeed and then we'll report the numbers as we come.

Then a question from [ Joakim Reimer ]. Why don't you specify why EPS didn't increase even half as much as revenue? I would appreciate quaternary reports, I guess, EPS is temporarily hampered by the factory investments.

Yes. Maybe I can comment. So there is a couple of elements if you compare the net profit growth percentage against, for example, the EBIT line percentage growth, there is -- one is related to the parent company taxes. So Incap headquarters, Incap Oyj is currently paying taxes. And actually, in the past, that was not the case. Incap Oyj had historical losses that we are now fully utilized. And therefore, it means that also the parent company is paying 20% taxes. So that increased the taxes side. And then other important element of the elements impacting net profit is that there are certain loans from the parent company towards the subsidiaries as the Incap Oyj is working as a treasury function. And there is, of course, the currency fluctuations and those impacted in the unutilized or like unrealized currency effects. That was the two elements impacting on the EPS as well eventually.

There is maybe a follow-up question or maybe you answered already. Have your tax increased, tax percent increased since last year?

Yes. I think that was part of my answer.

Then a question to Greg. Can you elaborate on what types of customer segments you're being mostly exposed to? For example, industry, greentech, meditech or defense? And what type of fields are you most enthusiastic about upcoming 3 to 5 years?

If we look then, it's mostly industrial electronics that we're working with, but we have a lot of IoT. We have a lot of -- we see a growing trend in e-mobility and different type of projects tied to that. And we've done some press releases recently on the projects that we're working with, with the rideshare scooter platforms with the electric bicycle platforms. We talked also about Corvus Energy. And those are the companies that I can talk about that we have already shared press releases about. But I would say that a lot of them are sustainable projects where they have a future that is going to continue to grow. You obviously see EV chargers, inverters, solar and wind power. There's a lot of projects that Incap is tied to here in Estonia working together with those. And so we see that there's a sustainable growth for these industries and they're supported by government. So it's not so much a consumer product, thankfully. So it's something that will continue to grow. And as electric energy prices grow or as maybe signs of recessions come, then people will start to invest more in looking into the solutions that we're manufacturing. So we see a positive outlook on that.

Then going a little bit back to India. You might have already answered some of these questions, but if you would like to elaborate that. In the report, you mentioned that the factory expansion in India is still on time. When are you planning to start the production and could you open up a little bit the ramp process and the schedule for the ramp-up? When are we going to see the expansion in full use?

I think the expansion in full use, that we will see over the year that will come. And as I mentioned before as well that we always plan with a little bit overcapacity. And so we try not to fill anything fully ever because then we can't sell anything extra. But that said, we will start in Q1. And over the year, we will add on more and more business. So it will be ramped up during next year. And let's see once we are there and the numbers how fast we managed to do it.