Incap Oyj (ICP1V) Earnings Call Transcript & Summary

Good afternoon, and welcome to Incap's H1 result webcast. Today, I have here with me the CEO and President, Otto Pukk; and then CFO, Antti Pynnonen. You are welcome.

Good to see you, [ Rosa ].

Thank you.

Excellent. Yes, thank you also from my side. And as always, thank you for the interest in Incap and for all of you guys who are following us through this webinar. We will, as usual, do a short presentation and then follow up with a Q&A session. And of course, if there's any questions we don't have time to answer during the Q&A session, then in the interest forum, as usual, we also are answering questions. So I hope everybody gets the answers that they want on the questions. But perhaps, we can start with the presentation and go through that and then get on our way in that sense. So if we look at this first half year, then this was relatively strong. We had the bad news coming up in quarter 1 or earlier this year, with our biggest customers decreasing their stock levels. This hasn't that much impact in the first half of the year. So we will expect to see more impact of that now moving into Q3 and Q4. But with everything in hand, I think a relatively strong first half of the year. We'll be focusing, of course, very much on increasing sales with other customers and new customers as well as being engaged, as you saw, also in M&A activities. And we were very fortunate to be able to close a good deal for Incap here just some weeks ago. Looking at numbers in the first half, of course, the revenue is increased. We also have an increase in the EBIT. I think that is, with everything under consideration, a very good and solid result. And we are continuing to work very hard with the profitability to defend that profitability, even if we are downsizing and taking down the cost according to match the volumes. This work so far has gone quite well. And we will, of course, continue with that now during the quarters to come. I cannot emphasize enough how great people we have in Incap. We have our teams all over the world working very strongly on developing the business and taking the business forward. We have a good teamwork, I would say, not only in the units, but also between the units seeking synergy effects. And if you look at that, apart from perhaps our biggest account, we see growth almost all over our other customer accounts. And this is, of course, the fruit of the work from our fantastic people that we have in the different units. We take pride in being an equal opportunity employer and work very much to promote our values in the different units. And I think our best ambassadors in that sense for our values are the people that work for Incap. We have suddenly new Incap team members now. This was with the acquisition of Pennatronics, or nowadays, Incap Electronics U.S. And I'm very excited to welcome our U.S. team into Incap. It's an excellent company with very good and long experience in the electronics field and a very competent team. And I think they will fit right into the Incap ecosystem and the way that we are working. And I think there's a lot of opportunity now when we are enforcing the team in the U.S. to themselves take more of an active role in where the company will go. And be part of making the strategy and also affecting the operations on a day-to-day level on perhaps a bigger scale than they have been able to do before. So that is very interesting. Also, there are some new interesting fields when it comes to, for example, electronics for nuclear facilities and so that we have gained certificates with this acquisition now. And that, I think, also is interesting for us looking ahead and so. So very much happy to introduce and to take our Pittsburgh team on board in that sense. A little bit in numbers, 102 employees have joined us. Roughly 6,000 square meters in floor space and there is expansion possibilities there. And I think overall it's a very good facility. We're a good team and we have good capabilities there. And already interest from existing customers as well that what this could do for them in that sense. Because in the U.S., there's a lot of made-in-the-U.S. programs that need to have U.S. manufacturing on site. And now we are able to offer that to our customers that we have and our new customers as well. And vice versa, of course, offer services for our U.S. customers outside, also on other markets in Europe and Asia. So looking very much forward to continue with the integration work and working with the team there. Antti, perhaps you want to take over and talk a little bit more in detail about the numbers in quarter 2.

Yes. Thank you, Otto, again for the good introduction for the first half events and figures. If we look now -- especially in the quarter 2 this year. So we reported revenue declining 7.8% in euros, EUR 56.4 million. EBIT was EUR 7.5 million, corresponding to 13.3% of revenue. And there was a decline in 12.8%. Adjusted operating profit 14.7% last year, same period, 14.4%. So there is, of course, an explanation of the non-recurring costs, which we mentioned also in the report. Mainly basically due to this acquisition that we were able to disclose and complete in early July. So there was roughly 700k for these kind of non-recurring costs, impacting, of course, the profitability of the second quarter. Trend illustrated in the form of graphs here per quarter. Of course, last year, 3 or even the first quarter this year were extremely high, very strong quarters. This quarter is therefore less, but still, as anticipated, the impact of the biggest customers' de-stocking exercises is taking a bigger impact in the second half. But overall, of course, the adjusted profitability was on a very strong level. And then, of course, here in Incap, the very big focus, a lot of energy has gone internally for adjusting our resources, our headcount. Of course, especially in the Indian unit, as there is this main impact of the de-stocking exercise. But on the other hand, in European units, where the business is growing, and for example, quarter 2 was in all units higher than last year. So we have added some resources. And yes, all European units indeed were growing, and also actually the business in India was growing. Only basically the biggest customer de-stocking exercise was the thing that impacted kind of negatively the figures. So here is in the form of the table, the key figures. Of course, the big item we always report and follow internally a lot is the level of inventories. Here, we have had a very, very good development since the end of December last year, almost EUR 18 million reduction in there. Of course, that shows very, very strongly and clearly in our cash flow statement. That was very strong compared to, of course, the year '22. And then in the middle, you can see actually the interest-bearing net debt. Now it's negative, because the cash and cash equivalents are higher than our interest-bearing debt elements. And then on the personal side, in the end of June, we reported 2,224 persons and the split is described there. Yes, acquisitions, as Otto already mentioned, so that is some area we keep focusing on. Now as you can see in the cash level. So we have room for continuing on that path. Of course, internally, the priority is always to support our units in organic growth. And like Otto mentioned, the business in India, there is some, of course, capacity available. Production has started up there. But then as we have so good financial position, we can keep investing in the right areas and support our organic growth. So that is a positive thing. And yes, outlook, what we have also reported here, we repeated the same message as in April when we heard about this destocking exercise. So the '23 revenue and profitability, EBIT will be lower than in '22. And then, of course, the outlook on the business on a longer-term and from the strategic perspective in the EMS sector remains very positive. As mentioned, all the European units were growing, business in India is growing, except the biggest customer destocking exercise. So yes, this is in the big picture, will help Incap to grow the business. And then that's in a nutshell.

Yes, thank you, Antti. So I think perhaps that is one of the key messages also to take away from here. We still think our steering we have -- that we gave here earlier this year will hold in that sense. And business, except for this destocking exercise looks actually quite good. And that gives also good indication for the future. But we are ready for your questions, guys. So start shooting.

Yes. So let's start the Q&A session. We have quite many questions coming. So I will start with the first one. How do you see the future of Pennatronics and new U.S. customers? Do you have European customers that are willing to start production in the U.S. as soon as possible? Or U.S. customers that are interested in starting production in Europe or in India?

We see that there is cross-selling opportunities here for sure. And that was -- of course, with all of these projects, it takes a little bit of time. And it's not so that we immediately can start up. So it's always starting or qualifying the different units. And so -- but I'm happy to say that we already are in discussions with customers from both sides, old Incap and now our new U.S. Incap. And this work will continue. So there is for sure opportunities there for us in both directions.

Okay. Do you have free capacity in the U.S. at the moment? How likely are you to expand the U.S. factory in near future?

Yes. Currently, there is free capacity in the U.S. unit. And that was also something that was important for us, that when we looked at the M&A target, there is possibility for expansion. And that we could utilize some capacity immediately if we can, I'll say, find the work for it or have the need for it. So there is a possibility in that sense. Currently, and there is also a possibility for us to expand the facility if so needed. So it's a good first, I would say, we have a foot into the U.S. market with a good facility, and a lot of interesting things to offer to our existing and new customers.

Okay. How would you describe your investment plan in general this year and 2024?

I think, we -- in that sense, plan -- our plan is very much need-based. So if we have a need for an investment, we see like we have done now in our European units. In Estonia, for example, where we needed to expand the SMT capacity. Or like in Slovakia, where we have expanded the floor space in the warehouse. And so somewhat to gain a little bit more space on the production. Then we do it in that sense that I think investing in our capabilities and capacity is something that we do all the time. And will continue with as well here -- this year and next year and in the future. So if there is a need, and then there is, I would say, a need for it and you can calculate a good return on it. Then we don't hesitate to make investments.

How would you describe your success in acquiring new customers or growing previous customers in 2023?

I think we have done excellent work. And as I mentioned, the teams in the different units have done fantastic work. We see growth currently on basically all customer accounts, except for our biggest customer, where we have this destocking exercise. So the business looks good. And we have good new customer acquisitions in the different units as well. That -- so overall, I think we are doing good work. Of course, our biggest customers having had that dominant position in our numbers. Then always in the pure numbers, it doesn't show the great work that we are doing on other accounts. And we opened this up a little bit last year during the Capital Markets Day. And I think perhaps in one of these settings or so, we can open it up a little bit again, because I think that is something we should take pride on, how we are developing currently the business, if you take away the biggest customer in that exercise. So we have good, I would even say, great development in new customer acquisition and development.

You mentioned that reducing the stock levels of your biggest customer will affect your business, especially in the second half of the year. How confident are you in the outlook and guidance for the end of the year?

So I think we are confident that our best knowledge currently is that we will be able to defend it, or help set to keep the steering at where it is. Of course, we are, as I mentioned as well, working very hard with the profitability side on it to maintain that and so forth have been successful. But our best knowledge currently is that our steering is holding. And -- so in that sense, I'm quite confident in those numbers given that we can continue to defend the profitability.

You made a great acquisition in the United States. Is the stomach full for a moment in terms of acquisitions? Or can we see new acquisitions, for example in Germany in the near future?

I think, I totally agree that the Pennatronics acquisition is a great acquisition. But I would rather see it as a good starter than a full meal.

Yes. What will be the impact of the Inflation Reduction Act for Incap Pennatronics?

Antti, do you want to comment on that one?

Sorry, can you repeat that one? Inflation…

What will be the impact of the Inflation Reduction Act for Incap Pennatronics?

I think that is something we haven't yet internally discussed or analyzed too much. Integration anyways is very much on a kind of planning phase still. And starting this kind of more deep analysis is a working process.

Okay. What was the main reason for Pennatronics owners to sell business Incap?

I think Pennatronics owners is -- yes, excellent guys in that sense that they have been in the business a long time and have also been in other industries before that. And they're all, I think, young in spirit, but getting old in that sense in many years. And decided to focus on other things and retire from perhaps active from -- active business even if they remain investors in Incap. And have other investments of course as well. But yes, they were retiring in that sense, and that was the main driver.

Did you manage to get new clients to fill your factories? What are the expectations for new clients?

No, I think of course, the expectations with all clients is that we can get a good cooperation and provide them with good services where they win and we win from it as well. And I think all client relationships in that sense is key is that both partners are happy and that is what we try to strive. That it's a relationship and in our industries, we're offer we're a long-term relationship. So here you go in for it also in the long run in that sense. So if that answers the question.

Do you expect more M&A in the next 12 months?

Yes, it's hard to say. It all depends on what kind of targets, and so we have in the pipeline. I think, we still have a very good pipeline when it comes to M&A and we are working on different streams. But it all comes down to that. Can you find a good target? Can you agree upon a good or how to say reasonable evaluation of the target where both partners are happy? And so it all depends of course. It's hard to say that, yes, for sure within the next 12 months, there will be more M&A processes closed. Or in that sense that we will sign more deals or not. In that sense, we are continuing to work with that stream as well. I think M&A is already, I would say, have a big part moving forward as well in the Incap's growth strategy. So we continue to focus both on organic growth, but also growth through M&As. Now we have a footstep into the U.S. market. It's a huge market and I wouldn't be surprised that in some reasonable time frame in that sense in a few years’ time that we have more than one site in the U.S., because it is so big of a market. And also here was mentioned, Germany is still the biggest EMS market in Europe. And we are working with German customers, but we don't have presence in the German market. And I think the German market also is a little bit of a conservative market. And presence in the market would, of course, help to penetrate it further in that sense. So if that opens up the subject a little bit.

What are the key challenges related to integration of Pennatronics? Is there any big differences in a way of doing business or organizations between Incap and Pennatronics?

I think in that sense, of course, we come from -- they come from an owner-driven business. And now they're part of a listed company. And Incap, we are driving the business very much decentralized. And now we are encouraging the team to more actively take part in decision making. And to how say, drive and develop the business. So perhaps there is, of course, some changes for the local team there. And so how you are expected -- what they are expected to do and what the expectations on their work is. That said, these are excellent people. We have spent now plenty of time already together with them. And I already feel the enthusiasm from the team there. And they see a lot of possibilities in joining Incap. And I'm quite sure we will succeed. And in the end of the day what we do in Incap with our decentralized model, and empowering people to take part of business. And so that is normally perceived as something good. It's not so that we come into some new business and want to slaughter it and centralize the decision making and take, I would say, all the interesting part of driving business away. In the opposite, we try to empower people to take the helm of that business and develop it further and give them quite free range on what kind of opportunities to proceed. And so of course, giving our knowledge, sharing the knowledge between the units and what has been successful. And so it's a key part. But normally it's a very good thing to for employees to suddenly get the opportunity to perhaps do more and that they could previously.

Could you please give some more color to this inventory destocking effect in 2023? Could orders be down by some 50% year-over-year from this one customer in H2 2023?

Yes. No, H2, here we expect, so if you look at, we started the preparations of the decrease in volumes and did the reductions in manpower. And some of these moves here during now Q2. But the full effect of that is running now. Antti, do you want to comment more on the number side of that?