Incap Oyj (ICP1V) Earnings Call Transcript & Summary

Good afternoon, and welcome to Incap's Q3 Results Webcast. My name is [ Paulina ] [indiscernible], and I have with me Incap's President and CEO Otto Pukk; and CFO, Antti Pynnonen. Otto and Antti will go through the Q3 results presentation. And after that, there is time for questions and answers. Gentlemen, the floor is yours.

Thank you very much, [ Paulina, ] and also hello from me to everybody listening. Of course, as always, thank you for the interest in Incap and looking forward to answer all your questions. But first, perhaps a little bit of introduction on going through the main milestones when it comes to our quarterly release. And of course, as you all are aware of, we have been working very heavily on this destocking exercise with our biggest customer. And of course, the quarter has focused very much on that. It's the first quarter, we start seeing some larger effect of that, even if we expect that the bigger effect of it, we will see on the fourth quarter. The destocking have gone a little bit more slower than we initially expected, but we're getting there and in a steady pace, and we are working very closely with our customers to make that happen and help them out in that sense. Otherwise, I would say that the work with other customers have gone very well. So it's a little bit -- two different works. We're working on decreased in -- with our biggest customer. But on most of our other customer accounts, we have been able to grow if we look at during this year. And that is something we are very much happy with to see that our different -- different work streams on that are working. Looking at the numbers, of course, Antti will go through that more in detail. So in the revenue, if you look at the first 9 months, there is, of course, a decrease compared to the previous year. Profitability, we have been able with our flexible model to maintain on a quite healthy level in that sense. And I think here, it shows the strength on how we're organized and how agile we actually are to meet this kind of challenges. Of course, that said, it has not been easy. We have had laid off a lot of our colleagues in India and that has taken a big toll, of course, on the team. Team effort, I want to emphasize like I do on all of these webinars here that we have fantastic people. And it has been a tough time, especially in our Indian unit, but we have been able to do that -- this in a very efficient and cost-efficient way, and that also shows in the numbers here for the quarter. Incap U.S. have joined the family and the project with integrating them have gone very well. I think that it already feels like they have been part of Incap longer than they have, but we were working steadily with the integration. We see a lot of cross-selling opportunities in -- with our existing customers from Europe and India, having interest in the U.S. market and also vice versa. So I think here in the coming years, we will see quite good traction on that. That, of course, things take time, but it is growing interest in that sense. And now Antti, do you want to go through the numbers now, and then we can take it from there.

Yes. Absolutely. So Otto, if you take this first slide, so focusing not only on the quarter 3 numbers, so the revenue recorded EUR 50 million. There's obviously a decrease of 29% since the year-to-date and then mainly, of course, due to the destocking exercise. And on the revenue side, as we also commented, so the quarter 4 next quarter will most likely be clearly the -- like the lowest of -- also in quarter 3, we still -- still had some decent volumes from the biggest customer, plus then, as we remember, we closed the U.S. acquisition in the July. So from the July onwards, we have consolidated the newly acquired business in the figures. Operating profit was 11.4% and on the profitability side was -- the decrease was 48%. Here, we have on the quarterly results on the left side, we have the revenue development. As you can see, then the 2022, there was -- really the figures were peaking, and there was -- quarter 4 last year was the all-time high. And then, now we are a little bit going down, as the graph demonstrates here. Like I said, the profitability has been then the real, like the focus area of the management here depending -- and then obviously, we have had a -- for us to take a hard measures on reducing the workforce and adjusting to the production needs. And that's the result that we were still able to defend the double-digit in the profitability. And about, for example, the items impacting the EBIT, there was some non-recurring items and some purchase price amortization. So on that side, that also played a role in EBIT. So then almost EUR 0.5 million was the impact of the quarter 3 PPA elements and then non-recurring items regarding acquisitions was just [ 100,000 ]. That just shows that we were able to integrate this. And we will continue the integration work with the U.S., but we really like lean and an efficient manner, and that's the spirit in Incap. Key figures here other than the ones already mentioned here, I would focus on the warehouse level inventory is so important for Incap's business. Materials represent typically 75%, [ 80% ] even some cases of our turnover. So now it's -- in September, we recorded EUR 83.6 million level of inventory, and that includes the warehouse from the newly acquired U.S. business, [ EUR 8.8 million ]. Without that, the number would have been [ EUR 75 million ]. And if we compare it to the year-end 2022 number, 92%, so there is a significant reduction in the warehouse levels, obviously, helping with the material availability issues and so forth that the turnover of the materials is getting a bit better. Then on the center, we always want to highlight also the -- a little bit the cash position and the loan situation. So -- we have a net debt of EUR 4.5 million. Currently, cash position is EUR 30.2 million. And then the loans combined is approximately EUR 35 million. And then about this personnel number in September '23. Overall, we are now 1,903. And indeed, there was unfortunate -- unfortunately hard measures taken and then a reduction of the workforce was indeed required in order to keep the head up. And then that's a very significant number if we compare the whole Incap's personnel. So that is what the -- the most of the time has gone to support the Indian team and really help them and -- and take through the -- sail through this tough times. But then outlook, what we specified earlier was this one here. So this has remained the same. So we just repeated that one. And then indeed, the outlook for the full year revenue side is EUR 210 million [ until to ] EUR 220 million. And then on the profitability side, EUR 24 million to EUR 28 million. And these figures include the newly acquired U.S. business. Yes, that's the main message from finance.

Yes. Excellent. Thank you very much, Antti. So [ Paulina, ] we are ready for questions. I see that we are building up in the chat. So let's start go [indiscernible].

Yes. So let's start with the Q&A session. The first question is about the share of the largest customer in your business. How large is it? And how does the trend look like? Are other customers growing faster than the biggest customer?

Yes. No. As -- now in the Q3 release, we don't have exactly the customer, the data in -- published in that sense. But yes, if you look at that historically, our biggest customer have been over 60% of our business, and this customer have now clearly lower volumes than it had in the past. So for sure, other customers are growing currently quicker than the customer that is declining.

Okay. There's another question related to this, and it's looking forward. So do you plan for a ramp-up again in Q1, 2024 for the customers' orders? Or will the Q4 level be the new normal for some time?

It all is up to our customers' sales and how that will progress. We believe that Q4 will be, I would say, where we reached the bottom level and that we will -- from that turn back to growth. But it all turns -- comes down to how quickly and how the sales is developing for our customer.

Okay. And a question about the EMS market. What is the forecast of demand for EMS market in 2024? Do you see more activity from customers for the coming months despite the current macro situation?

I think if you look at the [ Informa and the TriVice analyzed ] then he expect the next year to have somewhere 6% to 7% growth on the EMS market in Europe. And I think that is a good, good average in that sense [ in our road shows ] -- shows, where most of the companies will be. We have been -- as we also wrote in the report to been able here to grow other customers in Incap here above that percentage during this year, and we are continuing to push for -- on our sales and try to outgrow, I would say, the market average when it comes to other customers. Of course, Incap, as a whole, it's very much up to what our biggest customer, how their sales pick up. But we have been very successful so far this year. And so, we are increasing organically. And also, we continue to look at M&A targets, and there's also opportunity with the current cash position, and so, to perhaps do some acquisitions in that sense.

Okay. There's a question about -- which is a small detail, but anyhow, is Pennatronics included for the whole quarter or from July 5th?

Pennatronics has been consolidated [indiscernible] quarter. Am I muted. Can you hear me now? I'm not muted on my computer.

Yes. I can hear you at least.

All right. So the answer is [ full quarter ].

Another question maybe to Antti. How is the high interest rate environment directly impacting Incap. Are Incap loans, fixed or variable rates?

Incap loans have Euribor 3 months element and then there is a rate margin from the bank depending Incap's level in the KPI called interest-bearing debt over EBITDA.

Okay. Then there's a question about M&A. [ Antti ] or Otto already touched upon this, but do you plan for more M&A?

We continue to look for acquisition targets and have an active pipeline in that sense, and continue to pursue that in -- yes, we have mentioned before that Germany and U.S., of course, are interesting market for us and -- but we're also looking at in some other places. Yes.