Incap Oyj (ICP1V) Earnings Call Transcript & Summary

Incap's Q2 Results Webcast. My name is Pauliina Tennila, and I will be hosting this event today. Our speakers today are Incap's President and CEO, Otto Pukk; and CFO, Antti Pynnonen. Otto and Antti will present Incap's second quarter results, after which there is time for questions and answers. You can post your questions with the Q&A function already during the presentation. The recording of this webcast will be available on Incap's website later today. I hand it over to you now, Otto.

Thank you, and welcome, everybody, from my side as well. It's always a pleasure having so many people having interest in Incap. And I'll start sharing the presentation here slowly. Currently, me and Antti, we are in Kuressaare in Estonia, where Incap is supporting the Kuressaare Saaremaa Opera days. And I hope that we have also some of the -- you guys, shareholders here in Kuressaare, enjoying the culture and the music. But let's talk a little bit about the quarter that has gone. As we had anticipated, the first half of the year started with a little bit anticipation in the market. We had hoped that by now already these tariffs and trade deals that are foremost with U.S. and Europe, but also U.S. and India, had regained some kind of clarity. But there's still uncertainties. And as you saw, we went in and we did a steering change here in the beginning of the week due to that. Otherwise, the revenue we had during the quarter was slightly higher than the previous quarter and the first half year figures in that sense is here on the screen. So still a double-digit EBIT and EUR 107.5 million in revenue. We give now an interval. So the new outlook that we have is showing a number a little bit than flexibility. So we choose to do that to get clarity. And we continue to now monitor what is happening in the foremost with the U.S. administration and the trade deals, and let's see. In principle, when we changed the steering, the biggest issue for us was the dollar exchange rate. And we had some projects that have been postponed, but our steering was, yes, very close to the previous year and when the dollar exchange rate changed, which is a big part of our business, is dealt in dollar. And as we have the Indian unit very much dealing in dollar and of course, the U.S. unit as well, then this very weak exchange rate affects our result. A little bit to visualize this as well. So there is an all-time low in that sense in both the dollar and the Indian rupee that follows dollar, and we feel the effect in both of those. Otherwise, we have continued, of course, to work in development with Incap. We have installed our new SMT line and the upgrade of that in U.K., and we have also invested in here during the first half in SMT production equipment in U.S. and new x-ray in Estonia and upgraded our PCBA washing technology in Slovakia. So we keep on investing and seeing that our factories are top of line and can handle our needs. Also in India, we have done SMT line investment, but also installed, as you saw perhaps in social media, quite significant amount of solar power in the Indian facility. And that, of course, is part of our sustainability program and so as well. Also perhaps to mention here during the quarter is that we have continued to develop our units and also regained some new accreditations in defense industry, for example, in U.K., where we have the JOSCAR Zero accreditation now in place. So business continues. We continue to develop and so the business all over the different factories. When it comes to sustainability work, it continues. So we just had a report out here in spring time, but of course, we have already kicked off the reporting for this year and now have been heavily focusing on our climate transition plan and have been focusing and developing that. So that is now with road maps and targets and so is in place, and we start developing and moving forward with that. And of course, we have a focus. We are looking at all the opportunities we have to reduce our CO2 emission, and that's why solar panels and other things that I was mentioning before is, of course, in very much focus. Of course, it's always about our people. And I think we wouldn't be here today without our excellent teams all around the world that continues to deliver and perform very highly and see to it that our customers get what they want and needs in that sense. So it's always a team effort, and it's a pleasure working with all Incap people around the world. But that said, Antti, you might want to dig in a little bit more into the details when it comes to the numbers. So go ahead, please.

Yes, please. So if we take on the next first slide here, the result of the second quarter, EUR 55.3 million, slight increase from the first quarter, almost 6%. We recorded EBIT EUR 6 million, and that is in healthy double-digit figures, sniffing on 11% and then adjusted EBIT was EUR 11.5 million. Here, we come again on this trend since 2020 second quarter. So the figures show now on the second quarter, a slight increase from the beginning of the year. And then towards the second half, we expect the similar level to continue. Then if we take the next one here. So we also measure, of course, the development on the inventory values. And then as we commented earlier this week about the currency rate, so obviously, when Incap is so international business and most of our assets are in different currencies and then mainly this U.S. dollar-euro rate has weakened. So of course, we value all our assets as well. Balance sheet is valued on the latest currency and then inventory also is partially impacted by weakened currency effects. If we would have used the similar rates as 2024, actually the inventory levels have slightly increased since the December 2024. And then we still remain extremely healthy when it comes to our cash position. Our net interest-bearing net debt is minus EUR 35 million. So below is the definition of where it comes from EUR 64.4 million cash and then interest-bearing liabilities, EUR 26 million on the noncurrent side and EUR 3.5 million short term. And 2,600 approximately FTEs on the group level, and there is an increase in the figures and mainly contract worker number in India is picking up.

Yes. So coming back to the outlook, our new outlook is that we will have a revenue between EUR 210 million and EUR 230 million and operating profit between EUR 23 million and EUR 26 million, given that there is no change in -- now in the inputs that we have regarding material availability or other things on the market. And our previous estimate was that we were going to be higher than this year, but this is now revised. But I think that is it from us when it comes to the numbers and so we are always happy to take questions. That's the main part of this webinar. So guys, please go ahead and let's discuss what is in your mind.

All right. There are a couple of questions here for you. So talking about the postponements done by the customers, do you see a lot of pent-up demand due to them?

Yes. I think, first of all, I want to emphasize that the main reason for us changing the steering was still the exchange rates and not postponements of projects. Postponement of project is more reflecting to that we were expecting the Q2 growth and in the end of Q2 and so. But yes, we see it. There is still hesitation. There is hesitation in especially our customers that deliver into U.S. or have end customers on their side that deliver into U.S. And we see that in many sectors that both industrial customers, but also defense customers have said there have been some question marks regarding some projects in the support of Ukraine from U.S. that now is a little bit pushed into future. So yes, that is -- but I don't think it's not a question of demand that is, I would say, disappeared. It's a question of timing. And now we are already in the second half of the year and very close to the window where we already know what, I would say, the year will play out. And if the orders haven't been placed by now, then, of course, it won't be a big probability that it will already be fitted into this year and can be delivered in the year. So of course, the longer it takes and the longer people wait, the more likely is that it's orders that we're going to deliver next year rather than this year.

So what is your current utilization rate? And what is your remaining run rate at full capacity?

Yes. Full capacity is a relative term in the sense that we have talked about it in this webinar several times before that we always plan with some kind of overcapacity. We have that today as well. That is what we are selling in terms of -- for our customers and for our potential growth. So -- but capacity, it all depends on what kind of product mix there is. So if you do, like we do for some customers, 10 feet by 10 feet big controller units, then you can fit those -- fewer of those than if you make a small board that is perhaps 10 millimeter or 10 centimeters by 10 centimeters. So it all depends on -- so I wouldn't talk about capacity in that sense. And in general as well, I think it's an old way to look at manufacturing, talking about always, how to say, capacity utilization because it's a moving target. As an EMS company, we can always rent more facilities. We can rent equipment, we can rent people. So it's more a question of what the customer needs and what is the current output need that we have, and then we will match it. And it's the service of matching that need that is the core and the essence of EMS business nowadays.

Yes. Well, maybe from my side is one comment here on this one. So that definitely, we have capacity available. So it means that we don't need to invest necessarily on the floor space or the real estate itself. So in theory, of course, we could add more from one, kind of working in one phase, you can add in the 2 phase or even around 3 phase working around the clock basically. So the message from my side is that we don't need to invest in real estate or floor space or not necessarily even on the -- that much on the machinery and equipment on meeting the growing demands from our customers. So that's one way to look at it as well.

The next question is about your largest customer. And how have they been developing relative to the rest of your customers in H1?

I think they have been developing good. We have slightly increased the volumes, and so during the quarter, we are producing steadily for them, but they are also one of the customers where we deal in U.S. dollars. And so even if we have increased slightly in the volumes in the -- and when we convert this now on paper into euro, then the value of that is slightly less than it was, say, a quarter or 2 ago because of the dollar exchange rate. Antti, do you have any want to double down on that one?

No, I think you actually -- you had the point there. And then -- yes, of course, then when we do the full year forecast internally, we do a lot of different scenarios with different exchange rate as well. And of course, the main driver, obviously, is always the customer demand and their outlook and the confirmed orders and agreed production plans. And then we put all these numbers together. We do it several times a month, this kind of scenario analysis with all MDs in the meetings and then go through the plans. And then with the exchange rates we have had so far on average, 6 months, January and June period of time. So then we saw that it seems like then this outlook that we gave out is -- yes, we stick on that one. That's based on the current best estimation on the business, and then we believe on that one. And of course, in Incap, we always aim for shooting a little bit, of course, on the top tier or the higher boundary of the range. So that is our ambition level internally. But now we are in July and then obviously, still a lot of work to do to meet those figures. But we will keep you guys posted, of course, on the progress.

Thank you. Then there's a question about defense and aerospace. So is defense a big market for Incap or Incap's customers? And would you like it to be bigger considering how the defense market is developing currently?

Yes, defense currently is not big. So I think it's slightly -- less than 5% of our total business is related to defense and aerospace in that sense as we bundle those in one segment. We have been working on increasing it here over the past year, and we are looking at continuing with that work. That said, it's also a volatile market. Now it's a good base for defense business, but there is also downsides in -- so when the turn goes on the downwards. So I think that focusing only on defense business, we, of course, won't. So it's a part of a balanced, how to say, customer portfolio for us is to be in many sectors. And so -- but of course, it's currently attractive. There's a lot of money moving there. And we are also working very close with several customers and several projects on the defense side and have -- and we'll continue to do that.

Thank you, Otto. Then there's a question about financial expenses for the debt, and that's increasing. So what is the trend going forward?

So if we actually look really the interest rate -- interest that Incap is paying, that is actually going down as we have seen interest rates, Euribor and then Incap's own agreed percentage premium on top of that one, interest premium with the local bank. So a combination of those, that is going down. So the real -- what Incap is paying for the debt is actually EUR 150,000 less first 6 months this year than it was last year. So the majority of the finance expenses actually is all related to this like a translation differences. Like mentioned earlier, we are very international business, and then we have a lot of dollar-based assets. There's a dollar-based bank accounts in parent company in U.S.A. And then there is internal loan between Finland and U.S.A intra-group loan, EUR 20 million receivable, and when all of these are always valued in the end of the month with the latest currency rate. So that explains the growth on the finance expense side. That said, Incap has also monitored this development of the currencies and what can be done there and then analyzed different ways to protect against this one. And then we have already taken a step to hedge. For example, we hedged end of last year, internal -- this intra-group receivable from U.S. and that is, on the other hand, then showing some financial income on the P&L side. So hopefully, this answered the question.

Thank you, Antti. Talking about the foreign exchange rates and also the gains, how about then on the purchases side? Do you have benefit at all on the U.S. dollar situation in your purchases?

In that sense that, for example, in India, which is the biggest unit or in the U.S. that also, of course, deals in U.S. dollar, then we also purchased very much in U.S. dollars. So I guess that a little bit offsets each other. And -- but -- so we are in that sense, I think, a big part of the business or even the majority of the business is U.S. dollar based as India is and U.S. now dealing with them. So perhaps that's the way you should see it. But also, I want to emphasize this is on paper, that we are not in reality converting the U.S. dollar to euro. It's what we do in the reporting to show the figures to the market. But in reality, we haven't got any hit by it. It's on paper where we see -- when we now evaluate it. Of course, if we would pay dividend and then actually repatriate the cash and then start doing -- exchanging it, then that would be. But here, it's a loss. Some year ago, we got the plus on the same way and the minus. It's nothing now super dramatic into it because we will continue to trade in U.S. dollars and so in the future as well.

Yes. And then on this topic, if we a little bit continue further, so there was a question on EPS, what items impacted on Incap's quarter 2 EPS figure. And then one thing we haven't mentioned and discussed yet here, obviously, it was in our report, but we collected from our Indian subsidiary quite substantial intra-group dividend. So if I color the background, so typically, we repatriate funds through different transfer pricing mechanism. And that's the prioritized method, and that has its reasons why we do it that way. But then especially now and when the cash levels were growing pretty hugely in India, so then there was a decision to repatriate in the form of internal dividend to the parent company, and then there is a withholding tax related to this kind of transactions in India. So we ended up paying EUR 2.5 million on this kind of intra-group dividend withholding tax in India. And that obviously impacted a lot on this second quarter. But I would consider that as a nonrecurring item by nature. And it's also good to understand that the parent company is responsible, for example, for all the major strategic initiatives. So the cash needs to be in Finland if Incap is pursuing for major acquisitions. So then it's handy that we obviously have the funds and cash in use for those kind of moves. So just wanted to little bit give color on that topic as well as I have seen some questions here and there on this topic.

Thank you, Antti. How about the customers? And there's a question about their end markets. Where is the majority of your customers' customers?

We, of course, have customers all over the world. And so -- but if we look at the majority of our customers are European based. But then their end customers in turn can be all over the world. So it's a little bit hard to say, but we -- many of our own customers are European-based or European companies, then we can deal with their subsidiaries in different parts of the world. So even in, for example, our U.S. business, we are dealing with some companies that -- some customers that are U.S.-based, but also have big business in that sense within the U.S. and same thing for the other units. So we have customers all over the world and so as our end customer -- or like they're our customers' customer.

Thank you, Otto. Then there's a question about strategy to avoid commoditization in the EMS industry. Not sure what that means, but maybe you do?

Strategy to avoid?

Commoditization in the EMS industry.

Commoditization, I don't know what can be thought about that in that sense. But I can say like this that everybody is very often talking about different segments when it comes to our business. And I see many of our peers, they even classify they have different divisions work for different kind of industrial segments. But we have never looked at them in that way. There is -- we rather look at that we produce complex electronics and then these electronics can be used in medical or industrial or in defense or in whatnot. So when you take a hammer to electronic device, then in principle, it's the same. You will end up with a PCP, you will have some perhaps buttons displays and some mechanical envelopes around it. And then it doesn't matter if it's a computer, some kind of tester or a mobile phone or whatever it is in that sense. So I don't believe that there is a very big difference in many of these segments that you normally see. So if we then talk about different commodities, perhaps that goes for the same in that sense that it's rather a point of view than actual practical, I would say, differences in the business. So in that sense, you can avoid it by having a different point of view. I don't know, I was swinging on that one. So let's see if that satisfied the listener.

We can take follow-up questions if it was not. But the next one is about your long-term financial targets. And is there anything you could share about them?

We have been talking about this before as well here and so that -- I still believe there is a sweet spot on the market. When EMS companies become big and so they become very rigid. And I think that there is very big strength in our operational model. And if we can continue to scale this up and be somewhere, EUR 500 million to EUR 1 billion company instead and keep on the same way to work, then I think there is a sweet spot on the market for that. Because getting bigger, most companies get very rigid and start dictating to customers what they want. And you will see that very often customers come from these bigger companies seeking more of a service approach and more of a tailor-made approach, and I think we can offer that by growing Incap as well. So that is what we continue to work with that continue to scale both organically and also through mergers and acquisitions, and we continue to pursue those actively.

I think this one fits well as a follow-up question. So how do you evaluate internal reinvestment opportunities versus returning capital to shareholders? And how do you prioritize between organic growth and further M&A opportunities?

Yes. And I think you should look at it in a little bit different ways. So first of all, internal investments. So I remember I had a long, long, long time ago when I was studying in university, and we had this old Swedish industrial guru as a teacher in Orebro University. And so -- and he very clearly was always pushing for that if you don't have any depreciations on machines, you have invested too late in your production infrastructure. There is always a machine cost in the equation. So this, I'm a strong believer in that you need to keep on investing in equipment, having the latest technology on stage. There is no sort of freelances that we depreciate our equipment and then we have 0 depreciation. It will cost you more in the long run to do it. So investing into your own manufacturing, I think, is a hygiene thing. Now you can always argue that if we now have a totally new business, opportunity that we need to invest in a new factory to set up compared to an acquisition, then those perhaps are a little bit more like comparable. That said that those opportunities will often come with existing customers and growing organically with existing customers, I would say, is always preferable towards growing through acquisitions. So we are evaluating those. But yes, you need to keep the apples apart in this and really think that are they comparable? Are they comparable to the potential acquisition or the potential investment in reality? Or is it so it's more hygienic that you need to do the investment to keep up with the latest technology development and then keeping up with having your production in par with your strategy needs.

Thank you. I think we could take one final question here, and it would be then that do you expect to finish any M&A transactions this year?

I expect to finish a lot of transactions every year, but it takes two to tango and we have an excellent team when we are and we have -- when we do due diligence and look into different cases and so on. And so far, we have -- you can argue that, yes, perhaps we have done fewer acquisitions than some, but we haven't stepped on any mines either in that sense. So -- and I think that things take time, and I'm not stressing it. We are earning money. We are having a healthy income. It's a healthy business in that sense. And I think it will naturally come, the right times for those acquisitions. That said, I can say I saw also in some forum some other question that I think that many of those acquisitions that some of our peers have communicated about here lately, are very familiar cases for Incap as well. So if that answers some of the questions, but let's see. I'm always hopeful, but if it will be this year or when, then I can say here and now today.

Yes. And maybe for the viewers that are new with Incap. So Incap is working very, very closely with the M&A team. So we have established an organization to do acquisitions. So we have also, of course, then external help on there if the case moves on the due diligence phase. So we have all the resources needed. We have the firepower to do those. We are constantly looking at different markets. And then interestingly, so Incap is working typically several acquisition leads on parallel. So 3 to 5 leads are always moving, meeting the owners and negotiations -- negotiating with the owners and making the valuation, doing the nonbinding bids and so forth. So we have a lot of, lot of activities ongoing all the time on the acquisitions at the moment as well. So then we are active on this one. And then always very difficult, obviously, to say closing timing on those depends on many factors and how the due diligence goes and do we find any red flags there that are showstoppers and so forth. But the more you keep pushing and trying, eventually you will get those deals that are good for Incap and that are good for the shareholders of Incap. That's the most important.

Thank you, Antti. So for my part and the IR team's part, I would like to remind here at the end of this webcast that you can subscribe to Incap's stock exchange releases and IR calendar on the web pages. So don't forget to do that. And now I hand it over back to Otto to finalize this webcast.

Yes. Thank you, Pauliina, and Antti as well. And thank you, all of you guys who have been listening in and are taking interest in Incap. I have said it before, reach out to us, come and visit. And me and Antti, we are always happy to take questions where we can, and if you have questions regarding what we are doing and things about Incap. As always, I hope everybody takes some time and try to enjoy the summer as well. And if they have the possibility, why not come here to Saaremaa and visit the Opera here in the Kuressaare Castle that Incap also supports with this year as we have the Jubilee year, where we are supporting some culture events and so as well. So that said, thank you once more for the interest and see you guys in a couple of months' time when it's time for the next one.

Thank you.