Incap Oyj (ICP1V) Earnings Call Transcript & Summary

Good afternoon, and welcome to Incap's Q3 Results Webcast. My name is Pauliina Tennilä, 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 third quarter results, after which there is time for questions and answers. [Operator Instructions] The recording of this webcast will be available on Incap's website later today. So Otto, please go ahead.

Yes. Good morning from my side. I'm currently over in our U.S. unit. So it's quite early, and that's also the reason for why we started a little bit later than usual. So it's -- it's not too inhumane time for me. So I appreciate everybody logging in a little bit later. But yes, about the Q3 results. So we'll do it, of course, as always, we have a walk through with Antti and then we try to leave as much as possible time for questions. Third quarter, it ended and went as we anticipated. We had seen some uncertainties on the market and some postponement of some customer projects, and we flagged this already last quarter release and the outcome was what we expected. So a bit lower than we had last year and in that sense, low point of the year. We are quite happy with the profitability. We worked very hard with the different teams to protect our EBIT. And I think it shows the strength of our operational model that we can keep also with the lower volumes and less utilization, the same kind of double-digit EBIT throughout, even if some of the units were a little bit struggling. Looking forward, we see that the pipeline for Q4 is promising, and I think we have seen the low point of the year. And overall, we remain within our steering that we have given. So no surprises in the big picture. Impacting, and I think Antti probably can go deeper in this later, but impacting, of course, the result is also the foreign exchange, of course, especially when it comes to U.S. dollar and Indian rupees. And you see here the development of both. And this has had an impact on our figures as we wrote as well and should be kept in mind when you look at the numbers. We keep on investing, of course, and developing our business even if the volumes were a little bit lower in Q3. We have invested in India in new capabilities for flying probe and testing capabilities and also increase the SMT capability and capacity in India as we expect more demand here as we develop the unit. Also in Slovakia, we have done a milestone project changing the ERP and updating also the mass platforms and so -- and this will take the Slovakian unit into a new era when it comes to digitalization of the production. So we keep on adding on and developing our production infrastructure and that we take a lot of pride in. Something perhaps newer is also that we are doing some investments perhaps that are more value-driven investments when it comes to sustainability. And Incap is now solarizing and going in more and more into renewable energy so usage and so for our manufacturing. We have now installed solar powers in U.K. during this period and almost half of the U.K. energy consumption or electricity consumption will be covered by this. And perhaps the biggest investment was announced here just a few days ago on U.S. side, where we are investing in a major solar power, I could even call it solar power station. And there, we have the possibility to cover 100% of the electricity need of the U.S. manufacturing with sustainable energy. And so when we produce in the future in U.S., we will do it totally green when it comes to electricity. So interesting development and this in combination with our previous commitments and investments into renewable energy will take our group very nicely forward when it comes to our footprint and how we affect the environment. Also, of course, we, during this period, continue to work with our reporting, and we reviewed also the double materiality assessment that we had. And so we have done a lot of work also with sustainability and ESG during the period apart from the investments. Quality, of course, is in core of us and part of what I'm doing currently here in the U.S. is also reviewing the development they have had on the new ISO certifications. And they are now aligned themselves with the rest of the group when it comes to also environmental and health and safety certificates and done an excellent job here on implementing these new management systems and making our group now more unified when it comes to the different certificates we carry in the different units. So also a great job from the U.S. team. I'll hand over to you, Antti, you can dig in more deeper into numbers and then let's get back. And once you are finished with that, then I can comment on the outlook moving forward.

Yes. Sounds good. So then let's focus on the third quarter and then if we start from the top line, so we recorded EUR 51.8 million in revenue and EBIT was EUR 6.7 million, 13% in terms of the proportional EBIT percent. And then regarding the comparable year -- comparable figure quarter 3 '24, the delta is EUR 10 million. And as we also wrote in the release and explained, so there is various reasons and then 1/4 of this delta can be explained by the unfavorable exchange rate differences, mainly U.S. dollar to Indian rupee and then Indian rupee to euro. On this slide, we have illustrated the quarterly profitability and the revenue historical trends. And then yes, 13% EBIT is, of course, solid. And then we would like to also highlight that there was this exceptional item. So the net proceeding from insurance was explaining part of that one. So EUR 1.5 million impact booked under the other operating income in Q3 explains 13%. And then adjusted one, EBIT-wise was 11.1%. Inventory is illustrated here. There is a slight increase there, but then it's more or less normal to business fluctuations. Of course, then the net cash position is still very, very strong for Incap. So it's illustrated as a negative sign, even cash deducted by the interest-bearing loans is a negative sign, so almost minus EUR 39 million. So there's a lot of opportunities and firepower to move bigger strategic moves in that sense. Yes, outlook.

Yes, no, you can go as well. But yes, outlook, we remain or kept the same. So it's still valid that we gave that we estimate that our year will be somewhere on EUR 210 million to EUR 230 million and an operating profit of between EUR 23 million and EUR 29 million. So our outlook, we haven't changed and it continues on being valid moving forward. That said, as I mentioned in the report as well, we see a positive development when we look at now on Q4. And so -- but it's still within the given framework that we have seen. But I think we are ready for questions. So please shoot and we'll try to answer as many as possible.

All right. Thank you, Otto and Antti. Here comes the first question. So your guidance assumes a strong Q4. What gives you confidence that the target is achievable?

Yes. Q4, of course, we already know we are within Q4 already, and we know very well what orders we have and so that we are working on. So there, we have quite high confidence when it comes to the outcome. Of course, always can something happen, but it's very unlikely that we won't hit our marks in that sense.

So maybe a follow-up question on that. Is it based on already confirmed orders? Or is it more like the signals about improving customer demand in the Q4?

Yes. No, it's based on confirmed orders. When you talk about the running quarters, then we are already talking about actual orders. And so as I've said before, in the 3- to 6-month period, we know quite well what we're going to do because there we are already within the orders. Then we have some forecast and so moving forward from that. But within this short time period, then we know very well. So in our business, we are driving materials and so -- and these material lead times often are as long as 3 months or sometimes even longer. So we are very well aware of what we are going to do now in the coming months in that sense this is already production we have planned a few months back.

Yes. And just internally, we finished this quite extensive forecasting around in the beginning of October. So the feedback and the overview we received through this internal exercise is very much supporting this statement on Q4 and is actually the analysis behind this comment. We included in the Q4 report. And then yes, that's supported by internal analysis, yes.

How about the revenue and profitability? Can you comment anything about if there's differences between different units or different segments? How did it develop?

We normally don't report those separately and comment on that. But of course, there is always differences between the different units and depending on what customers they are -- so there's always a variation. That much I can say. But yes, we normally don't go into detail on segments or units.

And maybe that's related to the actual figures, but then how would you comment on the demand situation across different geographical regions? Do you see differences there?

Yes. I think still we see some effect of the U.S. tariffs and uncertainties in -- from some regions and there is -- keep in mind, there is not trade deals in place in all regions. So that, of course, is still in the background in that sense on some of the plans and demands. And so -- but I would say that in general, we see that there is growth in -- some growth in defense and, I would say, defense and aerospace, which we have a quite small exposure to still even if it has grown over the years. Then there's also around data centers and AI, an increase in demand. And of course, that infrastructure is normally the bigger Tier 1s that are taking. But we see, I would say, in projects around the infrastructure and so that there we see an increase in demand. And there, we are also active in that sense. So otherwise, I would say that the general market demand is quite flat in when it comes to classic in the industry and so we don't see any like huge increase in demand. It's more in these 2 sectors that we see growth currently.

Thank you. Maybe then a question about the financial expenses, and they were quite high. So how would you comment? Is that -- what is the reason behind high financial expenses?

So this is actually a very good question. And yes, indeed, it's a big number that we reported under financial expenses. If we start first a little bit understanding, so what that line consists of. So there are unrealized currency rate effects, realized currency rate effects and then leasing-related financial expenses and then typical bank loan-related interest expenses. So I think while I've been speaking with some investors, so the thinking has been that this whole amount, EUR 5.5 million are basically loan expenses that we paid to the banks. So about EUR 700,000 cumulatively are the payments that we pay over the loans that we have, so interest fees. By far, the biggest amount is unrealized currency rate effects, EUR 3.5 million from that total amount. And those are basically internal currency-related loans that we have granted to subsidiaries and then reevaluating those on the end of month -- end of month rate on the balance sheet. So these fluctuations explains the majority of that part. Then smaller amounts are related to the leasing liabilities, some EUR 300,000. And then there was a bit over 10% was realized currency rate effects. So biggest amount by far are the like currency rate fluctuations and the minority are really financing fees.

Thank you, Antti. And maybe while we are talking about the exchange rates, there's a question about if you could explain the effect of the U.S. dollar and the Indian rupee more in detail how it affects your top line?

Yes. So I think I already mentioned that so 1/4 of this gap between this quarters and last year comparable quarters revenue difference is explained by this difference. And it's just how the units are reporting back to the HQ and then we consolidate with the average rates and then compared to the last year Q3 figures. So then, for example, India rupee against euro has weakened quite dramatically. So from rate being somewhere around INR 90 equaling EUR 1 now we are far over INR 100. So there's like over 10% of fluctuation. And then when I'm getting their figures in the rupees as that's the functional currency of Indian entity and then we are converting -- just mathematically converting the figures to euros to consolidate the subsidiaries. So there comes this explanation and story behind this impact.

So perhaps to explain that the business in India, for example, is done where we buy and sell mostly in U.S. dollars. Then this is converted into rupees, of course, when we do the reporting that -- and first converted into rupees, then converted into euro. And so there's a lot of, I would say, mathematical exchanges that take place in between. And also perhaps for understanding for investors and so is that Indian business, we have 3 big factories there. So that business is mostly in U.S. dollar. Then we have, of course, our U.S. factory as well. And so the majority of the business is -- in Incap is in U.S. dollars that we trade and not in euro. Same we have our U.K. unit there we have, of course, British sterling, but majority are not in euros. So this is converted for the reporting into euro. And perhaps that gives a little bit more light on the subject.

Then there's a question about the inventories. And are you planning to increase inventories in the coming quarters?

Yes, that's good question in that sense that if volumes go up, then of course, inventory go up as well. And that said, we have been working on reducing inventories. And as you all remember, we had a big exercise on reducing inventories here when we were, so to say, overstocked with the destocking exercise we did here some time ago. But also that material availability is better on the market. And that means also that the inventory levels or that can be taken down and the materials we don't need to buffer up so much what we did here in the past. So I understand the question in that sense that is our current inventory level, which was a little bit higher than the previous month. An indication on the level. So yes, it's always some kind of indication, but you can take it to one-on-one because there's more factors into it.

How about the volumes for your largest customer? Can you comment on them? And how do they look going forward?

Yes. I wouldn't say that our volumes to our largest customers are stable, and we continue to serve them on a high level and so that said, we have been working very much together with them to reduce the cost for their products and find alternatives when it comes to different components that are cheaper and so to -- and that, of course, takes down the product price, even if we earn percentage twice the same money, then if the bill of material cost goes down in the product, and we will, in absolute terms earn less in that sense. So that is affected a little bit now when we look at this year and the then so compared to some years ago that we are producing the same or even higher volumes, but we are less because the work have been done with the products where they are getting it done cheaper and more optimized, and so perhaps to give a little bit flavor on. But it's part of the service we do and we try to help our customers to achieve their goal when it comes to cost levels and so on.

Thank you, Otto. A question about the shipments from India to the U.S., how much do you ship? And are you now suffering from these higher tariffs from India?

Yes, I don't have the figures on the last quarter, how much...

It's about 20% so far this year is the volumes going from India to U.S. I spoke with Murthy, fresh information from Murthy. So yes, that one.

So in that sense, it hasn't impacted so directly, but India and U.S. is still settling their trade and have not the trade agreement in place fully. So let's see where it ends up. But yes, we continue to shift to U.S. from India. And yes, we'll hopefully in the future as well.

And are there any regulatory or structural challenges for you in getting a larger share of revenue from the defense sector?

There is, I would say, no hurdles in that sense in any law rules or regulations or so. And we are working on increasing the defense segment as well. But you should keep in mind that these companies are old and conservative, and it takes time to qualify. And even if we have now qualified on with several of these bigger defense giants and it still takes time before that will become a vital part of our business in that sense. And that said, in the newer segments in defense, in drones and other in some more start-up companies in defense industry. There, the order is much, much less. And there we have, I would say, quicker developments, but defense industry is quite conservative. So it takes time. And also I think that if you look in the general concept of this, that we are not peaking yet in that sense. The defense model is still expected to go up and continue up and perhaps peak on somewhere on 2030 or so. So I think the work we are doing will pay off in that sense.

Okay. Maybe we can then move to the M&A topic, the past and the potential future ones. And here, there's a question about the U.S. Pennatronics acquisition and how have the cross-selling potential from that acquisition being already realized during the first 2 years that you have been working or operating as 1 unit?

Yes, I think we have quite good development when it comes to cross-selling opportunities. And we have several customers that are -- have been exploring and are exploring the possibilities and also we have some production started in this. So it has gone well. I think when we did the Pennatronics acquisition and several of our customers realized that now we are more globally positioned and look into possibilities to take advantage of that. So I think it has gone -- sorry, very well.

Then there's a question about -- you have a lot of cash on your balance sheet and plans with that? And how about the M&A pipeline and the valuation of the potential acquisition targets?

Yes. We have, of course, plans with that cash. M&A market is more active currently, and we have a good pipeline. Antti, do you want to comment, I'm losing my voice a bit.

Yes, sure. So of course, as we know, Incap is very much looking after different ways of growing, organic growth, of course, always is something we explore very, very aggressively. But then on the other hand, we see also this consolidation and a lot of opportunities on the market when it comes to acquisitions. And then -- but I think there's also saying here that recently and within past, I would say, 3 to 6 months period, there has been also like these bigger size acquisition targets, let's say, 100 plus -- around EUR 100 million and even higher figures revenue companies available. And then with the firepower and with very healthy balance sheet and then cash position and things like that. So then we are, of course, keen to explore all the potential targets out there. And then, yes, growing through acquisitions, obviously needs a pile of cash, and then it helps also to move quickly when the right target arises and so forth. So we are ready in that sense, if there is a good opportunity and the valuations and everything matches and culture and everything is there for us to grab. So yes, we are looking and ready to move quickly in that piece.

So if there's a lot of market activity, has that driven the target valuations up? And is that your opinion? Or how do you see the valuation.

Yes, I think we see somewhat higher expectations in that sense when there is more activity and then also more competition on some of these targets. So yes.

So then there's 1 question about alternative uses for the cash, which might not be in your hands, but how about buying back your own shares?

So I think that if we are not successful with M&A and so then, of course, there is a lot of possibilities there with share buybacks and dividends and so on, but that is more up for the Board of Directors. We and the management -- of course, we want to keep the money and have that as possibilities to make moves with. So if that answers the question.

Yes. And also from a management perspective, we see that the bigger you get, the company has better ways of succeeding also in the future just because you buy bigger quantities of materials and then buying in bigger quantities, you get better prices, payment terms, you can -- you will be more competitive in the market and when other companies are growing. So I think that's why how the management sees that we should invest in the business and growing on the business through ways -- in different ways. So whether it's organic growth and investing in the lines and the latest technology there or then there's other way, which is inorganic growth. But end of the day, to be sustainable business also from 10 years from now. So it's key that the business is growing and then staying competitive when it comes to these elements I mentioned.

Well, thank you, Otto and Antti. I think we have been going through the Q&A now pretty well. And so thanks everyone for active participation. And would you like to recap once more, Otto, the Q3 before we end this session.

Yes, I will try to do so before I lose my voice at least. So -- but as always, thank you for the interest in Incap and for everybody who is tuning in. We are always open to take questions. So take the opportunity, of course, here in the webinar, but also you can contact us directly or shoot them in the investor forum where we'll try to answer them. And, as I said, we are looking on positive development in Q4. And so this was more of a last quarter that's done, and low point of the year and now we've moved forward. So that said, thank you, everybody, and see you next time.

Thank you.

Thank you.