Inission AB (publ) (INISSB) Earnings Call Transcript & Summary

Thank you, Henric. I'm switching to English here since we are for the first time presenting our year-end report, both in Swedish and English. And for international listeners, if we have any of those, we will take this in English. My name is Fredrik Berghel. I am, as Henric said, the CEO of Inission. I am also 1 of 2 founders, me and Olle started this company in 2007. Now 15 years later, we are still the main owner, and we've actually not sold a single share so far. I'm really proud to present the best year ever and the best quarter ever in many ways. Our coworkers throughout the organization have done a tremendous job in the quarter and in the year because we have a lot of challenges out there, as you all are aware of, especially the component situation and -- but also sales increasing very rapidly. For the first time, we have sold for more than SEK 0.5 billion, and that is a remarkable achievement, I think, really. We have also increased now our stake in Enedo to about 96%, and there will be a squeeze-out process and the delisting, and we are working on that right now. The restructuring of Enedo was completed Q3, and now we have -- we are going forward with Enedo actually more on an improvement basis. As explained, we Inission Group consists of Inission contract manufacturer and Enedo power supplier. The Inission did also, of course, an extremely good quarter, best ever. Customer is continuing to place order in a high pace. We had a little bit lower order intake, nothing dramatically, but order book was thinking a little bit during the autumn. But end of this quarter, new big orders came in. So we are at almost at record level when it comes to order book at the moment. And we are scaling up now. Of course, we have component availability issues, but capacity is our main problem now. So that's why we are scaling up our production to meet demand. The same way with Enedo, they have also reached a really good turnover. And operationally, Enedo also did a very good quarter, I would say. Still though, some skeletons fell out of the wardrobe, cleaning up towards year-end. So the EBITDA and the EBITDA margin was not meeting expectations for Enedo, I could say that. So we had an extreme growth for Inission Group this quarter, 51%. But then we have to remember that we are due to the situation, selling material. we sold material for SEK 60 million in the quarter. So if we adjust back for that, we would be more like 36% growth, still impressive, I would say. EBITDA, SEK 28 million. That is also an extreme increase compared to last year's quarter since we were actually loss-making, I would revert to that. So all in all then, EBITDA, SEK 4.7 million, which is not good, but decent. Again, of course, we are diluting our margin here now with this extra sales. So if we correct for that, we are slightly above 5%, 5.2%. Regarding the component shortages and the situation in the market, it's dragging extra stock for us. However, Q3 was actually a little bit higher when we ended Q3 compared to Q4. So we have come down a little bit in stock, but the rapid sales increase and also material sales resulted in that we moved the stock into receivables. So cash flow-wise, we came out negative. And we certainly have an issue here now to stop the increase in stock and starting to convert profit into cash, of course. If we look at the whole year, we are now close to SEK 1 billion. Also for the year, we had a fantastic growth, 50%. Using the same correction here, we sold material for SEK 128 million. So that will bring down this impressive SEK 50 million to still impressive SEK 38 million, I would say. And also adjusting back the margin, the EBITDA margin, we will be a little bit higher. We will be actually 5.0% in EBITDA margin if we take away this extra sales that is diluting the margin. We are also happy for our last acquisition this year, MLB, which has performed extremely well during the year. We are also really glad that with this summer could discuss with the main owner, the other main owner of Enedo so that we during the summer made this share-swap when we increased from almost 50% to about 80%, actually by combining these businesses. So we're very, very glad for that as well. We have done a tremendous job, but not we really. It's more like our CFO, Mikael Fryklund and our Accounting Manager, Annie Axelsson. They have worked many hours with a change project here from K3 to IFRS. Even though we are not a huge company, we are enough complex company and also combining Enedo to make this dragging a lot of consultant hours to do this together with our own forces to do this transition. But I think even though all the hours spent, it is -- in the long run, it will be really worth it, not the least vis-a-vis the capital market. We will be -- it will be easier for all of you to compare more like apples-to-apples now with our peers. So I think it's worth it. And the thing here, there are a lot of details. And if you read the quarterly report here, you can see in the appendix in the notes there, all the details. But I will highlight a few ones for you here. There are some applied relaxations rules that we have used. Business combination carried out before [ 1st of 1 ] '21 are not recalculated. Translation differences are reset for 1st of 1 '21. Lease liabilities is measured at present value of the remaining lease payment. Right-of-use assets recognized amount equal to the lease liability. Adjusted for prepaid lease payments. So these are the relaxations we have done. And then we have implications from K3 to IFRS. We have reevaluation of business combination. Some notes there. We also had the valuation of intangible assets. Customer relations have been valued according to the [indiscernible] method and other useful life has been assessed to 13 years for all acquisitions. Brands have been valued according to Royal release method and the useful life has been assessed to indefinite for all acquisitions. We are now impairment testing of goodwill as per 1st of 1 '21 and forward, an impairment test of goodwill is carried out annually. No impairment has been assessed in any of the already carried out tests. Leasing, here, we have -- for me being an engineer, leasing is one of the big items what is happening since we are growing the balance sheet. We leased assets. And we are also putting in the right use on the asset side and lease debt on the debt side. So that is the big thing here. We have leases now for SEK 220 million in our balance sheet. We have blown up the balance sheet. Financial instruments, here, we have a new rule with IFRS, and that is that instruments are contingent consideration are measured at fair value. In the old K3, we only took in negative values. We never took in positive values. So that would be a change. Going to hard numbers then. If we see what's the effect of K3 vis-a-vis IFRS -- so in net sales, Q4 '22, there are almost no differences, as you can see. If we look at EBITDA, our main number that we report, with K3 be at SEK 28.45 million. Putting in these now IFRS considerations, we will be at SEK 27.45 million, so small differences. Net income, there you see a big difference. So the adjustment from IFRS is moving the net income from almost SEK 5 million to SEK 15 million, so a big difference there. If we see on the balance sheet side here on the assets, there are movement building up from SEK 1.378 billion, some big pluses and some big minuses and some smaller adjustments, ending up at SEK 1.57 billion, SEK 1.58 billion there. So quite an increase, yes. And also on the debt side, we are increasing starting with SEK 956 million going up to SEK 1.155 billion. So there you have the -- as a summary of the changes from K3 to IFRS. At Inission, we have an idea of profitable growth. And we see us growing. We see that as a value by itself. We think it's super important, but profitability is even more important. So when we have to judge profitability vis-a-vis growth, we always judge profitability. And we have all the way back since we started 2007, 2008 was our first year, we actually -- we had a turnover at that time of SEK 74 million and now almost at SEK 2 billion. We have grown 26x since. And if you have a shorter span here, we still have -- we have a high growth rate and combining that with not a high profitability, but with a decent profitability that we're very proud of. Of course, last year, '21 now, when we have recalculated to IFRS measures. And then you have to know that Enedo is now in -- 100% Enedo is in from 1st of April '21. So that, of course, boosts turnover, but it also pulled down the EBITA to minus SEK 80 million last year. So that would really be the exception. Looking at the 2 divisions now, as explained, we came from 49.6%. We increased to 80% over the summer, 96% during the autumn. So now Inission, Inission Group is old Inission, contract manufacturing and Enedo power supplies. The performance of this business area during the quarter was the Inission part performing very good sales and quite decent profit margin here. If we adjust for material sales here, we are on 6.8% in EBITA margin, which we think is okay. We are on a journey upwards, and I will revert to our ambitions there. On the Enedo side, we had a better Q3 than this. But as I said earlier, they were falling out a few skeletons from the Board. So we have to do some cleanup things. So unfortunately, the EBITA stayed at only SEK 2 million for the quarter. But from an operational point of view, Enedo has a really good demand from its customer and things are gradually improving, even though this result was a little bit of a disappointment. So just a few words of what we are doing. Inission, old Inission, the business area contract manufacturing, we are very much a Nordic Estonian company. We have a fantastic set of global customers in our customer portfolio that is, yes, world famous brands and very growing and really good customer base. Our customer value proximity. So that's why we are spread out like this on purpose, I would say. We also see upon ourselves as a total supplier. We have all the offerings in the life cycle here, all the way from innovation, product development, prototyping, industrialization, volume production, of course, and then looking after the product as its life ends. And we don't focus on any segment really. Our segment would be then industrial electronics, high mix, low volume. That's where we are targeting. Enedo is different to Inission in that sense. It has a more global approach. From a customer point of view, they also have a fantastic global customer portfolio. But they also have sales representatives all over the world almost. So they are more like a global approach. But the type of customer, advanced, customized, high mix, low, there you will find the similarities with the Inission. So there are -- there will be opportunities there for synergies in the future. So far, we have really operated these apart, but now we will step by step actually looking to see how we can do this better together. Summarizing then, we had a tremendous growth in the quarter. We had a tremendous growth in the year, even though, as I have explained earlier, doped by the material sales. All of our customers, both on Inission and Enedo side, they had a big demand. And when we talk to our customers, we see an increasing demand more or less all over the line. These megatrends that you could see them long before this tragic COVID and this even more tragic war. But these things, they've actually reinforced these megatrends when it comes to automation, electrification, not the least. And that is energy, clean energy. All of that is driving the need for industrial electronics in a very strong way, I would say. So at our Capital Market Day, 19th of January, we communicated for the first time in the history of this company, our financial targets. And I would say that our performance both in the year, but especially perhaps in Q4, are lining up here in a good way when it comes to turnover or revenue and profitability. When it comes to the capital structure, this transition into IFRS has blown up our balance sheet. So we are a little bit below now. If you use the old K3, we were slightly above 30. Now we are slightly below. So there we have an issue, of course. When it comes to the net debt, we have much more -- we have more EBITA now, but putting the lease debt into the -- for the net interest-bearing debt, that is also moving this KPI a little bit. But the main thing -- and we see -- I talked about material complications earlier, but we see step-by-step it's gradually easing. So our thinking is that during next half year, this would have been -- this will fade away. So next year at this time, we will not talk too much about material complications. We have also set forth long-term targets. And here, of course, the deviation where we are and where we want to be is bigger, not to grow really because we are growing very much faster. And we have an idea of how could this be achieved. And one important factor here is in our strategy, it lies that we will shift over from acquisition growth to organic growth. There is a market situation now. I have only been in this business for 15 years, but there is a market situation now with the demand that really makes this possible. So now our ambition would be to grow a little bit with acquisitions here and there very selectively and then grow by organic growth, 10%. And by doing that, we think that will help profitability. We also have now larger business unit within Inission, and we think that is also helping out. We have moved from an extreme decentralized sales organization to a little bit more centralized function within sales and within sourcing. So we are shifting. There is no revolution, but we are shifting a little bit the center of gravity there. There are also a change really and that you have seen for the last few years, I would say, the big players in the market, our big colleagues, they are not giving away production at low costs now to fill up factories because factories, as I said, are pretty much filled up all over the line as a general rule, if you speak generally. So all in all, that was what I have from me. Now we'll shift over if there are any questions, Henric.

All right. Let's have a look. The first question is you say the order book is going down, although it's high. How high is it?

We don't communicate the order book in millions, but we were peaking mid last year, and then it was slowly coming down, nothing dramatically, but we have a book-to-bill that was below 1 for a few months during the autumn. But now towards the end of this quarter, we are very, very close to all-time high again. So that is what I can say.

All right. Next question. Do you have any estimates or clues regarding where Enedo's margin will end up in the future?

Enedo is a turnaround project. All the main items are done. We have rightsized Italy. We have made Tunis stand-alone. We have taken necessary price increases. We have changed the organization. And so we have done -- the main items are done. But then now we are in an improvement journey. We are on an Inissification process. So step by step, we want -- we expect them to come towards Inission's profitability, 5%, 6%, but then Inission will move on. That is our ambition at least. But seeing it as -- seeing upon it as general product owner should have higher profitability than the contract manufacturer. So if we target long term or midterm for 10, they should be on 12, they could be on 15. So that's how it should be really. But that is not where we are now at all. Now we still have an improvement work to do. So I try to be clear with that.

All right. Also, what kind of products is it possible to cross-sell between Inission and Enedo?

All our -- let me put it like this. Enedo's products are -- they are a platform, but they are very often customized. So what Enedo is doing, they are doing power supply and they're doing power systems. If you put it really, really simple, call it battery chargers. And all of our -- all of Inission's customers, all contract manufacturer Inission customer, in their hardware application, you have to have a power supply. So that would be 100%. At the same way, a lot of Enedo customer is today purchasing contract manufacturing services. So it's not so much about products. It's more like services there. And then, of course, Enedo themselves, they are all -- they are buying EMS services for about EUR 50 million, which could be in-sourced, and we have started that work also. So there are -- and on the production side, Enedo has a factory in Tunis and power supply factory looks exactly like an EMS factory. So there, we see synergies also when it comes to operate the factory, processes, but also sourcing, of course.

All right. The next question is how much of the growth comes from new customers?

I don't have a figure on that, but that is a significant part because we won contracts '21 that was ramped up and is still ramping up '22. So the increase of -- now I'm talking for Inission, the increase would be -- a fair bit would be new customer, but I don't have a measure of that. On the Enedo on the other hand, they have -- their customer base is buying all what Enedo can produce. So Enedo is getting longer and longer order book. So their customer portfolio is actually asking for more than we are capable of producing at the moment. So there, it would be close to 0 new customer. And that is also perhaps the result of a reception process. You can't be out there chasing new products when you -- if you back 1 or 2 years in, Enedo was fighting for survival. And now 2 years later, they are really a coming company.

Moving on to the targets. There's a question asking, you say that you're aiming for an EBITA margin of 6%. Do you think you'll reach this, for example, in Q1?

We have not guided specifically. So -- but for the whole year, Inission and Enedo together, our target is 6%. But if we judge from Q4 then, the Inission was already on the target level for -- and Enedo also if we take the skeletons away. So we are performing not saying anything about Q1 because we can't play on nitrogen. I think Q4 already are on performing level on these levels.

Could you maybe expand a bit on what happened in Enedo this quarter? And how would you have expected it to perform if these things did not happen?

I can. As I said, performing-wise, Q3 was similar to Q4. Then you, of course, have the vacation and part of Enedo is Finnish. So you have the Christmas and New Year. So that will always take down, take away quite a few production days. So that would be a difference. But otherwise, performing-wise, Q3 and Q4 were very much alike if we take out those one-offs. So Enedo were performing on a 3.6% EBITA level for Q4, taking out the extraordinary things. We had the bad debt provision for a Russian company that we took out. We have a customer claim that we have made a provision for. We don't even know if we're going to use it. And there are some employee restructuring in Tunis, where there is also a claim that we have made a provision for. We also don't know if that is falling out. Tunis has over the -- late in the year, they simply raised taxes backdating the start of these tax raises so that you could actually see as a one-off. So all of that is building up to EUR 315,000, SEK 3.5 million. So that would have been the difference. So no more drama than that, no.

All right. I also have a question regarding the material sales. You said that they affected the results in Q4 more than usual. Could you expand a bit on what the effect was?

Yes. Material sales as a share of sales was higher compared to the whole year. So material sales in Q4 was SEK 60 million, whereof the material sales for the total year was SEK 128 million, just as a proportion. No, it's more like how it falls out. So it's nothing -- there is nothing new there. And it would rather be that these material sales will shrink over time rather than increase. That is how we see it. So it was more like a coincidence that we had a lot of those towards -- and then also towards the end of the year.

All right. If there are no more questions from the audience, I think we've been speaking for half an hour now, and maybe it is time to start wrapping up. Any final comments, Fredrik?

No. Again, we are very proud of this quarter, proud of our coworkers and the whole organization that have done -- during challenging circumstances, done a really good job. So we are happy and say goodbye, and we will revert with this in May when we are publishing our Q1 report. So see you in May.