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

Good morning, everyone, and welcome to Inission's Q2 presentation. My name is Henric Hintze. I'm an equity research analyst at ABG here to moderate this call. With me, I have, of course, Fredrik Berghel, CEO of Inission, who will present the Q2 results in just a moment. Please ask any questions you have during the presentation in the chat and we'll get to them at the end of the call. Please go ahead, Fredrik.

Welcome to Inission Q2 presentation. I am Fredrik Berghel, 1 of 2 co-founders of Inission. Me and Olle started this company 15 years ago. We are still both active. I am the CEO of the company and Olle is the Chairman. We have now Inission Group consisting of Inission EMS, the old contract manufacturing company and also Enedo, which is an OEM company, and they provide power supply for advanced industrial electronics. So, to the hard numbers. We had an excellent growth and good profitability in the quarter. Our net sales amounted to SEK 562 million, which is 23% more than the same quarter last year. Also, the EBITDA was fairly good, SEK 41 million, which is SEK 27 million more than last year, quarter 2, which will give a margin then EBITDA margin of 7.3 percentage, meaning also that the earnings per share has increased significantly compared to last year. If we want to explain this profit increase on a high level, it's actually a matter of the beauty of organical growth, this extra SEK 106 million. Then if you deduct the SEK 62 million material, material share of 58%, then that gives our NAV net added value increase of SEK 44 million. And to produce these extra SEK 44 million in value added for our customer, it cost us SEK 17 million, meaning that actually these SEK 27 million is dropping all the way down to EBITDA. If you measure that as a percentage, actually, over 60% of the NAV increase goes down to the EBITDA. If you measure it over the net sales, 25% goes down to EBITDA, which we are very pleased. If we draw out the time line a little bit and looking at rolling 12 months or last 12 months, our sales last 12 months was SEK 2.154 billion and the earnings measured as EBITDA, SEK 141 or a margin of 6.5%. This means, as you can see on the graph here, that we are running on higher -- the highest sales speed ever, record level and also the highest profitability ever. As a [ curious scientists, ] we can compare back in the days when we started the company, our first full year 2008 was our turnover were SEK 74 million, meaning that we have actually increased the sales speed here 29x over these 15 years. So to summarize what 1,000 people have been up to in 3 months in 1 slide is, of course, not easy, but I'll take the highlights. 20th of April, we had a customer supplier and partner conference held in Stockholm, which was quite a success. We had the CEO of Volvo Construction Equipment, Melker Jernberg, as one of our keynote speaker. And we managed actually to get the real decision-makers of our customer to come and work with us the full day and also spend the evening with us. So we saw that as an amazing success. We have also, together with ABG, started a liquidity provider. We did that 28th of April. At the shareholder meeting early May, we decided or the company decided about the warrant program for all employees. Back in the days, when we became public, one of the real reasons being a listed company for us that is since we are entrepreneurs, me and Olle, we also want our employees to be able to be shareholders. And this warrant program now that we have been running for the whole time is really an enabler for our employees to be able to be shareholders on almost a risk-free level for them, but they still have to make the investment when they decide to -- when the warrant program is over. We are, as I have talked about earlier, going towards larger business units. So, out of Boras and Malmo, have we now created Inission South. So we have the production in 2 facilities, but it is one ERP system. It is one management team. So it's around as one company. The same has been done in Vasteras. Where the production personnel has joined the Stockholm forces. And then we have name changed the Vasteras company to Inission Innovate, and that is our engineering company. That's why we provide engineering service, product development services for our customers. We also have delisted Enedo now, and we have 100% ownership of Enedo. We performed also in June a share issue where our main institutional investors took part. And we also are welcoming a handful of quite reputable new institutional investors. So we regard this as quite a success. We decided just before summer also to make a major investment in our sheet metal factory in Tallinn. So there will be -- we have ordered equipment for about EUR 2 million that will come just before Christmas. During the quarter, the component situation has become better step by step. We still have trouble. We still have quite long lead times compared to a normal situation. But still, we -- the situation is getting better and better, and that helps us, of course. We have a strong order book. So our -- even though we are actually shipping -- building and shipping and almost record levels, we -- our order book is not decreasing. So we have a strong order taking in the quarter. We also see new movements in the mergers and acquisition market. So we have been invited and will participate in a handful of processes. Nothing, of course, decided, but still, we -- the situation is loosing up for sure. 2025, we have an internal slogan where we have combined our midterm financial goals and our means. And our business target is also combined with our sustainability targets in this slogan, meaning that the EMS portion of this group will double the turnover from 2020 to 2025. We will also double the profit margin. And by that, becoming 1 of the top 5 Nordic contract manufacturers. And we will do that by increase the amount of flow production in our production units by June. We also aim to be carbon dioxide neutral by 2025. And since we are service company, of course, all comes back to our employees. So by increasing our employees' engagement level from -- on a 100-grade scale as a standardized measurement that we're using, we're going from 70 plus to 80 plus or an increase of 20%. And then not the most important is, of course, our customer satisfaction. So on a 6 grade scale, our target is to be above 5. So financial performance on business area level. There, you can clearly see that Inission is performing much better compared to the last first half year. The quarter itself was maybe a little bit slower compared to Q1. But there, we have -- on the top line level, we have less material share due to less problems in the component market. So it's about SEK 12 million less that we are just selling through material. And then we have the calendar effect also. The Q2 is actually shorter production days. And in those factory of ours that is really fully loaded or even overloaded, there every production day counts, that is also decreasing the volume. We also have negative currency effect in the business area Inission because both the euro and the dollar were significantly stronger, 4%, 5% stronger Q1 -- Q2 compared to Q1. So that is hurting us. We also are putting in -- pulling in or attracting a lot of new employees, especially in our Munkfors and in our Lokken factory. And when you bring in perhaps a little bit too much new people at the same time, that is taking down the efficiency somewhat. So that's where we are with the Inission unit. Business area in Enedo, they are performing on a record level since we acquired them. They are doing extremely well in the quarter. And this is much due to a lot better logistic function in our own factory in Tunis, where we now have a throughput that we never have had before because we have the orders. So now by being able to produce in higher speed, that has improved the situation. We have also been able to put up the prices, and that is impacting the result now. Actually, component prices going up. We increased prices, and you can see now how that we are sort of catching up now when component prices, both availability has become better, but also prices are not increasing at the same speed anymore. So we are not -- we're always behind there, but now we are sort of catching up. January 19, we held a Capital Market Day. So if you haven't seen it and have an hour to spend, I can recommend it because we are presenting there for an hour, a little bit more in detail, of course, what Inission is about and also Enedo is about. And there, we presented financial targets, and we made short-term goals for 2023 and then also midterm goals. And regarding the short-term goals, I feel quite comfortable since we are already on last 12-month level now running on a higher speed and have a better margin. And also due to our performance and also that we made the new emission that I just talked about, bringing in SEK 22 million has also lifted our capital structure. So our net debt over EBITDA ratio is now 2.3x. This which is below our target, and it's also well below our agreement with our bank, meaning now that we have the possibility to both do acquisitions and invest in machines where it's needed. Also, our equity ratio are now above our target. Then if we talk midterm, 3, 4 years, of course, the target is a lot more stretched and more ambitious. But still also here, I feel quite confident. If you look at the first half year, we are growing far above the speed here what we have as a target. We also have an EBITDA at 7.6%. So it's -- we're only 1.4 percentage point behind, and we definitely have the chance to within a few years to increase EBITDA. Of course, if we keep on growing organically, that will help a lot. And we are also developing the company, of course, what I just talked about going towards larger business unit is helping us. We will do acquisitions, but maybe less than in historical where we have been really acquisition-driven. Now we have weighted over here. So our acquisition growth will be 5% of the total. And the organic growth, our target is to be 10%. So we are weighting over towards organic growth, super important. So less acquisition, but those we do, and they should also be with higher quality, if I put it like that. We are also hiring resources and organizing ourselves to have central resources for sourcing and also for sales to enable this. We also, of course, work further with our process development using our consultant help there with part development. So they have now -- they have been in Munkfors. They are right now in Lokken, and they will move on from factory to factory to introduce more efficient working methods. And then, of course, we need to and have already and are doing systematically investments faster, more efficient machines and automation equipment. It's absolutely needed. Also another way or reason I think it should be really possible to reach this 9% EBITDA is that we have a market situation now where our competitors is growing or colleagues, if you so wish, they are growing, but the market is also growing. So there is actually a much more balanced situation in the EMS market. I have only been around for the last 15 years, but I haven't seen this balance in the market during these 15 years. And we also have the underlying growth. We have all these mega trends that is driving the use of electronics that we have talked a lot about. And so we see that there is an underlying growth of perhaps 7%, which, of course, makes it easier to be growing ourselves. So that was what I intended to tell you. Hopefully, now we have some questions. So I leave the word over to Henric.

All right. Feel free to ask questions in the chat. I'll ask some questions of my own to give you some time to type them. So Enedo, Fredrik this was a very good quarter if you look at the Enedo margin of 8% on EBITA, quite a bit above the 4% target for the full year. Could you talk a bit about how you achieved that and what we can expect going forward?

Absolutely. Of course, Enedo is on a recovering path. As I have said before in earlier presentations, Enedo as a company has been mismanaged and underinvested for so many years. So now we have been the owner for 2 years. And step-by-step, we have done things a lot better. What is happening now really in the quarter, both Q1, which was okay, but now in Q2 also, we see the effect of the changes or the improvement projects that we have been running. And one -- and then we don't have to talk about the rightsizing on the Italy organization. What we see now is more like we are moving over the responsibility to the Tunis factory. So they become more of a stand-alone unit. It's not ready by any means, but we are on that journey. So -- but the highest throughput in the Tunis factory, that is really the key here in this quarter where we have a lot better because we have had orders coming in and piling up a huge backlog. And now when we are able to build and ship that backlog, that is why this is happening. And then the cost is almost the same really. So the better logistic function, better performance of the factory. And also, we have been -- I mean, the EMS industry have been talking about component problematics. But that have been the same for Enedo. There have been components missing there also, and that is easier now. So that is really what is happening.

So the increased throughput in Tunis was more the driver than the price increases.

Price increases is also, of course, important since we have had a material situation where we have chased increase prices for components, we raise prices to our customers. And yes, you could think that we should raise before, but we are not really in that position. So we are second there worldwide. So what we see now is that component prices is flattening out, and we have catched up. That is what you see. Yes.

And what can we expect going forward here that you're so far above your targets?

Yes. I think we should be humble though because it's -- they are on a recovering path. So doing an excellent Q2, but we have good expectations forward also, of course. But we have to be humble. And it can be a little bit bumpy also going forward. But the trend is -- the way I see it, the trend is extremely clear. And Enedo being a product company, I mean, they should be able to have in the long term, really long term, they should be able to have better margins than contract manufacturer. And our products and perhaps especially the products that we are running in Tunis that comes from Italian design, they are really appreciated from our customer, and we have really, really extremely interesting customer accounts there that appreciate the design, the capability of our engineering work that comes into our products. That has been invested then, of course, in product development, yes.

All right. You also mentioned that component shortages are improving. By how much have they improved? Is it still a problem? Or is it kind of negligible at this point?

Yes, it's, of course, very, very difficult to give a number on that. But if we put it like that, if we go 1 year back or 1 year plus back, it was really the component that put the limitation for our turnover or our sales. That was really stopping us. That was the bottleneck. Today, now, and already, as I said last quarter, component is not the bottleneck for us now. Sales is not the bottleneck either. It's production capacity that has been our bottleneck in this quarter. And what we are doing there that is investing in machines, as I said, the Lagedi sheet metal factory, we have had bottleneck machines there. They have been running 24/7. And the only way for us to actually have higher turnover from that unit that would be to have new machines, and we have decided to buy those. The same goes actually both for our Munkfors factory and also our Lokken factory. The output, the orders is there and the customer are -- they are not all happy when we are pushing orders forward. And that is also reverting back to Enedo. That has also been the situation in Enedo. We have been forced to give longer lead times for new orders. And on top of that, we have also pushed the existing order book forward because we have overloaded the factory, oversold the factory, unfortunately. So now we are hiring people, and we are investing in machines. So that is what we are doing. But you can do that to a certain extent because -- and we are at the limit there now. We can see that, as I said, from efficiency point of view. If we load -- it's the speed when we load when we hire new people is too high, that will affect out, unfortunately. So it's a balance act. It's a balance act. And then, of course, we try to load-balance within the group. We have possibilities to move work from Munkfors to Tallinn EMS, and we are moving work from Lokken to Malmo for example, or Lokken to Boras. So we do that. But that is also a time -- there's a time lag on that work also.

So we have a question from the chat here. You've made some changes in the company with regards to the organization. For example, Mikael Fryklund going from Enedo and Olle leaving the operational role he had before. Could you talk a bit about this?

Yes. Mikael Fryklund has done an excellent job turning Enedo around. As I said, it has been a company that has been 0 or minus for the last 15 years. And to turn that type of organization and that company culture around that is quite a heavy work. So Mikael has done that extremely well, and it has been a little bit project oriented. Now when we have come through the worst part from there, we have to lift the eyes and look further into the future. What about the product program, what about the new customer, what about product development. And there, we think that our new manager, Kalle Huittinen is -- would be a better person to lead Enedo from where we are now because now we have -- we have survived. We have made it profitable. But now we've also had to work so that we get growth -- secured growth also for the future. So that is the shift Mikael, Kalle there. And Kalle has an excellent career within the ABB structure. He's extremely well-known in Finland. So it's from the industry. So -- and he has also lived and worked in Italy where the main portion of Enedo actually has its brain and its operations. Olle leaving, yes, that is too sad. He is the producer of this webcast, among other things. And we have been working together these 15 years, but he has come to a point in his life where he -- he doesn't want to work 60 hours per week anymore. He thinks like 40 would be more suitable. And by being a working Chairman of the company, he still will be around, but he will not be operational anymore. And we think we have appointed Fredric Jansson as our new Marketing Director, and he is excellent. So -- and Olle is there. So we can tap off whatever experience and knowledge continuously, of course. So we see this as -- yes, it's part of the future that we have to change people, and we have to do that continuously.

All right. Another question from me. You wrote a bit about acquisitions in this report that you're noticing that the M&A market is becoming a bit more attractive. Should we interpret this as you may be looking to get something done this year? And if so, how do you feel about your current debt level with regards to a possible acquisition?

As I said, and we have communicated that with earlier quarterly reports that we have actually -- due to our own capacity level, we have had the Enedo project to take care of, and we have limited resources centrally that is working with this. And they have been really focused on Enedo. So that has been one side of that. But there has not been so many objects either. What we see now quite clearly is actually people are calling me and mailing me and saying, "Hey, what do you think about this?" So there will be definitely chances for us to make deals in the future. When they will occur and how they will occur, we will not speculate in. But if it's -- if we talk about midsized -- small or midsized add-on acquisitions, we think or have the idea that our debt or leverage level now can accept that. If we come through more substantial acquisitions, yes, then we have to deal with that differently, then we have to go back to our owners most likely. But we are not there yet. And we don't have that kind of projects in the pipeline either at the moment, no.

All right. You also mentioned that Inission was hit with some negative FX effects on the profitability level. Could you just expand a bit on how much you're affected by this and why?

Yes. As said, I think we are losing -- we are losing out on top line, but just pushing materials through doesn't create added value. So that also gives us our higher gross profit. So -- but what is happening in the quarter is the euro and the dollar is -- we are losing out about SEK 5 million on that. We are also losing out or we have increased quarter-over-quarter, Q1, Q2, we have increased costs for employees. And of course, we need to have higher cost for employees if we want to run faster in the future and if we want to get rid of the backlog, but that is costing somewhat inefficiency. So a few millions there also. And if you count that back, you will derive to Q1 profitability, yes. But then also, of course, I mean, if I talk about negative currency impact for Inission, of course, the Inission group and the top line, if you measure quarter over the last year's quarter, of course, the euro being substantially higher, and we also write that in the report. Top line is actually are driven also partly by a lot higher euro now and our euro companies, especially then Enedo that is substantial. That is affecting on the plus side. It doesn't help the margin, though, because the cost -- all the cost goes up in euro also, but the growth is partly affected from that.

All right. Thank you, Fredrik. If there are no more questions from the chat, I think we will end it here. So maybe you want to say some final words, Fredrik.

Yes. Thank you for listening in. Those of you that have done that, we are optimistic about the future. We have, as I said, a good order book. We are structuring ourselves better and better. Evolution, we always talk about within Inission and not revolution. So we are improving step by step from where we are, and we are quite optimistic for the future. Thank you.