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

Good morning, and welcome, everyone. I'm Henric Hintze, Equity Research analyst at ABG, covering Inission. And with me here today, I have Inission's CEO, Fredrik Berghel, here to present the Q3 results. There is a chat where you can ask questions during the presentation, and I will then ask them when Fredrik is done presenting. With that, I think I'll leave it to you, Fredrik.

Thank you very much, Henric. Yes, welcome to Inission Q3 presentation. My name is Fredrik Berghel. I am one of 2 co-founders and one of 2 principal owners of this company. Myself and Olle started this company 16 years ago, and we are still both active. I am working as the CEO and Olle as working Chairman. Inission for today consists of 2 business areas. We have old Inission EMS contract manufacturing, and then we have the company Enedo, which is developing, manufacturing and producing power supply. Both these business areas are in customized high-end, high mix, low-volume industrial electronics. This is the agenda for today. I will take the numbers. I will explain a little bit the highlights of the quarter and then go through our financial targets, and then we will end with a Q&A, as Henric said. Yes. Running with last 12 months net sales of just over SEK 2.2 billion and an EBITA amounting to [ SEK 159 million ] or 7.1 percentage measured as a margin, then we are running at the highest speed ever and with the highest profitability ever. The quarter as such, our turnover was SEK 515 million, which corresponds to a growth of 18%, all of that organic. We have an earnings measured as EBITA of SEK 45 million or SEK 18 million more compared to last year, which corresponds to 8.8% in profit margin or 2.6 percentage points better than last quarter, which corresponds to an earnings per share of SEK 1.38, an increase with SEK 0.49. A high-level explanation of the very good result in the quarter is really the beauty of organic growth. This extra SEK 76 million that we were selling compared to last year. If we deduct the material, we have a net added value there of SEK 37 million more. And the cost of running those extra SEK 37 million is SEK 18 million, which gives then this extra SEK 18 million EBITA level. And that means really that every measured on the NAV value that every second krona higher NAV actually falls down all the way to EBITA, which we are, of course, very proud of and really emphasizes the importance of organic growth. If we look at the year-to-date number, the net sales amounted to SEK 1.6 billion, which is 23% more than last year, also that organic. We have an EBITA year-to-date of SEK 131 million or SEK 68 million more compared to last year, which gives an EBITA margin of 8%, 3.2% better than last year and earnings per share just above SEK 4, which is SEK 1.70 more than last year. The high-level explanation also for the year-to-date numbers are really the same as for the quarter. This extra sales falls through the P&L. So that explains the higher profit on a high level. I will get back to some details later. Just to explain what happened in the quarter, we have got a new CFO. We had an interim CFO for a while, but now we have John Granlund in place. John comes near from a company called SEGULA in Gothenburg. He is both an engineer and educated in finance. He has an Executive MBA from University of Gothenburg. We have also appointed Fredric Grahn, our Sales Manager as Marketing Manager or Marketing Director. Fredric has been with us for 10-plus years, starting off as a salesman and then for a while now being our sales manager, and now he will also be responsible for our marketing activities. For the business area in Enedo, we welcome Kalle Huittinen as a new CEO. Kalle is former Regional Division Manager for at ABB Large Motors & Generators Europe. He lives in Helsinki, but he also have experience from both living and working in Italy, where Enedo has its biggest daughter company. We have launched our 10th edition of Inission Innovation Award. We have started up a cooperation with South Pole in order to increase and also prepare for the sustainability work and sustainability measurement that we are -- will do for '24 and present '25. So that is quite an extensive work that we have started now there. We have decided quite recently to enlarge the factory in Malmö with about 50% to make room for more production. Our partner, Part Development is still keep on working with us, and they have now also started project in our Stockholm factory. They started off in Munkfors, as I have told you, and they continued in Løkken Verk and now they have moved on to Stockholm as well. So now they are actually working and developing 3 of our 6 companies, so to say. Regarding the component situation that has been a hassle for all electronics industry for the last 2 years. We see less and less of that, even though some lead times are still long, and there are still some, yes, strange behaviors maybe from both the producer of some components and also the distributor. But all in all, we have a more and more normalized situation regarding the components. We have a good order intake, and we have an order book -- the order book is shrinking, but it's also getting shorter in length. So order book or order backlog measured at next coming 3 months, we are still on record level. But the total order book as such has shrunk. And yes, we, however, foresee maybe a slower organic growth going forward. So that is -- that would be our prediction there. I have shown this picture before, but I like it. I show it again. Internally, at Inission, we have this '25 2025 as a slogan. And here, we have combined our ambitions, our financial ambitions and our sustainability ambitions with a means how to achieve those. From 2020 to 2025, we want to double the turnover, and we want to double the profitability. And we also want to be top 5 in profitability in the Nordics. And how to achieve this, yes? We want partly with the help of Part, increase the amount of flow production that we have in our factories. We are going towards carbon neutrality, carbon dioxide neutrality, and we are doing a lot of savings. We are changing energy consumption, and we are switching to green energy, and then we are taking this step by step. But 2025, we have the ambition to be carbon dioxide neutral. That is our ambition. We work with our employers to increase the employee engagement. On the scale 1 to 100, we are 70 and our ambition is to be 80 plus. As customer satisfaction index, we measure that on a 6-grade scale and that there we want to be above 5. So to the business area performance. I think the EMS portion of this group is doing a tremendously good quarter, both for the quarter and the year-to-date number. And then we have to remember that this is -- a lot of these factories or all of the factories are in the Nordic where we have vacation in this quarter. So doing a quarter like this in a vacation quarter, that is really -- we haven't done it before. So that is really something -- we also see that component prices has flattened out. So when it comes to our customer, our supplier increased price and then we increased the prices to our customers to compensate, but there are always a time lag there. Now we see that we have catch up in that time lag. That is also one of the explanations here. For Enedo, they are also doing a very good quarter compared to last year, which was about 0. The year compared to Q2 in Enedo little bit performing a little bit less. But then also, we have to remember that we also have a vacation period, both in Finland and in Italy, where we are doing the main activities. The factory in Tunis is still doing very well and are still on an improvement path going upward. We have decided and bought new SMT lines that will come to us late this year and hopefully up running early next year so that we can improve the Tunis performance even further. We presented in January this year, our financial target. And now as said, with SEK 2.2 billion plus in turnover and 7.1% in the EBITA, we are very comfortable of making the short-term target here. We are extremely comfortable of doing that. We also have a shrinking balance sheet, as you might have seen, which improved the equity ratio quite a bit. Net debt to EBITDA is also quite okay, remembering that we have our deal with the bank or covenant with bank language, we have 3.0. So there will be room here now to actually do investments, both in machines for improving quality and efficiency, but also to be able to make acquisition if we find good opportunities. And we are -- keep on scouting there, as we have explained. Regarding the more long-term or midterm goals, at least, I think that Q3 now shows that Inission are capable of running this 9% since we made 8.8%, very close to the midterm goal. Also the year-to-date number with 8% in EBITA, that is not far off either. And we work really systematically here now with our organic growth and with our profitability. And as I have said a few times, but I think it's worth repeating at Inission, we like evolution. We don't -- we are not so fond of revolution. We are steering towards larger business units. And this year, [indiscernible] Stockholm and Lohja has become substantially larger by co-organization and co-location. So we have very much bigger factories now and companies compared to a few years ago. We invest in organic growth by having central sales resources. We also have central sourcing resources. We keep on, as I have explained, working together with Part Development to improve our internal processes, to be more efficient, to be more productive, to have higher quality. We also invest continuously in new machines that also have higher productivity and higher quality output. There is also a balance in the market, and that has been like that for the last 1, 2 years. So there is very few of our colleagues now chasing job with price. So we don't see that. So we think that is very good. And we also have an underlying growth in this in the industry that we are in due to the megatrends, electrification, automization, robotization, Internet of Things. And then we have this regionalization of the world, good or bad, you can debate on that on a philosophical level. But this means that we are -- we see job coming home from Asia, reshoring, they call it, yes. So then I have used 16 minutes to explain our Q3 activities and results. Then Henric, do we have any questions?

I'll start us off with some questions of my own. If anyone does have a question, feel free to post them in the chat. So this was obviously a very strong quarter profitability-wise, as you mentioned, impressive to achieve that in Q3 of all quarters as well. What would you say that this means for the profitability level in Inission going forward as we go into Q4 or even further? Is this level of profitability sustainable? Or will it be even higher in other quarters?

I think this is to be a holiday quarter, it's maybe not sustainable, but to be a normal quarter, absolutely. I mean this -- I think where we are now when -- with prices to our customers, with efficiencies in our factories, and we have been -- in some of our factories, we have been running with high load, and that is okay. But in some other factories, we have been running with overload. And that has created inefficiency when we have to put in new employees every week, every month and the number -- and that is not the problem either. But if that is -- if the share of new employees becomes too high, that is actually taking down even the capacity. And of course, it's a disaster for efficiency. Now we see that our employees that came in a year ago, half year ago, they are starting to get more familiar how we work, how we do things so that the efficiency there. And when I say efficiency, I mean the combination of productivity and quality has improved significantly. So absolutely, I think this is doable for the future, and this should be the sustainable level. It's not where we want to be midterm because I think we have -- we are on an improvement journey when it comes to profitability. Absolutely. But also, it shows, as I said in the presentation, it shows that if you can push through more sales through the same factories, organic growth, that is really helpful here. That is really helpful here. Yes.

But what was it that made you say that maybe it's not sustainable for a vacation quarter? Was there anything special this Q3 that made it so good?

No, not -- there are no one-offs or like that. But still, we all know that when we have more or less in a quarter or 3 months, most of our employees are back home for one of these 3 months. That is normally -- if I -- historically, Q3 is always lower in profitability for that simple reason. Sales goes down, and that is also this if you compare Q3 now with Q2, sales is coming down. So normally, it is difficult. It's a challenge to keep up the profitability. So now I think we have this -- we have good circumstances coming with us here. As I said, we have the components floating in and disturbing us a lot less compared to Q3 last year. We have higher efficiency in the new employees, as I have explained. We have a good mix also. There is a mix factor here, meaning that material share comes down a little bit. But that, I rather place in the bucket of price increases catching up with price increases of component coming to us. So I don't think that is a vacation effect really. So we -- yes, yes, I am there.

All right. Sounds good. So you talked about that the order book is shrinking a bit, getting a bit shorter time-wise as well. But you also say at the same time that you're still seeing good demand. How do you think this will unfold as we move into 2024?

Yes. We haven't guided for 2024, of course, but we see that this increased -- I mean, we have an order buildup where we had a situation. First, order building out, component shortage, capacity shortage. And we have been now increased capacity and shipping out this order backlog. So the organic growth we see this year and also this quarter is partly orders that we have pushed in front of us that we are shipping out now. So meaning that is a little bit, how should I put it, [indiscernible]. So -- but I still foresee organic growth, but not perhaps on 20-plus percentages, maybe half of that. And that is perfectly in line with our midterm goals, actually growing 10% organically. That is where we want to be, but growing 20%. We don't foresee that next year. No. All right. But we also -- just saying this, we -- having this huge workload in front of us, we were afraid that our customer has overbooked. And we can see that in some of our colleagues in the business where their customers have actually overbooked. So now they are destocking. We see some destocking, some customers, but very little effect of that. But we have been afraid of a hard brake here. And now we are so far in this process, and we have we are shipping in that speed now. And all the products we ship, our customer really wants those because we are still behind. And some factories, we are still pushing some jobs in front of us. So there are still a little bit of this order backlog actually due to be shipped out. And we have an order intake in a very good speed, but maybe not in the speed that we are running now. So more -- the situation will be more normalized. That will be my prediction, yes.

All right. And could you also just clarify a bit. Cash flow this quarter, operational cash flow took a bit of a hit from current liabilities changing there? And you mentioned the COVID-related tax deferral affecting this. Could you just clarify exactly what?

Last year, we have to remember that we used to finance us. We used this COVID loan -- tax deferral loans. So just for the comparison purpose. But the tax -- the cash flow now this quarter 7-something in. We have a good profit. We have stock standing still. We have receivables standing still or even -- so we are earning from the profit, the inventory and the receivables, plus, plus, plus. But then we are paying -- we are paying off debt to mainly to -- yes, there are some, of course, other debts, but mainly we are shrinking in payables. And one reason there is really that our business area in Enedo, they have been behind paying their payables. So their payables, that is a portion of this. It's not all, but there is a portion there where they have catched up with payables due actually. So that has been happened. And that will not happen again. And -- but then we also have the pattern. We also have the pattern when our -- and that is the biggest reason here really. We are buying too much, our stock increased, payables increased. But now when we are increasing capacity and the order backlog is still not growing because we have improved our capacity. Now we are in a situation where we are not buying so much to our factories. We are actually using the stock instead of putting in new material. So we have a swing effect here. And that is the biggest reason why payables have come down, so payables may be more on a normalized level. And that will not further go down. So I foresee actually payables from this level either comes back a little bit or stays. And I foresee receivables also quite stable. But hopefully, now with this improved capacity we can actually decrease our inventory. So I foresee a quite strong cash flow in Q4. That would be my prediction.

Just to double check, did you pay off any of this tax deferral for this quarter?

No.

Okay. So what exactly made the change in liabilities be so high, SEK 86 million.

Yes. The comparison quarter there when we had the state loan of SEK 119 million. That's why the comparison quarter, Q3 '22 was extremely high in cash flow because we brought in those SEK 119 million. And those will be paid back now in Q4 a little bit, so that will drop out from there. And then also -- but we have them in our debt, of course. So from a balance sheet point of view, that meaning that you are shrinking our balance sheet and or replacing them with our because we have come down in using our factoring. We have come down in using our cash credit. So maybe we are just switching credits with credits here. But from a cash flow point of view, it seems like a huge shift here from last quarter. That's why I put it there to explain it. Yes.

All right. Thank you for that. Unfortunately, we seem to have some technical difficulties with the Q&A chat. So we'll have to wrap it up there, unfortunately. But thank you all for listening anyway, and have a good day.

Thank you very much.