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

All right. Good morning, everyone, and welcome to Inission's Q2 presentation. My name is Henric Hintze, and I'm an equity analyst at ABG Sundal Collier, and I cover Inission, and that's why I'm here to moderate this presentation today. We will start with a summary of the report from CEO, Fredrik. And after that, we will move on to a Q&A session, which I will moderate. If you have any questions during the presentation, please ask them in the Q&A and I will read them out for Fredrik to answer afterwards. With that, I leave it to you, Fredrik.

Thank you very much, Henric. Welcome to Inission Q2 presentation. My name is Fredrik Berghel. I'm 1 of 2 co-founders and 1 of 2 principal owners of Inission. Myself and Olle, we started this company 17 years ago, and we are both still active. I am the CEO and Olle is the Chairman of the company. Today, as we have said a few times now, Inission Group consists of old Inission EMS, contract manufacturing of industrial electronics and Enedo, which is a company that develops, marketing, selling and producing power supplies. Both these business areas are operating with customized high-end, high mix, low-volume industrial electronics. I will present the Q2 financial performance, go through the main items, what we have been about in the quarter. And I will also finally comment our targets, financial targets. And then as Henric said, we will end with a Q&A session. So to the hard numbers. Reported sales increased 1.4 percentages to SEK 570 million. However, adjusted for the AXXE sales, SEK 46 million, sales decreased SEK 38 million, meaning that we had a top line organic drop there with 6.8%. As a high-level explanation of the Q2 result, I would like to comment that due to lower top line, our net added value and the way we count that, that is revenue minus direct materials, that is the money that we are living on, is actually SEK 9 million higher compared to last year. But then if we again adjust for AXXE here, that is new in the group. AXXE have now in the same period was SEK 20 million, meaning that our net added value was SEK 9 million less. Cost level-wise, we are SEK 20 million up compared to last year. But again, AXXE adjusted, it's SEK 5 million up for the group. All in all, that gives an EBITDA of SEK 29 million, which is then SEK 12.6 million lower than last year. AXXE contributed in this program with SEK 4 million of that money. I talked a few times last year about the beauty of organic growth. Exactly the opposite happens now when we have organic decline. We are losing out net added value, and that requires that we need to stay back on cost here to maintain our profitability and margin. Lower financial cost, I will talk a little bit about our bank procurement later, but we have lower financial costs now, and we will see that also coming forward. But then in the period, we also had a currency-related cost of almost SEK 4 million, which brings down the earnings per share to SEK 0.65 or 65 ore, Swedish ore. And important now for the organization and for Inission is, of course, to lower cost level here. We have started braking, but there is a time lag in braking. And some of the factories that are still doing well, they are perhaps not braking. But the factories that are running now on lower volume, they are breaking, but it takes a little bit time to have these cost cuts come through, and that is where we are fighting now. But forward, we have to do this even harder. If we zoom out a little bit and look at the longer time horizon, I think we have had a fantastic journey. If we look -- also look at the last 12-month numbers, we have a net sales of just over SEK 2.2 billion. We have an EBITDA amounting to SEK 167 million or 7.1 percentage as a margin, meaning really that we are running slightly, slightly faster LTM compared to '23, but profit margin and profit are lower than 2023, a little bit. So over then -- sorry, over then to the split between the business areas. I think if we look at the first half year for business area -- in Inission EMS, we did it reasonably well. We have a NAV in the quarter adjusted for AXXE that is on the same level. And I think that is -- since we have lower sales, I think that is -- I consider that good. However, then costs are SEK 3.2 million higher compared to last year. So all in all, that gives in the quarter an EBITDA of SEK 4.1 million. So of course, the same goes for Inission EMS as for the group. we need to come down in cost there, and that is the message to the whole organization. Looking at Enedo, the top line drop is severe. They are down almost SEK 30 million, SEK 28.6 million in the quarter compared to last year or 20%. And of course, that is difficult to catch up. And out of these SEK 12.6 million that the group is below last year, SEK 8.5 million of those is related to the Enedo program. Also Enedo is saving back. But again, they are braking and they are trying to save back costs. But year-on-year, if you measure it, they are slightly up. Of course, then we have to remember that we are shrinking in headcount a little bit. We are saving back, but we also have all costs with inflation increasing here. So that has to be remembered. Here, we have a more challenging, I would say, cost-cutting situation because we -- since we took over Enedo, we have shrunk it to profitability. And we have almost somewhere and in some functions, we have cut quite close to the bone here. So shrinking further might require, if needed, then structural changes. But we are doing our best here actually to save back and see where this takes us. So over to some descriptional story then, what we have been up to in the quarter, some main items. Inission Syd have invested totally in new equipment in the factory for the SMT line, which is the heart and the core of electronic production. Inission Board have also, in the period, decided to prepare the company to change to NASDAQ main list. So we have started that project. All the consultants needed to run this have been appointed and made contracts with and the first meeting are starting there. So we think early next year, somewhere Q1 next year. And the main reason for this is to get perhaps a little bit more attention in the media coverage, but also to be able to attract especially international investors. So this is a long-term thing really. We listed ourselves at NASDAQ First North 2015. And now we think the size of the company and the strength of the organization can actually carry this next step, which we find quite natural. New equipment have been launched in our sheet metal factory in Tallinn worth EUR 2 million. And this is, of course, a little bit ironical because we have been running bottlenecks machines '22, '23, 24/7, some of the bottlenecks machines. And now when we have new machines covering these bottlenecks, the economy is going down and now we don't have that problem at all. So -- but there will be -- the times will be sooner or later better and then we will be prepared. We're also restructuring the group in that sense that we have these two business areas now with -- where we have appointed Mathias Larsson as Business area Manager for Inission EMS. Meaning for myself then that my time will be freed up to work with the whole group and also with acquisition on a strategic level going forward. So Mathias will be in charge of the -- and work together with the company managers in Inission EMS. And here, we have another important thing. We have -- we are now starting up and begun a project where we will move the organizational home for our factory in Tunis from the Enedo to Inission EMS. And all in all, ex AXXE, the group have 10 companies and 10 factories. 9 out of those factory belongs to the EMS organization. So -- and they are really professional and really good in production. Enedo, on the other hand, they only have one factory. So it comes quite natural to move over the organizational home to the Inission EMS program. Then they will have the central -- they will have support from the central support function that is helping out with factory, product development, sourcing of material, machining development and so forth. And also by doing this, we see that Enedo will be a more focused product company. And that is really a trend among our new and modern customers that have OEM customers. They don't have factories. And Enedo Finland, they don't have a factory. They rely on EMS companies to produce their goods. And that will be also the future then later for Enedo Italy. So Enedo will be more focused. And also another good thing that we see with this move is that we will, from -- Inission EMS, have a wider offering to our customer, meaning that we can actually produce a little bit higher volume with a lower cost level since salaries in Tunis is -- production salaries in Tunis is quite attractive. Inission Syd have also decided to relocate the factory in Boras. So we have found a new premises. We have signed a contract there, and we will move spring next year. And since we are moving, we have almost sort of a clean sheet there that we have a white paper. So together with our lean consultants, we can really have a fresh start and design that factory to be really flow orientated from the start. We have done a few very good recruitments also now in the period. We have got Elisabeth Nilsson hired to be the MD for Innovate. Elisabeth is -- she has a background from Volkswagen and have been working centrally there in Germany. She also have been at McKinsey as a consultant. We have also recruited Charlotte Jansson to be our Chief Digital Officer. So making sure -- and this is on group level, Charlotte's job is on group level to take care of both Inission and Enedo to make sure that we are collecting our data, taking care of our data. And as a base for that, of course, that starts with IT infrastructure, which is also one of Charlotte's responsible areas. We have in the quarter also done a bank procurement and our home -- our main bank, I would say, because we have a set of banks. Our main bank made the best offer. So we have a better structured setup also now for our bank services, where we have quitted or are about to quit lending on invoices and also selling on the invoices that have been a part of our cash infrastructure. So now we will have a clean cash credit line. We will have more simple setup. However, cash flow-wise, this is affecting us with about SEK 30-plus million in the quarter. So when you see our cash flow there, that is actually that we have sold invoices less because they go off balance sheet. But again, then cost-wise and also administration-wise, we have a much better setup now. And this bank procurement that was for the whole group. So now we have financed also the Enedo program, which was quite costly financed a little bit here and there. And now we have one program for all of that, which will lower our financial cost and can be seen already in this quarter, but also lowering it forward. So something about our financial targets. We are in a situation now where the economy is breaking, our customers here and there, they have still a little bit too much on the stock level. So they are hesitant. They don't place orders with the same horizon anymore. So -- but we still think it's doable to reach our SEK 2.4 billion as a turnover about -- so that is our target. We still think also we are balancing there now on 7% EBITDA. But we still also think that we can actually shrink this company down to that EBITDA level. So that is our target. And our target then for capital structure, they are well -- our performance for capital structure, they are well in line with our targets. So then with a little bit longer horizon, annual growth, 10% organic, Yes, difficult to say now when we are thinking 6%, 7%. Acquisitions, we have never been growing so little as fine. So for us, it's more like don't -- we should be very cautious with the acquisitions. The market is back there, we think, and we have a handful of opportunities, but we will be quite selective and cautious. But then again, the things that I have talked about earlier, it's about to be very efficient, to have a good production setup. We are -- as I said, we are going towards larger business units. We are centralizing -- we have centralized resources for sourcing that is helping out. central sales resources and again, then shifting to organic growth rather than acquired growth. And then we have the mega trends, even though now the economy is braking, but the mega trends about nearshoring, automation, robotization, digitalization and not the least electrification. That will be a driver for our industry with a little bit longer time line. So that was all from me. Do we have any questions, Henric?

Yes. But before we begin, I'd like to remind everyone listening that you can write your questions in the chat, and I'll read them out for Fredrik to answer them. But let's start with some questions for me. So the Q2 margin was 5%, down from 7.3% last year. Could you just talk a bit more about what drove this and what you are doing to adapt costs to demand? And also how long does it take for cost reductions to have an effect on the P&L once you implement them?

Yes. As I tried to explain, the way we talk and think about this, we see top line and then next level is, of course, how much of that top line or revenue goes to our supplier. what is left there that is then our net added value. So -- and we are defending that even though top line is going down. So I think we are both for Enedo and Inission, we are making reasonably good business. But of course, with -- then we have a new factory here. So we are doing about the same net added value, but we have another the AXXE factory. And if you would make it really, really simple, you could say that the cost of the AXXE factory here. But then we are not prolonging hire people that is hired on temporary contracts. If someone leaves, we don't replace. We are cost cautious wherever we can. We are also running programs at Enedo with shorter working weeks together with them with the unions and the society, they work less and they get some compensation from the society and the unions and we pay less. So there are those programs. But yes, there is a time lag, of course. And that is also 1 year ago or a little bit over 1 year ago, the big question was how can we equip our factories, hire enough people and get enough material to produce to all the customers that was really -- is not screaming at least shouting, give us more products. So when you have started that journey and all the whole organization is moving in one direction. And when you start to break that, there is a time lag, absolutely. But I think it's also -- there is another component, and that is this is not 1 company, it's 10 companies. And some of those are doing still really well, and they are not breaking. So -- and they have good margin, and they have a little bit less margin now since the cost is perhaps more adequate and more sustainable compared to 1 year ago. But that extra cost that goes on the total. And then the companies that is doing less well, they are trying to cut costs. But the total there is, as I showed you, it's ending up with a couple of millions more at Enedo and a couple of million more spending or total cost level compared also for Inission. But yes, that's where we are. But this has to be -- the cost cutting has to be enforced, and that is the program that we are running now together with Mathias and his company managers, [ Charlotte ] and his company managers. Now we have to -- because we are not -- we don't have a size problem. If we sell things running rate of SEK 2.2 million, even with 10 owned factories and then AXXE factory including here. it's not a size problem. We can shrink this to profitability, no problem, no problem. But then it's also a balancing act when will the customer revert and want material again because I am so old, so I've seen this a few times. All of a sudden, stock levels are too low, and then they will start to order again. And it's a balance also. It's not just only to slash and send home our coworkers. It's not that simple. Yes.

Yes. So given that there is a time lag here and you now in Q2 had a 5% margin, what are the chances then that you during H2 can get these costs under control sufficiently to reach the 7% target for the full year?

We regard them as good. Otherwise, we would have changed the target. So we see that we can shrink ourselves down to maintain the margin where we are now. In H1 7% or 6.99% if you really count LTM number, 7.1%, we can -- we should be able to. That is -- and we, of course, have asked -- we do this bottom-up since we are off of our budget track. We have asked each and every daughter company to rework to their budgets and replan now for H2. And if we sum that up, it looks absolutely doable, absolutely doable. But then, of course, if it breaks even further, yes, then we have to chase down even further. And that is, of course, a $10 million dollar question. Will the economy sort of go from here and flat out? Or will it drop further? If it drops further, yes, then it will be difficult. If it goes from here and then catch up towards the end of the year, then it's absolutely doable. So -- and that we don't know. And we really try to talk to our customers and be close to them. But they are difficult. As I've said, I think both last presentation and the one before, a lot of these people are very optimistic, but they don't place orders. So that is the paradox.

So that kind of touched on my next question here. You wrote that book-to-bill has improved quite significantly since the Q4 low, but it's still below one, of course. If you could just elaborate a bit on that and whether you think that underlying demand is in an improving trend? Or are there more timing effects with orders being delayed and placed now instead of back in Q2 -- Q4 and Q1 and also what you're hearing from customers started talking about?

Yes. And there is fragmented pictures. I mean we have customers that is doing well and ordering more. And we also have on the other side of the scale there, we have big, super big international, well-known customer names, so to say. Maybe we don't need anything for the whole '25 which I don't think is true, though. But there is...

We have so much on the shelf, Fredrik. Is that really true?

So there is a big scale here from the ones that is ordering and are moving forward to those that is really bearing this and are extremely cautious. But as a total, I think the way we judge it now with our revised plan for H2, that is pretty stable, pretty stable. That is how we revise it. So meaning then that now during Q3, we need to see, of course, that the book-to-bill comes back to one. Otherwise, this will be a further shrinking system. So -- and yes, that's where we are.

All right. And you mentioned that you think the SEK 2.4 billion sales target is challenging, but still achievable. Do you think you need additional M&A to reach this target? Or is it still possible to reach it organically from here?

It is challenging to reach it organically, of course. And then the way we have formulated it, it is about SEK 2.4 billion. So it is challenging. No, M&A is not in that thinking at all. We have -- as I said, we have a handful of contacts, but now it's mid-August already. The likelihood for us closing any of those deals affecting the top line for '24 is not 0, but it's limited because there is wise from the history, it takes a few months, in half a year or even longer to actually close the deal. And we don't have any -- we are not engaged in any negotiations to put it like that.

Yes. Okay. And how dependent is your margin target on reaching this SEK 2.4 billion sales target, would you say?

No, we don't need to do that without -- we need to -- and that is really the internal communication. We really have to cut down costs now so that we can reach that on SEK 2.3 billion or SEK 2.25 billion, we should be able to reach this 7% anyhow. That -- that is our ambition. That is our ambition because we -- as I said earlier, it is -- we don't have a size problem. And now since we have actually been working on this, that not only initial being a little bit bigger company, but also the daughter companies, the average size of the daughter companies are shrinkable if I put it like that. And then -- but then, of course, also, I think with the Enedo program where we recently -- 2 years back, we have half the organization in Italy. There are functions that is where we only have one now. And to cut that even further and now with this limited time program, yes, then we can cut cost, but then it's not permanent. And the cost you actually to save is also less compared to if you really shrink. But then to shrink further in Italy, that will also be -- that is time consuming also. And we want to move forward. We also don't want to shrink. We want to move forward. And that's the balance that we have there. That's the balance...

All right. We have some questions from the audience as well. One audience member here is asking if you could give some more color on the M&A pipeline and why you're remaining a bit cautious there? Are you afraid of a potential recession? Or why is that?

No. My experience from the M&As we have done during the initial time is that we have a lead either that is someone we find and those are normally the best or there are -- or that is a sales process going on. And we have been quite cautious due to our balance sheet and our net debt situation. Now that has improved. So we don't think that should be a problem. But also, we have been [ building ]. We have been [ building ]. We have been bidding, but we haven't won the bids because we are cautious bidders. So -- but now we think that the price expectations actually are coming down. So we think we can close deals. But then also we have a little bit of a shift since we think we are done in Sweden. We think we are done in Norway. We could do something more in Finland. We have been in contact there. Unfortunately, though, some of those, some were out a little bit too of the scope. Some was more like, again, these turnaround candidates, and we really try to avoid those -- but then we want to move further away from our home, meaning going down to Poland, Germany, Austria. And that may be also a bit of the reason why we are cautious. We are a little bit trying there, and it's not home turf for us. So we have engaged consultants and we are looking at names, and we have discussions ongoing. So yes, sooner or later, we will do something in -- I think, in Germany. That would be my preference.

All right. Another question from the audience. Do you have any comments on your construction customers and how they are commenting on the current situation?

Yes. Our sheet metal factory in -- especially our sheet metal factory in Tallinn have a big account in the Danish customer that is in ventilation of office buildings and big buildings. And they are running extremely slow. So that is hitting the operations there quite a bit. A big customer and the customer that we really have a good cooperation. We do a lot for them. And so when the construction business coming, and we have other those -- and that is a sheet metal, but we have also other electronic customers that is also construction related that is really slow now. And yes, I don't have any prognosis when that turns back. But I think that is a lot related to interest rates. And now we see interest rates coming down. We see valuations of real estate stabilizing. We see and also here that the financial market is back to actually provide that type of companies with capital and the immediate risk of like a big failure there or companies going bankrupt is over. So step by step, it will be a stabilized situation. That is our opinion there. But for the moment, it's very slow. For the moment, it's very, very slow.

All right. A final question from me while we wait and see if there are any more questions from the audience. I was just wondering if you could go into a bit more detail about these new bank terms that you negotiated. What kind of effect will that have? And from when do these terms start?

We got a better deal when it comes to the margin, meaning measured from the base interest, we got less -- we pay the bank less margin on the program. That is very beneficial, of course. But then also structural-wise, we have cut out our factoring program. We have been borrowing on our invoices. -- meaning that we are sending the invoices to the bank and we get 80% the day after, and that has been our way of financing this company. And then we have had a cash credit on top to take variances. But the big money has been coming from the factoring program. And since we have been a little bit -- we have had a balance problem, net debt to EBITDA. And then if we sell the invoices, we have been discussing this with the bank because we think if they -- if we have an invoice to Epiroc or ABB or AXXE or whatever, we think -- and we have that -- we have borrowed on that. It should be pretty safe. So they could go in the bank covenant thinking, it could go off balance sheet, but they don't think it like that. So -- but then we have done a small portion. We have actually sold those invoices. We have insured them and sold them to the bank. And by insuring them and selling them, we have had a cost level neutral. We have a neutral cost level. But what we have done now, we have cut that out also. And that's actually the way cash flow is measured. Of course, if we don't -- if we sell invoices, then if we stop selling invoices, that comes -- shows up now as -- and that can clearly be seen our receivables almost exploded, but they have gone up quite a bit even though sales have come down. So -- and that -- we can't say by decimal, but we estimate that to about SEK 30 million that has costed us in cash flow in Q2. And it will cost us perhaps another SEK 30 million cash flow. And then that is how cash flow is reported because if we -- the invoices that we have in the factoring program, they are very similar. But -- and they are also cut out, but they are in our balance sheet. So they are not measured as cash flow. But both selling and factoring is meaning that we get the money immediately. But now we have a cash credit that covers for that. And the bigger earnings is less costly and then also a lot less administration. So we have a cleaner structure now, much cleaner. Optical, it looks worse, but operational-wise, it's much better.

All right.

And that I also think that is -- and we -- big Swedish banks, we had 3 or 4 bidding here. And that is new for Inission as a company. They always in history. They wanted to have the invoice as the base for the security. Now they trust the company on next step a little bit. We also judge it like that.

All right. Thank you very much for that, Fredrik. That's all the questions for this time. So I'll leave the word to you for final remarks, if you have any.

Thank you, Henric, and thanks to all the listeners that we are done for today. No further remarks than that. Thank you for listening, and take care. Goodbye.