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

Hello, and welcome, everyone, to Inission's Q3 2024 Earnings Presentation. I'm Henric Hintze, I'm an equity analyst at ABG covering the company. We'll start with a presentation from Fredrik, and then we'll follow up with some Q&A after that. Please feel free to write any questions you have in the chat during the presentation, and I'll make sure Fredrik answers them afterwards. All right. Go ahead, Fredrik.

Thank you, Henrik. Good morning, everyone, and welcome to Inission Q3 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 still both active, myself as CEO and Olle is the Chairman of the company. In Group today consists of -- in EMS contract manufacturing, industrial electronics. [indiscernible] Inission EMS contract manufacturing of industrial electronics. And now we also have Enendo in the group, and they are an OEM company developing, marketing and selling, producing power supplies. Both these business areas are operating within customized high-end, high mix, low-volume industrial electronics. Today, I will present our Q3 financial performance, go through the main items for the quarter. I will also comment on our revised target. And then as Henric said, we will end the presentation with a Q&A session. So please come in with questions, and we'll try to do our best to answer those. Yes. Reported sales for the quarter decreased 9.1 percentage to SEK 468 million. However, adjusted for sales, SEK 33 million, sales decreased SEK 80 million or 15.5%. A high explanation of the Q3 results. If we take the total sales value and take away the material, what I refer to as the net added value, it was actually SEK 9 million higher in the quarter compared to last year. But if we adjust those numbers, it was SEK 6 million lower, meaning really that the material is significantly lower or our gross margin is higher, the other way of seeing this. And that is partly due to product mix, but it's also partly due to that our price increases have caught up now and material prices have stabilized, and we have catched up increasing our prices. We also have a cost level going up SEK 23 million. And if we take away those that belongs to AXXE 12 of those, we still have a higher cost level compared to last year, even though we are shrinking step by step now. And we can clearly see this in our personnel cost that is actually lower for the quarter. The total comparable units Inission to Inission. In fact is actually SEK 1 million lower this quarter compared to last year. So we are shrinking towards a smaller company since we have the lower revenue. This all in all gives an EBIT of SEK 26 million, which is then SEK 18.5 million lower than last year. And in the quarter, AXXE contributed with SEK 3.7 million. Of course, it is very difficult to maintain the margin here now when top line is dropping so much. We also have lower financial net cost with SEK 1.6 million, making the EPS earnings per share dropping from SEK 1.4 to SEK 0.6. And as I said last quarter, it's now, of course, really important for all the -- in units to simply adopt spending income here. So shrinking in cost is still high in focus throughout our units, some more and some less, of course. If we zoom out a bit and look at the longer time line, I think Inission has made a fantastic journey earning money and growing fast. If we look at the LTM numbers, we are just below SEK 2.2 million or SEK 2.172 billion to be super exact. And we have an EBIT earning in the LTM of SEK 135 million coming out as 6.2 percentage at a margin, meaning that we are running slightly slower compared to full year '23 and the EBIT margin is somewhat -- the EBIT and EBIT margin is somewhat lower compared to last year, 6.2% versus 7.2%. So even in this challenging market, we are reasonably well, I think, if we look at the year-to-date or LTM numbers, maintaining the profitability. If we put it really simple, we have added -- we are 11 factories now and 1 year ago, we were 10 factories. We have added one factory cost to the program, but we run slightly less in top line. And that is a challenge, of course, and then we have to shrink to make this work. The EMS portion of this company is doing reasonably well in the first 9 months. And also here, I think it makes sense to look at a little bit longer time span also seeing where we are coming from and where we are moving. We have an organic decline in Q3 alone of 14%. And as I said just before, it is difficult to maintain the margin. So we have a margin in the quarter alone for the business area of 6.3%. And of course, then the same goes for EMS as for the total company. We need to come down in cost. Endo is also shipping much less volume in Q3 compared to last year, SEK 23.5 million or 17%. Gross margin have improved also here. So the net added value is less -- it's less -- more or less could be expected, that is what I wanted to say. So -- and we're also saving back in costs. So all in all, on EBITDA level, we are SEK 3.7 million lower compared to last year. Cost cutting, I've also said this before, so it's a little bit of repeating, but cost cutting since we have recently shrunk Enedo quite hard. It is, of course, difficult compared to Inission EMS that has been growing for a while, then coming down in losses comparatively easier compared to the year where we are coming closer and closer to the b. But I also think it's worthwhile remembering where Enedo is coming from with many, many years of losses. And then '22, we had a breakeven year, had a reasonably well year last year. So seeing -- if we're seeing it in that picture, I think it's quite okay anyhow. Okay. Let's move to some happenings that we have had during the quarter. We have hired Elisabeth Nilsson as our new MD for Inission Innovate. Elisabeth has previously worked for Volkswagen Group in Germany. She also worked at McKinsey as McKinsey Consultant Innovate is our engineering company and Elisabeth's focus now because we -- to make this good, we have to grow. So Elisabeth's focus is really about growing this unit within the group. We have also hired Charlotte Jansson as our CDO, Chief Data Officer. Charlotte has a background from key positions at Ericsson, H&M Group and Epidemic Sound. Charlotte shall maximize the potential of our data to be used in business development and strategic decision, apart from, of course, also upgrading our IT infrastructure and IT security that is also an important task for Charlotte. In Finland, at Enedo, we have a new -- we have replaced Hannu. So we have a new CFO working together with Kalle and Tommi has been previous CFO roles and Deputy Managing Director at Lu-Ve Nordics. He also have experiences from Patria in Finland and Nanocomp. We also continue the work, of course, with our changing to NASDAQ main list that is ongoing and a big project for a company like us. We have delayed the schedule somewhat. Now we are planning to change listing early Q2 next year. As said earlier, but this is also one of the main items that we are working on. So I'm mentioning this again. We are moving our factory that belongs to business area Enedo to Inission EMS, the factory in Tunis, meaning that Enedo will be a focused product development, marketing and sales company. And on the Inission EMS side, we will get a broader offtake offering, having a low-cost factory close to Europe, where we can offer our customer running a little bit higher series at a little bit lower cost. Changing of our financial working capital has impacted our cash flow, more optical than in the real world perhaps. But still, the way it's measured since we have quitted factoring and quitted with sales of invoicing, we are losing out in the quarter SEK 46 million, the way cash flow is measured. And year-to-date, we're losing out SEK 78 million. This change will result in lower financial costs and a lot of less administration in our factories. So we will have a clean structure now with cash credit. I think it's all it last quarter, but it's also worth mentioning if we look at our cash flow year-to-date that repaying the COVID loan early this year impacted our year-to-date cash flow with SEK 82 million. So then totally, we have these extraordinary negative effects here of about SEK 160 million. Yesterday, I was in Malmo, taking part of our grand opening of our extended factory. We had a great celebration there with our coworkers, community officials, ribbon cutting, a lot of customers, suppliers, and we also have the Board of Director of INIT at the site. So then over to our revised targets. The Board of Directors of Inission have decided to revise the targets for 2024. Sales for the full year is expected to be between SEK 2.1 billion and SEK 2.2 billion as compared to the old target of SEK 2.4 billion. EBITDA margin will -- we expect to be above 6% as compared to the old target of 7% -- our capital structure and equity ratio is well in line with our targets. Also, of course, however, slightly affected of this when we have stopped invoicing sales, which are off balance treatment. For our midterm target regarding growth and profitability, we have not changed. The Board of Directors has not changed the target. So we still think we can reach these levels of 15% annual growth and EBITDA level of 9%. And we are systematically and have been working on this for a long time. The growth parameter is not has never been a challenge for us. We have been growing much faster than this through over the years. On the other hand, the profitability level has been 5-ish over many years. And we have -- on the EMS side, we have increased it to 8-ish a couple of years and 7-ish last 12 months now then. And Enedo is also on a change turn here. So -- and Enedo being a product company, we expect actually even double-digit EBITDA numbers from Enedo when we are coming through this slower economy and destocking that a lot of our customers is up at the moment. And the key items here are we are going towards larger business units. We are working step by step. We have not done a lot with central sourcing, but we are moving on further. Same goes for sales. We are on a journey on centralizing, especially hunting of new customers. We are doing more there also. And this shift from organic -- from acquisition growth to organic growth will also affect the profitability. And then we see the megatrends here coming with nearshoring, automization, robotization, digitalization. All of this is actually creating more need for industrial electronics. And then, of course, mentioning electrification, it's a huge driver for electronics use. Even though we are in a recession now with lower demand, the underlying trend is still there, absolutely. And then consolidation in the market. We are acquiring company, but so do also our colleagues. So there will be less and less player. And all of this has created the market pretty much in balance, which is beneficial. So that was all for me. And really sorry for this camera, the back there. Over to you, Henric. Do we have any questions?

Yes, we do. Let's start with some questions on my own maybe and give the listeners some time to type their own questions in the chat. So you started to report the order intake and order book this quarter. I can see that the order book is down almost 30% year-on-year. I was wondering if you could give any comments on if and how the duration of the order book has changed year-on-year.

Yes. What happened really '20 and '23 that it was an expected shortage, especially on component level, not so much on production capacity level because normally, if we have components, we will be able to fulfill our customers' needs. But the shortage of components had an impact on us that we had a lot longer lead times. And then our customer books orders they place their order with long, long lead times, and that has shrunk back. So a big portion of the lower order book is more that it's shorter in length, not necessarily in height, but it has come down in per week or per month also. But it is not as severe as it looks like because we have a much shorter order book now compared to 1 year ago, a big difference. And you can also see one example of that, you can see that we were running high speed all the way or good speed all the way out Q1 out, and that was actually eating up some of that. So it's a big order book, I would say, yes.

Yes. So is the length of the order book now sort of in line with what it was before the shortage.

Absolutely. This is exactly what has happened. Now we have a situation. '22 and '23 has been exceptional in that sense. So now we are back to the old situation with normal components, 3 months and then customers place orders with 3 months, 6 months, some people -- some customers also 9 months. But now we have a much more normalized time horizon or time visibility, you can also call it on the order book. Yes. All right. But we have also -- we are now, of course, if you don't ship so much, then it's easy to get the high book and build. I realize that, of course. But still, we are close to 1 now and September was actually over 1. So there is slowly, slowly, there is customer coming back now and placing orders. So -- and then some of our factories has actually -- even though I just talked about inking, some of our factories is actually hiring back now to cater for this. It's not massive, but there is a slow demand increase somewhere somehow in the market, yes.

Okay. So you also wrote that you're reducing costs at an increased pace to match the lower sales levels now. Could you just give us some detail on how far you've gotten in this process and when we can expect your costs to reach a more appropriate level and matching the current demand?

Yes, absolutely. We have shrunk step by step, mainly not key position, but because then we have to replace, as I just talked about, CFO for Enedo, for example, or Managing Director for Innovate. We have to replace. So -- but other positions, if they go out, we don't replace. If we have temporary contracts, we don't prolong those. So we have sort of slowly shrunk. But now we have hard programs, factory in Tunis, for example, where we are negotiating now and that will be severely -- very much smaller cost in there. So we are talking about in the magnitude of 1 out of 3 in our Tunis factory. And that will affect the cost level somewhere Q1 because there are some lead times. And there are also -- it has to be done also in balance. But -- and we also have other factories where we are negotiating about with the labor unions about cancellation of contracts. So it's boring and it's sad, but it has to be done. So I think the full cost impact will be -- it will -- you can -- you will clearly see Q1 and definitely Q2 next year, then we have adopted to this lower cost level.

Okay. Very good. So you also said that on demand, it differs significantly between different customers. Did you notice any changes during Q3 with regards to which types of customers you're seeing stronger and weaker demand from?

Yes. We have those -- we have had an overheated EV charger market, which is almost still zoned. We have not been very exposed to that, but those type of customers we have had there very, very slow. If we talk about perhaps if we call that infrastructure, we have a lot of other long-term more infra type structure kind of customer, and they are coming back now. So those that is more perhaps on a long-term investment level when their customer on the next level, if they are putting up grid systems, for example, ABB is a good customer, for example of that. They are building that type of long-term infrastructure project. They are coming back, yes.

All right. Then let's take an audience question as well. We have a audience member asking here, how are contract manufacturers in Europe going to be affected by potential raised tariffs versus the U.S., assuming that a large part of manufacturing is added up in Europe to get into the U.S. cheaper than if it's in Asia, for example?

It's a very good question. And of course, we had a conference in Poland a couple of weeks ago where there were a lot of EMS colleagues that I was meeting. And of course, if we see a China that is sort of subsidizing and boosting their manufacturing industry with a lot of subsidiaries and a lot of support, and we see what is happening in U.S. also with this Inflation Reduction Act, pouring out billions after billions of U.S. dollars to support the U.S. industry, manufacturing industry. And if that means that our customer moves out of Europe, that is, of course, bad. That is bad news, of course. And then as you exactly said now, if we put tariffs on top of this, yes, it's not promising. On the other hand, I think maybe this will -- Europe -- the conclusion really is that Europe has put their act together in a much more stronger way, supporting their industry, but also since we are also buying U.S. products. So there have to be a balance in things. And hopefully, the Europe, if we unite and do it good, we can actually play the game versus China versus U.S. and bargain there. So the total effect shouldn't be that severe. But of course, everybody would understand that free trade, especially for a country like Sweden, free trade is -- that is what we are living from competing on a free market. And if that is restrained, that is not good. So yes, but maybe also it will be over a longer time. Yes, we will see -- it's a very good but also very difficult question.

Yes, definitely. All right. That seems to be all the questions from the audience. So if there are no more questions, then I thank you all for listening and leave the word to Fredrik to say some final remarks here.

Okay. Thank you, everybody, for listening in, and thank you, Henric, for helping out. That was all from now or from us now, and thank you, and goodbye.