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

All right. Hello, and welcome, everyone, to Inission's Q4 report presentation. My name is Henric Hintze. I'm an equity analyst at ABG Sundal Collier, and I cover the company. With me, I have Fredrik Berghel, CEO of Inission. He will walk us through the report, and then I will moderate the Q&A session afterwards. [Operator Instructions] Please, Fredrik Berghel, go ahead.

Good morning, everyone, and welcome to Inission Q4 presentation. My name is Fredrik Berghel. I am 1 of 2 co-founders and 1 of 2 principal owners of Inission. Myself and Olle Hultberg, we started this company now almost 18 years ago, and we are still both active. I am the CEO of the company and Olle is the Chairman. Inission Group these days consists of Inission EMS, contract manufacturing of industrial electronics and Enedo, which is a company that develops, marketing and selling and producing power supplies. Both these business areas operating with customized high-end, high mix, low-volume industrial electronics. The agenda for today, I will go through the Q4 performance. I will talk about a few headings during the quarter. I will also comment on our targets for 2025 and midterm. And then as Henric said, we will end this session where you can ask questions. So please type in your questions to Henric. Reported sales for the quarter decreased 4% to SEK 531 million. However, adjusted for AXXE, SEK 43 million. Sales decreased SEK 65.7 million or 11.9% organically. A high-level explanation of the Q4 result is that the net added value that is when you take the revenue minus direct material was SEK 12.5 million higher compared to last quarter. But if we take away the AXXE [indiscernible] net added value, almost SEK 23 million, we are SEK 10 million lower in net added value. The material share, both in the year and the quarter was significantly lower compared to last year. That is partly due to product mix, but also partly due to the prices that we have been chasing in '22 and '23. We have caught up with that now. So we have a stable price situation for incoming material and also a stable price situation for our customer. Cost level, plus SEK 26 million compared to last year, of which AXXE consists of SEK 13 million of those, half of that money. We are trying to reduce costs. But here, we have a -- we obviously have a problem not coming down in cost enough. And direct costs, we're doing quite well on the operating units, but we have difficulties shrinking on fixed cost, white-collar people and other overhead. And we are also at the moment now moving forward with the list change that I will talk about later. And we have added on cost here for that project alone, and we have other one-offs also in Enedo in the quarter, old things that is still floating up. But then also from the mother company point of view, we have added on services with an extra business area manager. We have sustainability, we have HR, and we have an IT and data manager employed now compared to last year. And this is investments for the future to build a more robust and stronger company and more fit for the next level. And now that is in combining here with economy going down, revenue going down, so it's a bad timing, but still, long term, this will be the right thing to do. And of course, then as with this said, when top line is coming down so much, it's very difficult to maintain the margin. So this gives an EBITA of 17.8 million, which is then 13.4% lower than last year. We have better financial net with SEK 9.1 million, which makes the EPS earnings per share then dropping from SEK 0.6 to SEK 0.4 in the quarter. Yes, as I said, it is really important now on our operating levels that we are shrinking -- keep on shrinking. That is really the message. So if we look at the yearly results, we had a yearly turnover of SEK 2.15 billion and an EBITA of SEK 125 million. The organic sales dropped SEK 191 million compared to last year. However, this much better or much lower material share that I talked about gives that the organic gross profit drop is not that severe. But then again, higher cost of SEK 39 million, (00:06:09) AXXA adjusted gives an EBITA drop of this SEK 54 million. And then we add on the EBITA that AXXA contributes with, and we are SEK 37 million behind compared to last year. If we look at the longer time line and zoom out a little bit, then we can see that we have had fantastic growth over the years. And as I said, last year, we sold for SEK 2.15 billion compared to SEK 2.195 billion the year before, meaning that we are running slightly slower. And with the lower EBITA, of course, the margin is also dropping. So we end up this year with 5.8% margin, which is then, of course, clearly lower than the 7.4% last year. Also on a high-level explanation, we have added on one factory. We have added on the unit AXXE in Halden. So we have increased from 10 operating companies and/or factories to 11, but the top line has even come down. And we are disappointed, absolutely. Still, this is the second best year in Inission history if you measure it as top line and if you measure it at EBITA. So we shouldn't be too sad about it. So if you look at the performance on per business areas, I think that all in all, Inission EMS performed quite decently for the full year. Also here, I think it makes sense to draw out the time line a little bit longer than just focusing on 1 quarter. Even though I know that this is what this presentation is about. An organic decline here now in top line for Inission EMS of 12% makes it, of course, again, difficult to maintain the margin, which dropped to 4.7%. And then the same goes for the Inission EMS, as for the whole company, we have to shrink in cost here. Enedo, same story really. They are also shipping a lot less volumes compared to last year, 11%. They don't have any acquisitions. So the decline here is all organic. Gross margin has also improved as for the total. The gross margin have also improved for Enedo. And also, we are saving back in costs here. So the EBITA drop is SEK 3 million in the quarter compared to last year. We also have more difficulties to cut costs in Enedo since we have already shrunk that organization quite a bit. And we have taken temporary measures in Finland. Now we have made them permanent. So we have changed there. We have also taken temporary measurements in our Italian operation for Enedo to come down lowering cost. The factory in Tunis now, as we speak, are reducing quickly now in manning simply to adapt capacity to the needs and also, of course, to reduce the cost. Then some highlights for the quarter. We held a grand opening in Malmö, our newly renovated and enlarged factory. We have a lot of colleagues from all around the country. We had a lot of customers around, and we had the officials from the community cutting ribbons, and we had a great celebration there in Malmö. So that was really a highlight for the quarter. We have also, with our ambition to be listed on NASDAQ main market, we have the composition of the Nominating Committee was established. So Olle Hultberg representing himself in the Nominating Committee; [indiscernible] from [indiscernible] is representing my shares in the Nominating Committee; and Jacob Jonmyren is representing Lars Wingefors. We are working on the bonds with Tunisia. So we visited their embassy in Stockholm with a delegation during the quarter. It is really 2 things that we are doing on corporate level, on headquarter level, one that we spend a lot of energy and focus on. One of those is the preparation to changing from NASDAQ First North to NASDAQ main list during the spring here. And that requires, as I explained earlier, reinforcement of the organization. But on top of that, we also use quite a bit of external consultants to help us through this process to upgrade, lift our documentation and our processes to a new standard. And one could think there is a lot of bureaucracy there and some are bureaucracy, of course, but there are also a lot of good things that we are -- as I said earlier, we are investing for the future by actually putting these things together in a much more better way than we have done before. And we were not bad before, but now we have lifted up really. So that is pulling a lot of energy and a lot of focus at the time. We'll be ready soon though, so then we will -- then that will be -- we have that behind us, and then we will focus on the future. The other big projects that we have been working on for over a year now is actually to move the organization home from our Tunis factory from Enedo to Inission EMS, and we see a lot of potential in that. One is that Enedo will be a focused developing, marketing, sales company, really a product company and leave the production to production professionals, and those will be Inission EMS. The other positive thing about this is that we will have a wider offering for our EMS customers. So -- and we have already have had a few customer visits in Tunis together with our sales organization. And in this project, there are a lot of items all the way from ERP system to IT environment, but also to upgrade the factory in appearance. And the customer that is coming there now, they are impressed. We have a European standard EMS factory now in Tunis with a totally different cost level. And we have made a few quotes. And yes, we are really looking forward to this. It's a good opportunity. So about our financial targets. The Board of Inission have decided the targets for 2025. The full year revenue expected to be SEK 2.2 billion compared to the revenue for 2024 that was SEK 2.15 billion. EBITA margin, we expect to be above 6% to be compared with the actual of 5.8% last year. Our idea about net debt through over EBITA is less than 2.5. Here, our covenant vis-a-vis our bank is 3. So we have quite a bit of headroom between our target and the bank's demands here. And then we have an equity ratio of above 30%. So those are new for 2025. The targets for midterm, they are not changed. We are targeting for an annual revenue growth of 15%, where we really want to focus on organic growth, invest in sales and do better there so that we have the main portion, 2/3 of those [ 15 ] would be organic growth. And then we will top up with acquisitions. And regarding the growth, we have never grown less than 50%, if you measure us almost over any longer time span backwards. When it comes to profitability, we see clearly from our larger colleagues that 2 digits EBIT level is not impossible, and we have factories our own or companies, daughter companies of our own that is doing double-digit EBITA. So that's about to fine-tune this and trim this, and we will get there. And we have an environment. I have talked about this many times, and we have an environment with nearshoring, regionalization, automation, robotization, digitalization, Internet of Things, there are a lot of megatrends here that is actually requiring industrial electronics. So we think we are in the right business really. And then altogether, we have a balance in the market here, even though those of you that are in the sector would know that some of our colleagues are building new factories, and we can see about that where capacity is going to meet the needs. But at the moment, I think at least the bigger players here, they are wise enough not to trash the market by just supplying cheap or below cost here or -- they earn decent money, and I think they will keep on doing that. We also have the consolidation in the market still. It's very, very fragmented. So there are a lot of companies to be acquired, and there are a movement here. And when it comes to Enedo, it's a totally different story, much smaller, much more focused. And here, we really have to adapt cost to the income and then build from there. But their products are highly rated from the customer, service level, quality level and performance. So we have good hopes that Enedo being a product company should be able to have -- to be able to achieve -- to be higher in profit compared to a contract manufacturing company. So a few takeaways before I end this, and we move to the Q&A session. Q4 was slow in sales, as expected. We are still shrinking in cost, and we have a little bit further to go. And our projection is that we have -- should be able -- you should see the full effect of this Q2 this year. We had a strong order intake in the quarter. We have a book-to-bill ratio of 1.4. So -- and we have a clear positive trend all the way from July onwards now. We have added on to our order backlog. So there will be a new life after this headwind. So we are positive there. We also had a strong cash flow in the quarter, very good in the quarter. But also if you look at the yearly numbers, doesn't look so impressive with SEK 7 million in cash through, but then one have to remember that we paid back the COVID loan there of SEK 82 million. And also, we have changed the financial structure by taking out sales of invoices that costed us about SEK 77 million in cash flow. So all in all, if you adjust back from there, that we have a cash flow of SEK 166 million for the full year. So we are proud of that. We also decided about dividend at the Board meeting yesterday evening or night. So we will pay out dividend SEK 1 per share. That was all from me. Have we got any questions, Henric?

Yes. I'll start off with some questions of my own. And if our listeners, type any questions in the chat, I'll read them out too. So first, looking at the order intake, that was quite a sharp recovery going all the way to 1.4x book-to-bill. Could you tell us anything more about what drove this among your customers and how you expect this to develop going forward?

It's quite wide. So -- but there are some bigger projects that are included in this, and then they are -- they make an impact. We have got sort of annual volumes during the autumn here. But that is that we normally also get, we get these frame orders. So we have a new business and in -- especially in Norway, they are doing well. I mean we -- all our factories are definitely loaded here, but our Norwegian factory in Trondheim, they are the only one that is more or less fully booked for '24. So they have got quite a few interesting substantial orders. But also our -- the total bulk of our customers are putting back orders again, if we talk about the Inission portion of the company. If we take the Inission EMS. If we take the Enedo side, it's still slower. And there, we had -- also there, you can see a trend from sort of the mid of the year towards a little bit up and down, but it's trending upwards. So they have more difficulties in actually getting a good order flow again. Yes?

Yes. And we also got a follow-up question on this from the audience. Could you comment how the order situation has developed so far in Q1 compared to Q4? And maybe also how does the order situation differ between Inission and Enedo?

Enedo, yes, it looks a little bit different in that sense that Enedo has a -- they tend to have a little bit longer order book. They have more months covered into the future. And it varies also for Inission. Some of the factories, they are running with quite a short order horizon, a few weeks only in our sheet metal factories. They actually sell more the same month than they have when compared where they start in orders. So it varies in that sense. Sorry, I missed the first.

The other question was how has the order situation developed so far in Q1?

Yes, I would view no bigger change. Since this is only those listening here now, I wouldn't like to actually give new numbers here that is not officially spread. So I will be a little bit careful there. But it -- there are no signs that there will be a drop here, absolutely not. So it's keep on going, keep on going. I wouldn't expect [ 1.4 ] to continue the rest of the year, though. So I think we have recovered back a little bit. And -- but we really think that we will be above [ 1 ] going forward. That is really what we think, yes.

All right. All right. So looking at this quarter's results, then there were quite a few one-offs. First off, the listing change costs of SEK 4.8 million. Could you give any comment on what additional costs we should expect in H1 until the listing change is concluded?

I think external costs will be Q1, Q2 now, same magnitude, SEK 4 million, SEK 5 million of the budgets for quarter and most of that will be in quarter 1 because we hope to be done with this mid-quarter 2. So there will be SEK 4 million, SEK 5 million that will be spread over Q1 and Q2 that would be my projection. And we have got the bulk of the invoices now and we -- so we are really on the end of this project. Yes.

All right. And...

And then as I said earlier here now, this -- when we talk about this, that is external cost, that is invoices from auditing companies and law firms and things like that. Then we have our own add-on costs where we have actually, as I tried to explain, we have reinforced the organization to be able to do this. And to be honest, a lot of these advisers, they think even though we have reinforced the organization that we are quite thin in the headquarter here. And -- but I also like it to be thin, but we can't do it with nothing. So it's a balance point here. We have put on a few persons here now that is really crucial and essential to be able to do this. With the old organization that we had 1 year ago, we wouldn't have been able to pass on this change. It would have been impossible actually. So these extra IT, HR, financial persons that we have added on, they are -- you can see them in the cost here for salaries partly. Yes.

Yes. And then in Enedo, you had SEK 3.5 million for retroactive payroll tax, if I remember correctly. Could you just explain what's happened?

We have had a long [indiscernible] and a long discussion with both our auditing company and also the tax authorities and Tunis. That is how we should compute pensions. And they -- and the one auditing company saying this, we have other experts that is arguing for that, and that has been ongoing. But in order to clean it up now, we have put reservations there for the worst scenario. So this is a matter of we are reserving pension funds, and that is when and how these people will leave. So whether we're actually going to pay that out or not, that is not -- no one knows yet, but we have reserved the full amount now for this. So that is what we have done. And they have -- the tax authorities found this. They came to us and said, "Hey, we think you should have this and that in the books." So this is -- you could call it cleaned up. And yes. But it comes out -- when you see in the cost scheme here on our P&L, it comes out as salaries. It's not salaries, it's provisions for maybe pensions in the future.

Yes. All right. And then finally, there were some inventory write-downs. Again, if I remember correctly, you had those in Q4 last year in Enedo as well. Could you just tell us about this? And is this something that you think will be a recurring thing? Or how frequently have you had to do this in the past?

We put it out here because it's extraordinary. But you could also -- and we really don't like to talk about adjusted results at Inission. You can refer to it also as cost of doing business. We have bought material that we don't have any use for. But of course, we have a structure and we have processes to make sure that our stock is correctly valued. And maybe we haven't been good enough to implement those things at Enedo yet, but we will get closer and closer, of course. And now I think we should be there now. But then also said, it can be issues. We have a big stock and we have agreements with customers because it's their stock really. We don't need any of these materials. It's a customers' stock that we cater for them. And there can still be issues because that has happened to us in the history that customers has asked us to buy too much and then we have paid for it, we have it in our houses and it can be issues. So I will not promise that we will never do any stock write-off in the future. But I think we should have a good situation now, at least a lot better situation, yes.

All right. So looking at the guidance for 2025, the 6% adjusted EBITA margin target seems a bit conservative to me given that at least with the adjustments I've made for 2024, you were already above 6%. So should we not expect any significant margin expansion in '25? And if so, when do you think you will start making progress towards the medium-term target of 9%?

I agree with you, it's conservative because we really want to meet the target. It's a matter of volume here. It's a matter of volume. If it stays slow or even worse, if it keep on shrinking, and we are chasing the margin here now by cost cutting, then 6% will be a challenge. So we have been conservative to put it there because that is really what we think we should achieve, and we have a decent order book. We have about half of what we would sell next year. We already have an order backlog over a long time, of course, but still. So if volumes comes back as we predict second half of the year, we should be able to achieve over that. If volume comes back here and customer starts to order and we can ship better, we will have a rapid improvement if volumes comes back. And then this will be easy. But we -- yes, we are careful and we are cautious about this guiding.

All right. And a question from the audience that is kind of connected to this. Have you lost any key customers on the Enedo side of things considering the guidance of further decreasing revenue? And are you still hoping to keep a margin of 3% to 4% for Enedo as mentioned during the last presentation? And if you go below that from further cost cuts?

No. We have lost severe volumes to the main -- to our main customers within Enedo, and they are keep on destocking. So we have an idea of that general on the total level. General destocking has reached its peak now and getting -- should get back to normal. But we -- some -- a few of our bigger customers on Enedo, when we talk to them, no, they haven't left us, but they buy a lot less due to the case that they still have too much products on the shelf. So -- and yes, we -- as I said earlier, we have taken temporary measurements to reduce cost within Enedo. But now we have reached a point here now. If we don't see that orders is coming back, we have in Finland -- in Finland part of Enedo, we have already taken permanent actions. And we -- and also the factory now goes from 300-plus to 200-plus people in Tunis. So we are reducing in order to adopt capacity to requirements or to the need here. And then cost will come down also. We are behind in schedule, I'm sorry to say that, but we will get there. We will get there.

All right. So looking at the cost savings, which you say will have full effect from Q2 and just connecting that a bit to the margin guidance, could you give us some more details on the cost-cutting measures and how they [indiscernible] with the relatively conservative margin guidance?

Yes, we are reducing, as I said already, factory in Tunis shrinking severely, really quite a bit.

Was this mainly Enedo or is there was...

No, no, no. Sorry, [indiscernible]. In Finland, we are also reducing staff right now. Estonia, we are reducing staff. And we have also other factories that have to come down in cost. One could think that you are always -- if we only had a little bit more volume, we should be able to profitable. But we are shipping for SEK 2.15 billion, you can't say that you are too small to earn money. That is not the case. So it's a matter of when we were growing fast, we were putting on headcount and we were putting on cost. And then when it comes back again, it hurts and it's difficult and it takes time, but we have to shrink. And the contradiction there is, as I also already said, the central organization is swallowing or beefing up a little bit. But if the daughter companies here would perform as our best daughter companies, that would be a nonissue, the lifting process cost of SEK 5 million or other things that we are reinforcing the central organization. It will be a nonissue. But now that puts stone on the burden. I wouldn't know that. That is an English expression, but still. So keep on shrinking.

All right. And then finally from me -- if the audience has any more questions, please type them out now. But finally for me, given the shift away from factoring, what kind of net working capital to sales level should we be expecting going forward? Do you feel that you're currently at a reasonable level there?

I think if we are -- it's a little bit new times though, but I think also varies among the factories. But if we should trim down, we are close to 30% over invoicing now. And we have been running factories with half of that stock level. So there are a lot of net working capital to be taken out if we would be really, really successful. With that said, we also have a little bit of a new world where this just-in-time idea has sort of bounced against the few rocks. Maybe you should have a little bit more on the shelves in order to be able to give service and also in order to keep your production going. So it's a balance act. But my forecast would be that we should be able to shrink at least another SEK 100 million in -- given the same size of the company, at least another SEK 100 million in -- especially in stock level, yes. But then it's -- again, it's also slightly margin. It's easier said than done. So -- but it's absolutely possible. It's absolutely possible. And it is within the projects that the business areas and the daughter companies are working on. Yes.

All right. That's all for me, and it seems the audience has no other questions either. So thanks a lot from me and everyone for listening. I'll hand it over to you, Fredrik, for any final remarks.

Yes. Thank you, everyone, for logging in, and we end the session hereby. Thank you very much. Take care.