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

Hello, and welcome, everyone, to today's Q2 presentation of Inission. My name is Henric Hintze. I'm an equity analyst at ABG, who covers the company, and I'm here to moderate today's call. First, we'll have a presentation from the company's CEO, Fredrik Berghel; and CFO, John Granlund. And after that, we'll move on to a Q&A. [Operator Instructions] With that, I hand it over 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 of Inission and 1 of 2 principal owners, myself and Olle Hulteberg, we started this company 18 years ago, and we are still both active. I am the CEO of the company, and Olle is the Chairman. Inission today consists of 2 business areas. We have Inission, EMS contract manufacturing of industrial electronics. We also have Enedo, which is a company developing, marketing and selling and producing power supplies. Both these business areas operating within customized high-end, low mix, low-volume industrial electronics. Today, I will present the Q2 financial performance. I will totally describe the highlights during the quarter. I will also comment on the financial targets. And then as Henric said, we will finish with a Q&A. So please type in questions, and we will do our best to answer those. So reported sales for the quarter decreased 6.2% to SEK 534 million. And since we have no acquisition adjustments, it's all organic. To explain the result on a very high level, due to the lower volume, the net added value are SEK 13.2 million lower, which is partly saved by a little bit better gross margin or a little bit lower material share as we measure it. Cost level has come down, both personnel costs and other costs. Depreciation, a little bit lower. Cost level has come down SEK 8.4 million. This together gives an EBITDA of SEK 24 million, which is then SEK 4.5 million lower than last year. We have not obviously been able to fully compensate for the lower volume, and I will revert to the comment when I present the business areas separate. Lower financial net with SEK 6 million, including a small currency profit of SEK 1.6 million gives an earnings per share of SEK 0.6, which is the same as last year. Picture #5, John. So then we move on to Picture #6. Year-on-year, as the last picture shows is perhaps not so encouraging. If we look at the quarter in sequence, instead, we can see that the profit level has flattened out, and we can also even see a small recovery there, if you are a little bit optimistic. And I think really that we have passed the lowest point when it comes to profitability. I also think that the cost saving program that we are implementing, it sort of kicks in step by step. And we have decent volumes, what we can see in the order book for the quarters to come. So we think there will be a recovery second half of the year. Next picture, please. So looking at last 12 months numbers, we have a net sales of just above SEK 2 billion, and we produced an EBITA of SEK 88 million, which corresponds then to a margin of 4.4%. Next picture, please. So looking at the business areas separately, old Inission or Inission EMS, I think all in all, that we do a decent quarter. Turnover slightly up compared to last year, SEK 459 million compared to SEK 455 million, which gives a small organic growth of 0.9%. EBITA amounting to SEK 28.8 million compared to last year, SEK 25.3 million, which -- in the quarter, which gives 6.3%. This is a little bit below our target of 7%, but I still think it's decent. Volumes for the autumn looks stable. And as I just said, this together with the cost-cutting program kicking in step by step, make us believe that we will reach our EBITDA target. Enedo has, in my meaning, a totally different situation. Sales is dropping, dropping quite a bit. They have a much lower volume compared to last year. They are shipping for SEK 75 million compared to SEK 114 million, which is 34% lower. Compared to Q1, if we follow in sequence, the drop is not that bad, but still dropping SEK 8 million or 9.4%. We have a similar gross margin as last year, meaning that NAV is dropping SEK 15 million. We are also cutting cost and the cost that has come down has actually come down on the Enedo side, and that is also where we have the NAV drop. So -- but obviously not enough. So all of this together gives a profit or an EBITDA of minus SEK 4.5 million or minus 6.3%. What we have done now differently compared to early in the year, that is that we have shifted from temporary to permanent personnel reduction. We had the idea of doing this temporary reduction, but it didn't gave the cost reduction that we aim for. So now we have switched tactics here and are cutting down personnel in Italy and in Tunis. And we will see the full effect of these both reductions end of Q3. For -- also for Enedo volumes for the autumn, they are improving compared to quarter -- previous quarters. But still compared to last year, they will be much lower than last year going forward. So that was the financials. Then we move on to the highlights of the quarter. I showed you this picture last time I presented when I presented the Q1 numbers at our annual meeting. Still, I have to do it again because we have been public now for 10 years. And we -- 28th of April, we changed from NASDAQ First North to the main list in Stockholm. And it costed quite a bit of money as we have been writing about. It costed quite a bit of energy, but still think it's worth it going forward. We have a better, more well documented, a lot of better procedures in place now. So we have taken the next step here. And we have done that to be able to attract more investors and perhaps especially international investors later on in our history. Short term, it doesn't make too much difference. But longer term, we really think this was the right thing to do. I also showed the next picture, our Tunis factory. We had in the quarter an inauguration of the Inission Tunis. What we have done is that we have transformed the Enedo only factory into a full-scale EMS factory. Tunis as a country, I think it's -- we are not so used to it up here in the North. But if you come down to Italy or France, they use Northern Africa at their low cost. So there are quite a bit of electronic industry in Tunis, especially for the automotive sector. So having this as a new offering really to our customer, I think this will pay off in time. Still though, we have had a few quotations going out. We have had a small test orders, but we are in the beginning of that journey. We have also finalized an acquisition at the really end of the quarter. We -- it was the last of June, and we announced it 1st of July, and that is a company in Lithuania called UAB Unibalta and they have a long industrial electronic history there. They have a turnover of EUR 60 million last year, earning close to 9% EBITDA. They are situated in Kaunas, Lithuania with about 280 employees. We really think Selteka has a good strategic fit to our criteria when we evaluate possible acquisition. Customer base is totally complementary, and they also have quite a few very interesting customers. They have a very stable financial history, stable earnings, stable profitability. They are also complementary when it comes to geography. Inission is a Northern Europe company, and this fits in there. We also think that the size of the company is quite right. Regarding the size, I said it's SEK 60 million turnover last year. But then one have to remember that they have a substantial share of the customer there is actually providing material. So turnover is it would have been also supplying material is -- would have been almost double. So you can't say for sure, but about SEK 300 million operation that is we're talking about. And that is also how it fits with these 280 employees, meaning that net added value to come back to the same net added value. They have a strong lean culture with very efficient production. They do really smart things there, smart flow setups, and that is totally in line how we do things at Inission. Also the owner, which is the MD, the management culture and the value. This is an entrepreneurial company, have a perfect fit in that sense also together with Inission. We're also glad that the seller took 1/4 of the payment in Inission shares, which shows really that he also have a trust in our common future. So if we take next picture, I just summarize here the bullets for the quarter. The only thing I haven't mentioned is that we also in the quarter have celebrated our new opened factory in Borås, which is very modern, very, very well fit purpose for our operation. The fact that we had before, the ratio between office and production floor was not that good. It has several stores and so on. So this is in the central of Borås along the highway here, and it's new and modern. So we have all the possibilities [indiscernible] now actually to expand in the western part of Sweden. So over to our financial targets. We take next picture, please. As a base for our financial targets, I would like to show our historical performance. And if you look at the time span since we became public in 2015, we have an average growth of 25%, and we have an EBITDA here, as you can see, hovering around 5, sometimes 6, sometimes 5. And then we have the exceptional year when Enedo was fully consolidated. And after Enedo turnaround, we are back on the 5-ish track. So now Enedo have further a little bit of problem, but we still maintain this 5-ish track. So this as a base for the next picture showing our short-term financial targets. When it comes to revenue and profitability, we have a strong belief that the EMS part of the company will reach that. It will be more difficult to -- it is more challenging, that is how I should put it, to reach the EBITDA target for the OEM part here. So -- but it's a balanced act. Now we are doing the things that we need to do. And hopefully, EBITDA will come up and show a small plus towards the end of -- towards the second half of the year. Regarding the capital structure after the acquisition of Selteka, where we actually borrowed then SEK 66 million. Our net debt-to-EBITDA ratio has come up 2.9 if we just put in the numbers. The way we calculate our covenant, we can actually use pro forma accounting. So we use back -- also put back the Selteka EBITDA for 12 months. And then we end up on 2.7. So we have some headroom to 3, but not super much. We had a strong -- I would emphasize that. We had a strong cash flow in the quarter. We also had a decent or even strong cash flow in the first half year. Still though, paying out this or borrowing the SEK 66 million and paying them out has higher this KPI a little bit, yes. When it comes to equity ratio, yes, we are well above target. Last picture, our long-term financial targets. Here, we target for an annual growth of 15%, where we foresee and have the ambition to grow organically 10% and with acquisitions, 5%. We also have an ambition on a little bit further down the road to reach 9% EBITDA. And there are a lot of things that actually are going our way when we see the megatrends with nearshoring, electrification, automization, robotization, all of this is driving the use of industrial electronics, and that is exactly where we are, both in Enedo and Inission EMS. We are also having a program internally to make things more efficient, steering towards larger business units, using digital tools for more improved and centralized sourcing, centralized and also using digital tools for improving sales quality. So -- and also shifting here, I have talked about that a few times now, but shifting from focus from acquisition growth to organic growth and really put back money there and put back energy there. That is for the medium term, will improve the profitability from our 5-ish to this 9-ish. That is our ambition. So all from me. So Q&A.

All right. Let's move to the Q&A. [Operator Instructions] And while we wait for that, I'll start off with some questions on my own. So looking a bit at order intake in the quarter and the book-to-bill, this was a bit lower than the past 2 quarters. And seeing as we don't have that much history on your order intake figures, which only started reporting a couple of years ago here. How should we view this? Why is it lower now? And is there typically any seasonality in your order intake that should be considered when looking at the company?

Yes. We have -- yes, if we move back a little bit over 1 year, we ended '23 with extremely low booking, 0.5, if I recall it right. And then it recovered a little bit Q1 '24 to 0.7. And then we have from that point increased. And of course, that low booking that we had end of '23 and then during '24, that is why, of course, the sales have come down. Now we have had positive book-to-bill since summer last year, really. So it has improved step by step. And yes, we had really good numbers Q4 and also Q1. And there are some bigger customers putting in these big frame orders. So there are variations coming from that. So perhaps now that Q2 came in very close to 1, at least we are running at that speed. And there we also have a small difference because Enedo has steadily now coming from a low level, of course, you have to remember that. But they have steadily book-to-bill over 1. So they are a little bit better than the EMS portion Q2.

Yes. So that was a follow-up question I have to that on Enedo, which has obviously had a weaker sales development. Could you just give some more detail on what has been driving the weak sales development there and now what is driving the stronger book-to-bill relatively in Enedo?

We have had -- the customer base on Enedo is much smaller than for the EMS business area. And they have a few substantial customers that spent a lot of time last year '24 to do destocking and some also of the important customer have been -- keep on doing destocking during this year. But now we -- I actually had -- I took part of a sales meeting a couple of weeks ago with one of the biggest Enedo customer, and now they have realized that they are quite low. So now when their demand is going up, they have difficulties with the delivery capacity, and they have destocked too much. So that I think there is a pendulum swing, you really want to destock because you really want to squeeze out cash and then stock is shrinking and shrinking and thinking. And then you reach a point when the combination of demand going up, perhaps not dramatically, but still going up and you are buying too little to defend that. So now this particular customer, they were in big trouble now, and we will do our utmost, of course, to assist them in shipping. But Enedo have the same challenges as EMS in that sense that components have long lead times. So if you all of a sudden realize that you need goods and we order components, they are a few months away. So we will start to ship more to that particular customer now and -- but there will be a buildup. So I think that's where you see it. This customer, lower demand from their customer in the turn, together with destocking that has really crashed the situation for Enedo vis-a-vis Inission. We also -- in Inission EMS, we also have those customers that have dropped severely. But our customer base is much more fragmented. And also, we have other customers that is picking up instead. So we are balancing out much better on. We are less sensitive. That is another way of putting it, having a much wider customer base.

All right. There are a couple of questions on the Selteka acquisition from the audience. So let's move on to that. First of all, could you give some more detail on Selteka's revenue? You mentioned that their adjusted revenue is around SEK 300 million. And do you think that you can get more than 6% EBIT margin on those SEK 300 million?

Yes. To compare apple-to-apple, that's why I mentioned that, they have a very low material share. And the EMS industry in that part of the world would typically be 70%. So if you just do that theoretical exercise, moving from the 40-ish to 70, you will end up with almost double the turnover compared to the reported turnover. I think we have to be careful though and measure profitability against real turnover. And we absolutely think there will be room for improvement. We will be able to assist them. They are very, very smart and they are very strong on the production side, very, very lean focus, as I said, and very strong there. But we think we can help out and assist with our purchasing power for the items that they are actually purchasing because they are also purchasing quite a bit. We can help out there. And we will also, I think, be able to help out when it comes to commercial thinking, pricing strategy and things like that because the owner there and the management there, they are engineers and service-minded, looking after the customer. And we love our customer, and we always do the utmost for our customer. But we also -- in detail -- on a detailed level, we also have to make sure that all customers pay their bills in that sense that they produce a decent margin measured on customer level and also measured on article level. So I think there will be room for improvement there for Selteka coming into the bigger and more organized perhaps in that sense, commercial side of the business.

All right. And the second question on Selteka is does your guidance include the contribution in H2 from Selteka?

Yes. We have targeted for SEK 2.2 billion, and we think we will reach there. And then Selteka will contribute second half year. We have put a big number there, SEK 75 million. So yes, that is included, but that is also the site what we are talking about. So even without Selteka, we still are close to our targeted number. But Selteka will make it, yes, easier to achieve, if you put it like that or less challenging, but another way of wording it. They are included, yes. And as a comment to that, I think we are a company that is continuously doing acquisitions. And as mentioned, we have the idea of growing, and we have the idea of growing continuously with acquisitions. So when we guide that is acquisition including. But then, of course, acquisitions, they come in blocks. You don't -- you sell them do a quarter or half acquisition or we don't acquire in that. We like to buy whole companies, at least as much of the company so that we can fully consolidate it.

Yes. And then also since there seems to be a slight confusion here on Selteka. Just to be very clear, there is a question here from the chat asking in [ SEK ] revenue, how much should we assume from Selteka and at what EBITDA margin?

Yes. We should -- we are thinking if they just go as they have been doing, they are on SEK 15 million, SEK 16 million. So we -- in our thinking, we have put in SEK 75 million for the second half of the year and at an EBITDA margin about 6%.

Okay. Very good. And there's also a question if you have any comment on the previous acquisition of AXXE and how that has developed since?

Fantastic. AXXE is a star [indiscernible], sorry to say. They are performing extremely well. They are not performing, and I have seen it before, they are not performing according to what they showed us when we are negotiating about the price. No, they are not performing that well because they are extremely optimistic. But we also didn't put in those numbers when we calculated the price. And as presented earlier, we have this earn-out structure with AXXE. So we have acquired so much so that we consolidate it. And then we will pay for the -- almost the second half 2026 then. So they are doing really well, both cash flow and profitability, extremely good. And they also have -- they are also suffering from customer. They have a very interesting customer base, not so perhaps mature customer. So they are doing extremely good. Still, they are suffering from customer not developing according to plan. But as a total, if you sum it all up, it's -- they're doing well.

All right. And some more questions from me while we wait to see if there are any more from chat. So a bit of a technical question maybe, but when exactly was the Tunis factory moved from the Enedo to the Inission segment? And how much internal sales should we expect between the segments due to that?

We have this inauguration I said here in Q2. But since we have had only symbolic sales so far, we -- to make it simple for the finance department here, we will shift and you will see the Tunis numbers going into the business area EMS from Q3. So we made a clean cut there. The numbers from the Tunis factory has belonged to Enedo Q1, Q2. And then we shift now in Q3, even though the sort of the formal handover was in the middle of the quarter. Pure financially, we haven't moved it yet.

Yes. And roughly how much internal sales will you be reporting in Inission to Enedo?

Extremely difficult to say. We have a handful or perhaps even a little bit more than a handful, close to 10 RFQs out there. And we know that lead time in sales for EMS industry is 2 years, could be 3 years until you have substantial business. So I think for H2, we are talking about limited numbers. That is nothing that we have in our plans. We are working to break through and to start to get orders, and then we will see how it will build up. But we don't have anything in our prognosis for the second half of '25. It's a matter of sending out quotation, inviting customers to go there and also be very careful so that we get the right type of customer. And of course, especially are we looking among existing [indiscernible] in customers, bringing them to Tunis, explaining that this is -- could be an alternative for when they are using other EMS companies today, which don't have -- which have this low-cost alternative. So you could put [indiscernible] the second half of the year.

Yes. But now you're talking about external customers for the Tunis factory, right? I was sort of wondering now that you're moving to the initial statement about the internal sales between the segments.

Sorry. Yes, that we will sell to Enedo, Inission EMS would sell to Enedo. That -- I don't have that number, and we haven't presented it. I have to come back there. I don't have that number. That is basically the Italian proportion of the Enedo sales, 3/4 of the sales. 3/4 of the sales.

Okay. Very good. Another question from chat now. What H2 margin are you aiming for in Enedo? And how is your revenue visibility for this segment in H2?

Enedo, we have more or less the book there. Maybe we need -- we have to put it like this. When it comes to the Italian portion, which is about 3/4 of the operation or 2/3, they run with longer lead times, very close to the EMS system. When it comes to the Finnish portion, which is more stable and both profitability and revenue-wise, and that's why they have increased the share of the total company. They run the shorter order horizons. They get projects that can actually deliver out just within a few months. So that is the visibility. So we have good hopes that the turnover level have come to its bottom and it will, in sequence, improve during H2. We have that good visibility. So we can see that now. And profitability-wise, we think we will make a plus/minus 0. And then I put it like that, we will have restructuring costs for the Italian. And since it's really a little bit complicated, what we pay and per person there, but we have decreased with 17 persons in Italy, 15 of those have now signed. So -- but excluding restructuring costs, we think there will be a breakeven case Q3 and a small profit Q4. That is how we see it.

All right. And next question is with the current B2B in EMS, is H1 a reasonable run rate to assume for sales in H2, maybe adjusting for a seasonally a bit slower Q3?

Yes. Yes, I think that with where we think actually that there is an upside. There are tendencies for an upside. So we think there are reasons to believe that it will be a little bit faster H2. And then as said already, [indiscernible] on top of that. Yes.

And another question from me then. How is customer interest for the new factory that you talked about in the report? And how long do you think it will get -- it will take to get the utilization of this new factory?

As we speak now, we have just moved the operations from -- we were in Borås earlier. So it's not greenfield in that sense. It's largely a rail building and it's brand new. And we have a different ratio, as I said, between production floor and office floor. So we will be -- we have a lot more -- we are able to run a lot more here compared to at the previous time, but we will not sell more. And it's really sales that is the limiting factor here. And when sales come back and we will have -- we are ready here, and we will have the capacity to be able to move in more customers. And yes, almost as difficult as the last question, how much we will sell from Tunis because we are working constantly on this, of course. And -- but again, lead times are long and if it would have been easy to just bring in new customers, but it's also tough competition. We have very good and very active colleagues in this business also doing also very well. So it's a fight there, bringing in customers. But of course, we are optimistic. Otherwise, we wouldn't have done it. And we think we have the idea of proximity at mission and being present in the western part of Sweden, Gothenburg region because it's really what it is. We think that is important and it should be possible.

All right. Very good. I don't see any more questions from the audience. So with that, I thank you all for listening and I'll ask Fredrik to say some final words.

Yes. Thank you. Thank you, Henric, and thank you for all of you that have been listening. I think as a final remark, we are perhaps not totally out of the woods yet, but soon, soon, we are getting there, absolutely. Thank you very much. Take care.