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

Hello, and welcome, everyone, to Inission's Q3 presentation. My name is Henric Hintze, and I'm an analyst at ABG following the company here to help moderate this call. We will start with a presentation by CEO, Fredrik Berghel, and then we'll move on to a Q&A session. So throughout the call, feel free to type your questions in the chat, and I'll read them out for Fredrik later on. With that, please go ahead, Fredrik.

Thank you very much, Henric. Ladies and gentlemen, 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 Hulteberg, we started this company 18 years ago, and we are still both active. I am the CEO; and Olle Hulteberg, Chairman of the company. Inission Group consists of 2 business areas: Inission EMS contract manufacturing of industrial electronics and Enedo, which is a company developing, marketing and selling power supplies. Both these business areas are operating with customized high-end, high mix, low-volume industrial electronics. Today, I will present our Q3 financial performance. I will go through some highlights from the quarter. I will also comment on our financial targets. And at the end there, as Henric said, we will have a Q&A session. So to the market and to the numbers for Q3. Reported sales increased 13.5% to SEK 531 million. Adjusted for Selteka acquisition, the organic growth was 4.1%. High-level explanation of the Q3 result. Net added value came out SEK 30 million higher, of which Selteka contributes with SEK 28 million. Higher volume, slightly higher material share, 54.5% compared to 53.5% last year. We also have a cost level significantly higher, SEK 26.8 million, but most of that comes from Selteka with SEK 21.1 million. Depreciation SEK 0.9 million higher, of which Selteka also contributes with SEK 1.4 million. This gives an EBITDA of SEK 29 million, which is SEK 2 million better compared to last year. But if we adjust back for Selteka, it's SEK 2 million lower. If we have a look there on the cost side, if we take out Selteka and if we adjust for 3% inflation, our cost level year-on-year is sort of flat out, SEK 167 million to SEK 167 million. We are, as you're well aware of, doing a restructuring program, especially on the Enedo business area. And we have restructuring costs in the period. We also have extra costs for IT projects. So if you add those together, it's about SEK 6 million that we have extra here. I will revert further to the explanation per business area. With lower financial net of SEK 4 million, including a currency loss of SEK 2.3 million, this gives an earnings per share of SEK 0.7, which is [indiscernible] better than last year. Year-on-year, as the last picture show that we are back on the growth track, which we are very happy for. If we look at the quarters in sequence as this picture shows, it shows even clearer that sales and profit are recovering. I'm as sure as anyone can be that we have passed the lowest point now and that we are increasing in revenue and in profit. So far, a lot of our cost-cutting actions have been eaten up by restructuring costs, as I just mentioned. Q4 will also be in this way. But then Q1 next year, it will be clean and then we see the full effect from the cost cut, and we will have no restructuring costs. So hopefully, the recovery will improve even further in 2026. Looking at the big picture, we are almost 100% less employed, Selteka adjusted compared to last year. So it must show up in cost. If we look at the LTM numbers here, certainly doesn't look like recovery, but I think I've proven my point with the 2 previous pictures. Net sales, LTM was -- is close to SEK 2.1 billion and EBITDA for 12 rolling months amounts to SEK 19 million or 4.3% as a margin. If we take a few half a minute or so to zoom out, if you look at this picture, it clearly shows the overheated market '22 and '23. For Inission, we also had, if you remember, a really good first quarter '24. So that is a little bit Inission specific. So it illustrates the development of the market. If you look at the long-term trend, I would say that we -- if we reach our targets now for this year, meaning that we will have between SEK 2.1 billion and SEK 2.2 billion in sales and SEK 105 million, SEK 110 million EBITDA, if you look at the long-term trend there, I think it aligns quite well. 2025 will align quite well with the long-term trend. So looking at the financials per business area. Inission EMS did a good quarter. all in all, a really good quarter. Turnover much higher even adjusted for Selteka, which contributed with SEK 44 million. So compared to last year, SEK 405 million over SEK 355 million. And then Selteka adjusted, it gives an organic growth with 13.9%. We have higher salary costs in the period. That comes back to that we actually run -- we took away a backlog that we have in our Inission South company, very interesting customer, Falco that at last has started to order big volumes. And now we have fallen behind. We are catching back those volumes. So we were running the South factory more or less full speed in July. We also have some difference in the salary vacation debt booking, which comes down a little bit. But year-to-date, I think it's all correct. Perhaps it was a little bit too low salaries in second quarter then. So EBITDA amounting to SEK 34.6 million compared to SEK 25.3 million last year, which gives 7.7% as a margin compared to 6.3%, which is clearly over our target of 7%. Volumes for the rest of the quarter looks stable. So this, together with further cost decrease should improve EBITDA even further. So if EMS did really well, Enedo is, of course, a sad story. We are shipping much lower volume Q3 compared to last year, SEK 82 million compared to SEK 115 million. That is 29% down. And of course, anyone understands that it's difficult to sort of catch up with the shrinking in the situation like that. Compared to last quarter, Q2, however, it's slightly up, SEK 7 million higher or 9%. Gross margin, a little bit lower. This together with the volume drop gives a net added value decrease of SEK 15 million. Costs are coming down. We have a cost saving of SEK 7 million. However, of course, not enough. But then we also have the restructuring costs included here, which I talked about earlier of SEK 3.7 million. We will also take restructuring costs during Q4 about this magnitude, SEK 3 million, SEK 3.5 million. From Q4, the factory in Tunis will be included in the EMS profit reporting. For Enedo volumes, however, look improving to the future. Q4 will look good, still lower than last year, but we are constantly building our order book here. Book-to-bill have actually been both year-to-date and in the third quarter, 1.3. So we are on a -- from a low level, also on an improvement track with Enedo. So we are glad to report that our latest family member, Selteka, have performed really well in the quarter. So I just report some numbers from last presentation. We acquired 100% of UAB Selteka last of June, which is a company that had a turnover last year of EUR 60 million. Earning on EBITDA level, 8.9%. The plant and the factory is located in Kaunas, Lithuania with 260 employees. And we really think that we have an interesting acquisition here, very complementary and very interesting customer base, stable financial history, complementary geography in Northern Europe, which means for us, a new market partly, a good size of the company. It's EUR 16 million, but they have very little material share because one of the bigger customers is providing material. So if you count that back, it corresponds more to a EUR 300 million operation. Strong and very efficient lean culture and very efficient production. We also sympathize a lot with the management culture and values in the company. We are also, as I have said, very happy that the seller took a big portion, 25% of the value in Inission shares. So Arunas have become one of the biggest shareholders in Inission Group in this way. So some other highlights for the quarter. Now the factory in Tunis is also formally owned directly under Inission AB, which -- and that also means, as I said, we will report in the operations in the segment -- in the EMS segment from next quarter, Q4. We have also appointed Ali Blel as the new MD for the Tunis factory. Ali has a very relevant production and management background. He has been operational responsible for quite big operations. So we really hope Ali will be a good contribution there. So to our financial targets. And as a background to our financial targets, I would like to show this picture, our long-term performance. Since we became listed or public 2015, we have been growing in average 25%, '15 measured to '24. And we have, as you can see on this picture, been like a 5-ish company EBITDA. Then we have this severe drop counting in the Enedo losses '21 and then the turnaround of Enedo and now we are sort of back on the 5-ish track here. So 2 weeks ago, we sent out the PM, the Board of Directors decided to revise the targets somewhat. It's not no drama, but somewhat for 2025 compared to what it was earlier. So we have taken down the revenue from SEK 2 billion to -- between SEK 2.1 billion and SEK 2.2 billion. And we think it's now -- so close to the end of the year, we think it's going to divide between the business segment here as SEK 1.82 billion for Inission EMS and SEK 330 million for Enedo. We took down also the EBITDA target here. And this is -- now we're talking about reported numbers, no adjustments in this. So we think EBITDA will come out close to or vary around 5%. And the split there, the EMS sort of follow the track 7% over 7% compared to the old target, but we revised then the OEM or the Enedo target quite a bit, as you can see. They will not be able to do black numbers this year, unfortunately. The other targets are unchanged, meaning that we target for a net debt-to-EBITDA ratio of 2.5, having now including, I want to say also 2.9 and where, of course, the Selteka acquisition is included. And then we are -- if we count back on pro forma Selteka, we are a little bit lower at 2.8. Equity ratio, 30%, same same. And also, we want to be a company that pays out dividends, of course, if the financial situation allows for that. So over to our long-term targets or -- sorry, midterm targets, and there are no changes. And we really think with organic growth 10% and we top up with acquisitions 5% and meaning that we will have a total growth over the years of 15%. If we can stabilize around there, organic growth is extremely helpful, of course, for the profitability. And then moving now from our 5-ish up to this 9%, having in mind that we are doing the strategic changes that we are doing, we think that should be really doable. From capital structure, equity ratio point and dividend, midterm targets are the same as the short-term targets. So over then to you, Henric, have we got any questions for today.

Yes, we do. I'll start off with some questions from the chat. If anyone else listening in has questions, feel free to type it in the chat now. So first question, you have previously talked about a medium-term goal of achieving an EBIT margin of around 9%. What would be required to get there? I assume a better market and higher volumes. But in terms of your own performance and company structuring, what would be needed to reach a 9% EBIT margin given that historically, you've been lower than that?

Yes. Obviously, the turnaround of Enedo, we have to be successful there. So we -- and now we have been shrinking Enedo. So we have placed a cost level that should match the income there. So that is, of course, number one, number one. So -- and now Enedo, when the EMS business area is growing, and we are also making acquisitions there, the Enedo portion of the company shrinks, fades away almost. But still, we will, of course, look into also structural alternatives for Enedo. If we -- one of these days, we will not continue the Enedo struggle forever, of course. We will look into alliances and other possibilities. Either do something offensive, go forward or give it up. So we are -- the Board and the management are looking into structural alternatives for Enedo. So that is number one. If we look at the EMS segment by itself, I think there are -- it doesn't look -- sounds so perhaps dramatic to go from 7.9%, but it is, of course, quite a bit of a journey. And there, I think there are those items that we have talked about. And the most important there that is organic growth. If we can -- and we have focused over and -- focused on and investing time, energy and money in organic growth because that is extremely helpful for the possibility to make a little bit better margin. But then apart from that, there are all these classic things EMS is a tight and tough industry. You have to be smart and good. I normally when I talk internally about this, we have this 12 wheels that you have to adjust. And it's a matter of having the right amount of people, the right amount of square meters. We do the smart investments, continuously improve, of course, efficiency in the factories. And you have to be constantly maneuvering here. And then, of course, also in the environment when prices are changing on the material, we also have to be extremely alert since we are buying material on behalf of our customer. We have to be extremely alert and actually moving those extras further to the customer. So in short, I could talk the rest of the day, of course, about this, but that is an extremely condensed version of why we think if we take the Inission EMS alone should be able to move from this 7% to 9%. And that is not a -- it's not a rocket science, but it's hard work, yes.

All right. And I mean, sort of following up on this, there was also a question if you could specify a bit more what Enedo needs to do to reach positive margins and also what your long-term hopes are for the 2 segments margins?

We have been on a declining journey, and that is as good as it is with increasing the volume as bad and as difficult as is when you decrease the volume. So of course, stabilize the volumes and also to start to increase there. But now first, what you have to do that is -- and also that is an internal thing I always talk to my managers about, we can't have the time against that. We have to create a situation where we don't have time as an enemy. And we have done it once for Enedo and then the market fell even further and now we have done it again. So now we have created a situation where income and cost match so that the management and all our coworkers actually can focus the energy of actually doing these improvement items. And they have -- when I talk to Enedo customers, the products are good and extremely appreciated. It's a matter of finding more similar customers that really appreciate this good and smart technology that we actually have invented. And then being a product owner, looking at it generally, the product owner that have good products and have -- and are rightly placed in the market should, of course, be able to earn more than a contract manufacturer. That is our logic. And so -- but it has been a tough journey, and we will keep on struggling and and do these changes that is needed, absolutely. But then also, as I said earlier, we are looking into structural alternatives here for the whole business segment. So shall we add something to get the scale of economy? Shall we divest? Shall we look into the segments -- the subsegments of Enedo? And there, we have clear ideas of that. Perhaps this segment is even more cost-based. We pay that out. We take the cash flow and we paid it out and we focus. I think focus is a good word here when it comes to how to improve Enedo because they have been too wide. Now what we talk about in the Board and with the management is focus. We have to do less for less various type of customers and be more focused. I think we will have the clue there.

All right. And when do you envision Enedo contributing to overall EBIT?

I -- my absolute ambition and our absolute ambition is, of course, they will not be losing money next year, absolutely not. But when will they pass -- if the question is when will they pass EMS business area in profitability, 4, 5 years ahead. 4, 5 years ahead. Because that is the long yard. That is the long yard.

I think the question was about when it will be breakeven.

Yes, that is next year, absolutely. Absolutely. And then also one doesn't have to forget that we have done this factory shift that I have talked about. And Enedo have contributed with an extremely nice, highly efficient factory in a low-cost region, where now we have moved it over to the EMS segment. So now we are putting quite a bit of energy in scouting that type of customer. And we scout in our own customer list because we have customers that are running higher volumes that we sometimes lose out or they ask other colleagues of ours in the industry to run those volumes when they get a little bit more cost-pressed. Those are perfect to be moved then into our Tunis factory. So we see also quite a bit of an opportunity there.

And just to be super clear here, when you say next year, I think you wrote in the report that you hope already in Q1 that it will be breakeven. Is that correct?

Absolutely already in Q1. Absolutely.

Okay. And just if you could just repeat the one-off costs that you mentioned in Enedo, what exactly were those for? And how much was there?

We -- as I said, we have been shrinking the factory quite a bit in Tunis. It's close to 100 coworkers that have gone home. So we have been shrinking the cost in Tunis quite a bit. And also Finland, a little bit. But in Italy, we have been going there. We have taken down the amount of coworkers from -- with 19 people from 55 to 36. So the organization have been rightsized. But of course, that comes with a -- when we decrease in companies -- countries like Italy, it comes with retainment package. You can't like in Sweden, just to work and then you go. You have to pay like a retainment package there. So it comes with cost. And all in all, we talk about EUR 600,000, EUR 700,000, and we have taken half of that when it comes to the Italian operation. EUR 3.7 million to be very precise, EUR 3.7 million of those are in Q3 now, but it's extra that you don't get any. Well, of course, we have to take care of our coworkers when they have to go home and start -- try to do something else. So that is their caution, so to say. But of course, in this situation, when you have very little money and you're even on the minus, these EUR 3 million or almost EUR 4 million in the scheme, that makes a big difference, of course. So that going off the table from Q1 forward will make a big difference. Together volumes coming back because we see now we have a breakeven case here, EUR 2.6 million, EUR 2.7 million per month for the Enedo. And we have the order book there now, and we see perhaps more of a EUR 3-ish million going forward here. So if we can run over this EUR 2.6 million, EUR 2.7 million, then we have certainly a breakeven case.

So from Q1, we should count on costs being almost EUR 4 million lower then is that correct? Or is this only the cost for the reductions? So how much will the ongoing costs be?

Yes, the ongoing savings is EUR 1.1 million starting. But this is -- this shrinking we started in April. EUR 1.1 million, that is what we talk about. That is how much Italian costs have come down. At least -- that is at least 19 people.

And maybe I misheard you, but at the beginning of the call, did you say something about IT costs as well?

Yes, we are. That is minor in the situation, but still -- and that is on the EMS leg. We are investing money in actually connecting our CRM system with the ERP. So that is not a stand-alone. We want to have that. So all the data, all the orders, all the invoicing, everything the salespeople and also the management should see in real time to connect the CRM. So we are spending energy and money on that, and that is also like an investment. But that is also -- we don't put that up there. I'm mentioning, [indiscernible] mentioned, but that is cost of doing business, of course. But it comes extra -- a little bit extra now because we will not connect monitor with Salesforce next quarter also. So we are mentioning it.

But how much was that?

Yes. All in all, because also the mother company also have an IT project that is SEK 2.3 million, I think, totally. But if you run a company, you need IT systems and -- yes.

Yes. We just got a question from the chat now. What are the total one-off costs this year, including the listing change and the split between the listing change and restructuring costs?

I don't have all the numbers. But if we take big numbers, we are on extra about SEK 20 million. And SEK 7 million -- and now I'm also counting in this Q4 extra, what is the rest there. So SEK 20 million for the total year, about SEK 20 million. And yes, half half, -- if you make it simple, half half, about SEK 10 million. But then also we have external extra for the list changing. But then being on NASDAQ main market also requires more from our IT securities program. So we are -- so that comes up as extras there. We have to follow CSRD requirements so that we pay and those we don't count in that money. That is more like we are on a different level. So that is also a little bit more costly, but those are not included in those -- that money. But that is also part of growing the company and yes, it comes a little bit in steps like that. But SEK 20-ish million, that is my answer to the question. And half, half.

Yes. And a follow-up on that question also, what was that you were expecting in Q4 for one-off costs?

SEK 3.5 million that is those -- that's what is left in Italy.

Okay. And speaking of Enedo, any update on how customer interest for your Tunis factory is developing?

We have had a handful of visits. We have produced equally amount of quotations because we don't quote. If they don't spend the time and energy coming visiting us, we wouldn't quote. So that's where -- that's where we are. And then we have quite a few leads though, 10, 15 -- we have a long list of, I think, 20, 30 names in our customer catalog that should be interested. But out of that, we have a short list of perhaps 15 companies that we work a little bit more focused on to make them understand that they should utilize our Tunis factory. And we will get there. We will get there. But we have long lead times in our industry from the first discussion until we actually have volume production. If it's a new customer and a new project, we talk years. So we have to be patient also. We have to be patient also.

And on your latest acquisition, Selteka, how has the integration been going there?

We have a very, as you know, very decentralized structure. But we have started to work together with them, especially when it comes, of course, reporting, that is the next week so that they follow our schemes and we follow them up. So we put in our monthly financial review and budgeting process, all of that is right away. But now we are also making a plan out of -- I think I've told the story, but when we do the due diligence, we make -- we -- parallel with that work, we make this list of things that we want to look into and improve. And now we have taken that list and convert that to an onboarding program. And that -- the obvious and the first things that we look into that and where we have also started, that is sourcing because we -- normally, we have the same suppliers. Selteka is a little bit different, though, since they -- as I said earlier, they -- their customer is providing quite a bit of material. So they had less material share. They are -- if EMS company in that part of the world should have 70%, 75% material share that would be typical, and they are more like 40 companies. So the synergy in sourcing is less since the customer provides material. But then we also have integration on the others in the other direction. We -- they are extremely efficient in production. So we are sending initial EMS people there to study because they do good things. And next, what we are looking into that is some of the equipment they have is a little bit on the older side. So now we are discussing for the investment program. And of course, we are cooperating so that we use our knowledge and our contact and also our price list when it comes to investments. It's a whole scheme of activities.

Yes. And did Selteka contribute with, would you say, abnormal margin in the quarter or anything especially?

They are quite defensive people there in Lithuania, but they -- even on the EMS scheme, they were above average. They were above average. They contributed, as I said, with SEK 4 million EBIT, and they had SEK 44.2 million, I think, in turnover. So higher than average. But that is 1 quarter. You have to see it over time. But it's with a nice start, isn't it? I like that. Good start.

It sure is. All right. I think those were all the questions from this time. So with that, Fredrik, I leave it to you to say some final words.

Thank you, everyone, that have listened in. And that was all from me today. Have a nice day, and take care. Bye.