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

Good morning, and welcome, everyone, to today's earnings presentation by Inission. My name is Henric Hintze. I'm an equity research analyst covering Inission here to moderate today's Q&A. But before that, we'll start off with a presentation from CEO, Fredrik Berghel. [Operator Instructions]. With that, please go ahead, Fredrik.

Thank you very much, Henric. Welcome to Inission Q4 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 for over 18 years ago, and we are still both active. I am the CEO and Olle is the Chairman of the company. Inission Group consists of Inission EMS contract manufacturing of industrial electronics, Enedo, which is a company developing, marketing, and selling power supplies. Both these businesses areas are operating with customized high-end and high mix, low-volume industrial electronics. I will go through the financial performance of the quarter and comment on the highlights of the quarter and then also mention or go through our financial targets. And as Henric said, we will end this with a Q&A. So please come in with your questions. Reported sales increased 23.7% to SEK 657 million. However, adjusted for Selteka, SEK 49 million, sales increased SEK 77 million or 14.5 percentages organically. I think it's important to point out here that we, despite very high sales, still have a book-to-bill ratio over at 1.1, which indicates that this higher speed can be maintained. We are also really happy that Enedo are back in black, at least on EBITA level for the quarter. To explain the numbers on a high level, our net added value turnover minus direct material, net added value was SEK 35.9 million higher. If we adjust for Selteka takeaway there now at SEK 29 million. The material share was somewhat lower compared to last quarter, partly due to Selteka, which have a quite low material share. Cost level was SEK 11.3 million higher. AXXE adjusted for Selteka. We also have restructuring costs, mainly in Enedo during the quarter of SEK 5 million. And we have also restructuring costs at -- in EMS on SEK 1.8 million. To me, this indicates now that we are down in cost level. So if we can keep this volume now, we have a cost structure that corresponds to our income level. All in all, this gives an EBITDA of SEK 38.6 million, which is SEK 20.8 million higher than last year. Selteka in the quarter contributed with SEK 2.1 million. We have quite a high financial cost in the quarter, which makes the earnings per share dropping SEK 0.5 from SEK 0.4 to minus SEK 0.1. And this is explained by the acquisition of the last 49.9 percentage of Selteka that we made in the quarter. Compared to the original acquisition analysis since AXXE was performing better, the earn-out made the company valuation coming out higher. So we had a financial impact there, financial cost of SEK 20.9 million in the quarter, which is nonrecurring, of course, and it's also noncash. This is quite in detail described in the press release 14th of November. The rest of the difference here in financial costs are currency that we had a small plus last quarter. Now we have a small minus. If we look at the interest cost itself, it comes out very, very close to last quarter. Year-on-year, as the last picture illustrates, show that we are back on the growth track, which was, of course, we are very happy for. If we look at the quarter in sequence as this picture shows, it's even clearer that turnover and profit are recovering. So far, our cost-cutting actions have been eaten up by restructuring costs. But from Q1 this year, we will have a clean situation. If volume stays now on this level, we have a good chance of even further recovering of our profitability during 2026. Clearly improved net working capital. We have stock coming down, receivables going up a little bit and payables going up. If we net all this up together with the profit, we have an extremely strong cash flow in the quarter, SEK 101 million compared to SEK 70 million last year. We also -- this gives a lower debt. And now with this improved EBITDA have taken down the net debt-to-EBITDA ratio to 2.3x, well below our targets. Also thanks to this strong cash flow, the Board of Directors have decided to propose a dividend of SEK 0.6 per share to be proposed for the shareholder meetings that we have in early May. If we look at the full year numbers, sales increased with SEK 56 million to SEK 2.206 billion. But then, of course, Selteka and AXXE, Selteka contributed 6 months and AXXE contributed 1 month, and that sums up to SEK 106 million. So organically, we have a small decrease. We decreased with SEK 50 million or 2.3%. If we look at the explanation of all -- of the EBITDA result here, we had a really slow start for both business areas. And then we had also losses for the Enedo business area, the first 3 quarters, which brings down the EBITA result to SEK 111 million, which is then SEK 14 million lower than last year. And then as explained earlier, the profit per share here or the profit after tax is clearly affected of this SEK 20.9 million reevaluation of AXXE, the last 49.9%, as I just mentioned. Looking at the year numbers and the long picture here, we certainly doesn't look like a recovery, but I think I proved my point with the previous pictures. Net sales coming out at SEK 2.2 billion, EBITDA amounting to SEK 111 million or 5% as a margin. And as I said last quarter, I think this picture really illustrates our long-term performance and growth here. And then you can clearly see the overheated market, generally the overheated market '22 and '23. And then we have destocking and our customer had too much on the shelves '24 and the first half of '25. So I think this is a good picture illustrating that. Then it also illustrates Inission's specific situation where we actually were eating or taking high amount of Enedo losses 2021 and now also 2025 here. But looking at the long trend EBITDA level, looking at the growth here, I think we -- if we extrapolate numbers from pre-COVID, you can see that 2025 was quite okay. Looking at the business areas separately, all in all, I think the EMS portion performed decent considering the quite slow start. And then now we have had a strong increase in the last -- both Q3 and also now Q4. Here in Q4, we have an organic growth of 19% for the quarter for the margin here has been affected of the very unbalanced first half year and second half year. But I'm thinking with this higher speed and if we also have a better balance in loading over the year, that we should have good chances of improving the margins further. Looking at the -- comparing with our midterm target, we are only 2.4% away compared to the last 2 years now, ending up at 6.6% EBITDA margin. Enedo, of course, different situation. Also this quarter, we are shipping in lower volume compared to last year, but we are very much closer. Now it's only SEK 6 million below or 6%. As explained earlier, we have taken down cost level, both in Tunis and also in Italy at the Enedo side. And now we are in balance. So it has been offset also for the last time now in this quarter by SEK 5 million in restructuring costs. But still, even having that included, we have SEK 3.5 million better EBITDA in this quarter compared to last year. If we put this buyback, we will be at an EBITA level of 6.2% or 6.7%, which happens to be very close to the EMS or the same as the EMS result. From this quarter on, there will be no extra for restructuring. And if volume stays here, also Enedo will be able to produce decent margins forward. And then some main items from the quarter. We have became -- we have applied and the Board of SOFF have accepted our application being a member of the SOFF and that is an association for companies within safety and defense. We have, as I have said now, acquired the last outstanding 49.9% of the AXXE shares -- and this have hit us with this financial impact that I have talked about. And then, of course, what is better acquiring a company that goes better than you think and then you have to pay a little bit more or that it goes worse than you think and you have to pay less. Yes, one can be philosophical about that. But still, we are very happy about the AXXE performance so far. We have also employed a new Managing Director for our company Inission Syd, Torkel Skoglosa. He has a background from HEXPOL and Nolato and his latest was from Bona in down in Skane. And he has a very relevant industrial background from similar industry as ours, same setup here. So we are really happy that we have Torkel on board. Over to our financial targets, the Board of Directors for Inission have decided the financial targets for 2026. Sales for the full year to be between SEK 2.3 billion and SEK 2.5 billion compared to last year of SEK 206 million. Also, EBITDA margin is expected to be above 6% to be compared with the actual for 2025 of 5.0%. We also want our net debt over EBITDA to be between 1.0 and 2.5. Looking at our midterm targets, thinking about our historical performance, we have always had good growth. So -- and now we have -- we are talking about having 50% annual growth. That is our target and dividing here 10% organic and 5% by acquisition. Actually then compared to history, slowing down acquisition speed and focus on organic growth. EBITDA, EBITDA, we think we, over time, should be able to be among the best in class. So 9% is our target there. And there, of course, if we are home with our growth in volume, we have more to prove when it comes to profitability. Historically, 5-ish has been our standard. Our strategy have, however, brought the EMS portion of the business up to even 8 2023 and as shown here now, 7-ish the last 2 years. Enedo, we have turned around twice now under our ownership. But now Enedo is a smaller, more focused company, and they should be able also to produce decent margins. But all in all here, we think we are in a good industry. And we think our shifting from acquired growth to organic growth will be helpful for our profitability. We also think that we -- that the mega trends that I have talked about many times, they are still super valid. We see this regionalization and nearshoring. We also see that robotization, automatization, digitalization and now also Internet of Things with machines talking to other machines, and this will be even more driven by AI. And then not the least, we have electrification here as a strong driver that are a driver for electronics. So just to sum this up, a few takeaways before the Q&A session. We had a really strong sales in the quarter, increase of 24%. The last of the restructuring cost has been taken in the quarter, SEK 6.8 million. Order taking follow positive trend and comes out at SEK 1.1 billion. We have a very strong cash flow at SEK 101 million. We have also the Board of Directors have decided to propose a dividend of SEK 0.6 per share to be decided by the shareholders in our meeting in May. So that was all from me. Do we have any questions, Henric?

I'm sure we do. [Operator Instructions] While we wait for that, I'll ask some questions on my own. So first of all, I thought we could maybe dig a bit deeper into Enedo here. So in the quarter, you achieved an adjusted margin of 6.7% EBITDA. And you say there will be no more restructuring costs going forward. So is that sort of a reasonable level to expect in coming quarters in the near term? What do you say to that?

If volumes stay there, absolutely, we -- I don't think we will go from minus to plus 6.7%. So we don't have the target setting there as shown. We are thinking we should be -- for the full year, we should be above 2%. That is what we target for. That is how we have set it up. But under these circumstances, it clearly shows that also this business area can do -- yes, produce decent margins, as I said. But we -- but then also, it was a good quarter, and then we have the restructuring cost and things are happening. So we have lower expectations on the business area because they are still on an improving journey. So we have to be a little bit humble there also. Yes.

And maybe on the medium-term financial targets as well. No big changes there. But I was just wondering, if we assume for a second that you achieve the 15% annual sales growth that you target, 10% organic, 5% from M&A. How long do you think it would take for you in that scenario to get to a 9% EBITDA margin?

It has been shown earlier. And as I started to say, I've only been doing this for the last 18 years, so I have a little bit of experience. If we are growing, it's extremely helpful. Organic growth is extremely helpful for the margin. So in that combination, 2, 3 years would be my assumption. We should actually reach there. And having a group of company, I mean, Inission EMS is organized in 12 factories and 10 companies, and some of them are doing double digits already. So it's not that we don't know how to do it. It's a matter of every everybody, all the companies is doing it. And then you will perhaps always have some slower performer and some better very much due to loading our company, Inission Syd, they have performed very poorly over a few years. But now when we see that, that factory are loaded and as we write in the report, we have had coming customers there for many, many years in the defense area. And now when they are loading up our factory in a good way, even to the extent that we came behind a little bit. We were not even able to produce as fast as they wanted to, then it is like turning a hand, then they also -- Inission Syd is earning good money. So 2, 3 years would be the short answer.

All right. Moving on to some questions from the chat. Any news on the strategic options for Enedo that you talked about previously?

No. I think we have to communicate those extremely carefully. But we are -- the management of Enedo together with Enedo Board and also Inission Board are looking through our strategic options. And when we have decided where to go, we will, of course, communicate that extremely carefully. But the main track is our business plan. All our daughter companies and our business areas are doing business plan, and that is actually to they have sold the factory. Now they are a focused product company, product development, marketing and selling their products and in a smaller scale, but also much more lean and much more focused and having a turnover of SEK 300 million, SEK 400 million and earning this year a few percentages EBITDA and then grow back to grow up to where they should be 9% as the long-term target is or medium-term target is. That is our base plan. But we should -- since the history has been as it has been, we have carefully looked through strategic options, but not anything decided yet, apart from actually doing exactly what we are doing, and that is the main track.

Very good. Also, were there any write-downs of inventory impacting the Q4 numbers as there has been in some previous years?

Nothing substantial, no. We have -- and we do that every month. We have a system that every month, we are looking through the list and material is not moving. If it's not been moving, we -- it's our customers' material, we should sell it back to the customer. And if we, for various reasons, does not -- if we don't manage that, then we write it off and that we do continuously. So we don't have any extraordinary. We always have small writes off here and there in the factories, but not any particular, no.

Approximately what EBITA margin is AXXE generating at this point?

I think we don't communicate that. I'm sorry. And that is easy for me to say because I don't know the number even, but they are above average. They are above average to say something at least, but I should be careful. But they are doing very well. And they -- AXXE have -- the background here, I said we decided to acquire AXXE the last portion earlier than planned. We had a 3-year earn-out plan with AXXE, and they were doing well. The management together with the main owner, the previous main owner was also the Managing Director of the company. They felt they wanted to be a part -- a real part of the Inission family earlier because they saw our ERP system and difference compared to their own to be to marketing and sales in Norway, then being together, they saw a lot of opportunities there. So it was actually a request more or less from the management that we should do this earlier. And then -- and looking at their trajectory also when it comes to the valuation of the company, okay, we paid a little bit more than anticipated from start, but that's because they performed also very much better. And we think they will keep on performing better. So closing the deal now, I think the seller made a good deal, but I also think we at Inission, made a good deal at this level. And if we look at the average price that we paid for the company because we paid not too much for the first half. Now paying a little bit more for the second half. All in all, we -- I think that was an excellent example of how we can actually acquire medium-sized EMS company and build out our group.

Very good. Another question from the chat here. Encouraging to see Enedo delivering improved profitability. Are you considering any more acquisitions of OEM companies? Or will you avoid such acquisitions going forward?

So yes, back to your question about strategic alternatives. One -- if we really make it black and white here, you should say one end, we looked into actually, can we acquire something to make this sizable. That would be one track. And the other side or if we call it the black track, just sell it. That are the 2 extremes here. And then we have evaluated all the options in between, not all the options, but some scenarios in between to be -- yes. And there are -- the power supply industry are not as fragmented as the EMS industry, but it's fragmented. And our original plan was absolutely if we have solid ground under our feet at Enedo, if we are growing, earning money, positive cash flow, of course, we will go out there and look for add-on acquisitions also to Enedo. That is -- that was our original plan. And this is still our base case, yes. And it could be interesting. It could be really interesting.

Yes. All right. Another question here asking the revenue target of SEK 2.3 billion to SEK 2.5 billion seems a little bit cautious if we add the acquisitions and just a few percent organic growth, it should be quite easy to reach the upper end or even above that. What do you think of that?

Yes. I think we have discussions. I'm very optimistic, and I'm looking forward, and I want to have stretched targets, and we have internal stretched targets, but then also giving out targets to the market, we think we should be really careful, and we should really achieve those. So I agree with you to set the turnover target there. If nothing extreme happens, that should be really doable. And that is the whole idea with the targets we put out here. They should be really doable. Absolutely. I agree with that.

Very good. And maybe the same question on the margin then. You say a margin above 6%. Should we see that as a lower limit or where you sort of expect to end up?

To put it simple there also, we have higher internal ambitions, absolutely. So for us to do 6% if we have that turnover presented, it should be -- you should be very careful, but it's almost a no-brainer. But -- so if things goes right, it should be better. But this should be seen as the base. But then, of course, being humble, we have not been able to do the base earlier years. We have said 6%, and we ended up at 5%. Now we had a difficult year. We had a very difficult start last year when it comes to volume. Again, it all comes back to volume. And then what will happen with the world around us, this insecure things that is happening all the while. But there is also a lot of signs. It's not only me in this room reading the pink paper. And I'm quite confident that the economy will move towards better for our customer and their customer. And there are a lot of these indications. We are quite optimistic.

All right. Very good. Those were all the questions in the chat for now. [Operator Instructions] And while we wait for that, maybe another question on Enedo. So a lot of the drop in sales was due to customers reducing inventory, if I remember correctly. Book-to-bill has now been very strong in Enedo. Has this been those customers coming back mainly or something else driving the strong book-to-bill in Enedo?

No, that is correct. We have -- on the Enedo side, we have a quite -- we have much smaller customer base. Top 10 customer, there is really building up the main portion of what they are doing and even top 3, 4 is extremely important. And there, you will find companies as Daktronics, American company, you will find National Instruments. And those 2 are really, really the big ones. And they had these structural things, especially National Instruments early '25. But they -- we actually visited them a few weeks ago, myself and Karl and some other Enedo representatives. And they -- National Instruments, they are also really optimistic and their shelves have the right level of inventory now. So they are now buying at the same pace as they are shipping their own instruments. So they're buying power supplies from us that goes into their instruments and out. So now we have -- we are selling what they are selling. So we have a good situation there, and they are also optimistic.

All right. Some more questions from the chat here. Which activities are underway to increase participation in the defense industry from your side?

We have quite a few leads among existing customers. Kongsberg, not the least, Kongsberg is Inission's biggest customer. And we have been selling to Kongsberg Marine, and we have been selling to this other division, Discovery. But we have also started now with some test orders, and we have a small business to KDA as they are called, Kongsberg Defense and Aerospace. And we have all the chances. And it's a slow industry. I've heard some of my colleagues complaining that, yes, they have put a lot of orders, but they don't call up so much because they are growing so fast. They have problems actually growing as fast as their needs are. And since all of this is physical, it's not really scalable in IT. You have to have houses, you have to have machines, you have to have materials, all of this -- the ramp-up in this real world is slower than a lot of people anticipated. And we also experienced that. So that is what we are doing. We are really looking into that. And then we have new customers that we are also trying to be close to and starting to make business. But -- and I think I talked about our -- also one of our biggest customer now -- Inission Syd, biggest on Inission level and absolutely the biggest for -- Inission Syd, Danish company doing defense equipment, nothing that you can hurt other people with. It's communication. It's a communication equipment. And we have been working with these since they were a startup 2016, step by step by step. And they have -- they want to -- the sky is the limit for these people. But now they start to move. Now they get substantial orders to the U.S. Army and so forth. And then we're sitting there and shipping and even to the extent that this goes too fast for them now. Another example here, what we are doing being a member of SOFF, we think we can be there. And in that association, we can get closer to other companies that also want to be subsupplier to the defense sector and help them because we perhaps will not be in the first Tier 1 here. We will be Tier 2 or even Tier 3 suppliers.

All right. One more question here. Is the book-to-bill that you report including or excluding acquisitions?

No, it's all in all, all in all, yes. And since we compute it over total sales. So it's AXXE orders and Selteka orders, absolutely.

Yes, I guess, the...

And we are not, of course, counting pro forma here. It's only when we have been owning them. So it's very keen.

Yes. Yes. I guess the question might be if you sort of include the order book that you acquire in the order intake figure...

No, no, no. It's incoming orders in the period. Absolutely.

Very good. That's all then for today. So I hand it over to you, Fredrik, for final remarks.

Yes. Thank you to all of you that have been listening in. I think we did, as I've said a couple of times now, a quite good quarter, and we are -- yes, we are optimistic about the future, even though, we have, of course, to be humble and play the ball where it lies since it's -- we are now in a world that is changing fast. And we have customers, of course, experience exactly the same here. So -- but we are optimistic, and thank you for listening in.