Inission AB (publ)

All right good morning everyone and welcome to Initian's Q2 presentation. My name is Henrik Hintze and I'm an equity analyst at ABG Sundell Collier and I cover Initian and that's why I'm here to moderate this presentation today. We will start with a summary of the report from CEO Fredrik and after that we will move on to a Q&A session which I will moderate. If you have any questions during the presentation please ask them in the Q&A chat and I will read them out for Fredrik to answer afterwards. With that I leave it to you Fredrik.

Thank you very much, Henrik. Welcome to Inition Q2 presentation. My name is Fredrik Bergel. I'm one of two co-founders and one of two principal owners of Inition. Myself and Olle, we started this company 17 years ago and we are both still active. I am the CEO and Olle is the chairman of the company. Today, as we have said a few times now, Inision Group consists of Ode Inision EMS, contract manufacturing of industrial electronics, and Enedo, which is a company that develops, marketing, selling, and producing power supplies. Both these business areas are operating with customized high-end, high-mix, low-volume industrial electronics. I will present the Q2 financial performance, go through the main items, what we have been about in the quarter, and I will also finally comment our financial targets. And then, as Henrik said, we will end with a Q&A session. So, to the hard numbers. Reported sales increased 1.4%. to 570 million SEK. However, adjusted for the Axel sales, 46 million SEK. Sales decreased 38 million SEK. Meaning that we had a top line organic drop there with 6.8%. As a high level explanation of the Q2 result, I would like to comment that due to lower top line, our net added value, and the way we count that, that is revenue minus direct materials, that are the money that we are living on, are actually 9 million higher compared to last year. But then if we again adjust for Axel here, that is new in the group, Axel's NAV in the same period was 20 million, meaning then that our net added value was 9 million less Cost level wise, we are 20 million up compared to last year, but again, Axe adjusted. It's 5 million up for the group. All in all, that gives an EBITDA of 29 million SEK, which is then 12.6 million lower than last year. Axe contributed in this program with 4 million of that money. I talked a few times last year about the beauty of organic growth. Exactly the opposite happens now when we have organic decline. We are losing out net added value and that requires that we need to save back on cost here to maintain our profitability and margin. Lower financial cost. I will talk a little bit about our bank procurement later, but we have lower financial costs now and we will see that also coming forward. But then in the period we also had a currency related cost of almost 4 million. Which brings down the earning per share to 0.65 SEK or 65 SEK. important now for the organization and for ignition is of course to lower cost level here. We have started breaking but there is a time lag in breaking and some of the factory that is still doing well they are perhaps not breaking but the factories that are low running now on lower volume they are breaking but It takes a little bit time to have these cost cuts come through and that is where we are fighting now. But forward we have to do this even harder. If we zoom out a little bit and look at the longer time horizon, I think we have had a fantastic journey. If we also look at the last 12 month numbers, we have net sales of just over 2.2 billion. We have an EBITDA amounting to 157 million SEK or 7.1% as a margin. Meaning really that we are running slightly, slightly faster LTM compared to 2023. But profit margin and profit are lower than 2023, a little bit. Over then to the split between the business areas. I think if we look at the first half year for business area initial EMS, we did it reasonably well. We have a NAV in the quarter adjusted for acts that are on the same level. And I think that is, since we have lower sales, I consider that good. However, then costs are 3.2 million higher compared to last year. So all in all, that gives in the quarter an EBITDA of 4.1 million. So of course the same goes for ignition EMS as for the group. We need to come down in cost here and that is the message to the whole organization. Looking at Enedo, the top line drop is severe. They are down almost 30 million, 28.6 million in the quarter compared to last year, or 20%. And of course, that is difficult to catch up. And out of these 12.6 that the group is below last year, 8.5 of those is related to the Enedo program. Also Enedo is saving back, but again, they are breaking and they are trying to save back cost. But year on year, if you measure it, they are slightly up. Of course, then we have to remember that we are thinking in headcount a little bit. We are saving back, but we also have all costs with the inflation increasing here. So that have to be remembered. Here we have a more challenging, I would say, post-cutting situation. Because since we took over in Niido, we have shrunk it to profitability. And we have almost somewhere, and in some functions we have cut But quite close to the bone here. So shrinking further might require, if needed, then structural changes. But we are doing our best here actually to save back and see where this takes us. So over to some description of the story, then what we have been up to in the quarter, some main items. Initium South have invested totally in new equipment in the factory for the SMT line, which is the heart and the core of the electronic production. Initium Board have also in the period decided to prepare the company to change to Nasdaq main list. So we have started that, the projects, all the consultants needed to run this have been appointed and made contracts with and the first meeting of starting there. So we think early next year, somewhere Q1 next year. And the main reason for this is to get perhaps a little bit more attention in the media coverage, but also to be able to attract especially international investors. So this is a long term thing, really. We listed ourselves at Nasdaq First North 2015, and now we think the size of the company and the strength of the organization can actually carry this next step, which we find quite natural. New equipment have been launched in our sheet metal factory in Tallinn, worth 2 million Euro. And this is of course a little bit ironical because we have been running bottleneck machines 22, 23, 24, 7, some of the bottlenecks machines. And now when we have new machines covering these bottlenecks, The economy is going down and now we don't have that problem at all. But there will be. The times will be sooner or later better and then we will be prepared. We're also restructuring the group in that sense that we have these two business areas now where we have appointed Mattias Larsson as business area manager for initial EMS. Meaning for myself then that my time will be freed up to work with the whole group and also with acquisition on a strategic level going forward. So Mattias will be in charge of the and work together with the company managers in Inision EMS. And here we have another important thing. We are now starting up and then begun a project where we will move the organizational home for our factory in Junis from the Enedo to Inision EMS. And all in all, X-Axe, the group have 10 companies and 10 factories. Nine out of those factories belong to the EMS organization. And they are really professional and really good in production. In EAD, on the other side, they only have one factory. So it comes quite natural to move over the organizational home to the initial EMS program. Then they will have the central, they will have support from the central support functions that is helping out with factory product development, sourcing of material, machining development and so forth. And also by doing this, we see that Inedo will be a more focused product company. That is really a trend among our new and modern customers that have OEM customers. They don't have factories. And Enedo Finland, they don't have a factory. They rely on EMS company to produce their goods. And that will be also the future then later for Enedo Italy. So Enedo will be more focused. And also another good thing that we see with this move is that we will, from initial EMS, have a wider offering to our customer, meaning that we can actually produce a little bit higher volume with a lower cost level, since salaries in Tunisia, production salaries in Tunisia is quite attractive. Indonesian South have also decided to relocate the factory in Borås. So we have found a new premises. We have signed a contract there and we will move spring next year. And since we are moving, we have almost sort of a clean sheet there that we have a white paper. So together with our lean consultants, we can really have a fresh start and design that factory to be really flow orientated from the start. We have done a few very good recruitments also now in the period. We have got Elisabeth Nilsson hired to be the MD for Innovate. Elisabeth, she has a background from Volkswagen and have been working centrally there in Germany. She also have been at McKinsey as a consultant. We have also recruited Charlotte Jansson to be our chief digital officer. This is on group level. Charlotte's job is on a group level to take care of both initiative and the need to make sure that we are collecting our data, taking care of our data. And as the base of that, of course, that starts with the IT infrastructure, which is also one of Charlotte's responsible areas. We have in the quarter also done bank procurement and our home our main bank I would say because we have a set of banks our main bank made the best offer so we have we have a better structure that's set up also now for our bank services where we have quitted or are about to quit lending on invoices and also selling on invoices that have been a part of our cash infrastructure. So now we will have a clean cash credit line. We will have more simple setup. However, cash flow wise, this is affecting us with about 30, 30 plus million in the quarter. So when you see our cash flow there, that is actually that we have sold invoices less because they go off balance sheet. But again, then cost wise and also administration wise, we have a much better setup now. And this bank procurement that was for the whole group. So now we have financed also the Inedo program, which was quite costly financed a little bit here and there. And now we have one program for all of that, which will lower our financial cost and can be seen already in this quarter, but also lowering it forward. So something about our financial targets. We are in the situation now where the economy is breaking. Our customers here and there, they have still a little bit too much on the stock level. So they are hesitant. They don't place orders with the same horizon anymore. But we still think it's doable to reach our two point. four billion as a turnover. That is our target. We are balancing there now on seven percent EBITDA, but we still also think that we can actually shrink this company down to that EBITDA level. That is our target. Our targets then for capital structure are Well, our performance for capital structure, they are well in line with our targets. So then with a little bit longer horizon, annual growth, 10% organic. Difficult to say now when we are thinking, six, 7% acquisitions. We have never been growing so little as five. So for us, it's more like, We should be very cautious with acquisitions. The market is back there, we think, and we have a handful of opportunities, but we will be quite selective and cautious. But then again, the things that I have talked about earlier, it's about to be very efficient to have a good production setup. We are going towards larger business units. We have centralized resources for sourcing that is helping out. Centered sales resources. And again, then shifting to organic growth rather than acquired growth. And then we have the mega trend, even though now economy is breaking, but the mega trends about nearshoring, optimization, robotization, digitalization, and not the least electrification. That will be a driver for our industry with a little bit longer timeline. So that was all from me. Do we have any questions Henrik?

Yes, but before we begin I'd like to remind everyone who is listening that you can write your questions in the chat and I'll read them out for Fredrik to answer them. But let's start with some questions from me. So the Q2 margin was 5% now down from 7.3 last year. Could you just talk a bit more about what drove this and what you are doing to adapt costs to demand and also how long does it take for cost reductions to have an effect on the P&L once you implement them?