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?

Yes, as I tried to explain, the way we talk and think about this, we see top line and then next level is, of course, how much of that top line or revenue goes to our supplier. What is left there is then our net added value. And we are defending that even though top line is going down. So I think we are both for Inedo and Inision we are making reasonably good business. But of course then we have a new factory here. So we are doing about the same net added value but we have another the Axe factory. And if you would make it really, really simple, you could say that the the cost of the access factor here. But then we are not prolonging hired people that is hired on temporary contracts. If someone leaves, we don't replace. We are cost cautious wherever we can. We are also running programs at Inedo with shorter working weeks. together with the unions and the society they work less and they get some compensation from the society and the unions and we pay less. So there are those programs but yes there is a time lag of course and that is also a One year ago or a little bit over one year ago, the big question was how can we equip our factories, hire enough people and get enough material to produce to all the customers that was really, if not screaming, at least shouting, give us more, give us more products. When you have started that journey and the whole organization is moving in one direction, and when you start to break that, there is a time lag. Absolutely. There is another component, and this is not one company, it's 10 companies. Some of those are doing still really well, and they are not breaking. They have good margin, and they have a little bit less margin now since since their cost is perhaps more adequate and more sustainable compared to one year ago. But that extra cost, that goes on the total. And then the companies that is doing less well, they are trying to cut costs. But the total there is, as I showed, it's ending up with a couple of millions more at Inedo and a couple of more million more spending or total cost level compared also for initial. Yes, that's where we are. But the cost cutting have to be enforced. And that is the program that we are running now together with Mattias and his company managers, Kalle and his company managers. We don't have a size problem. If we sell things running rate for 2.2 million, even with 10 own factories and then AXA factory including here. It's not a size problem. We can shrink this to profitability. No problem. No problem. But then there's also a balance act. When will the customer revert and want material again? Because I am so old. I've seen this a few times. You know, all of a sudden stock levels are too low and then they will start to order again. It's a balance also. It's not just only to slash and send home our coworkers. It's not that simple.

Yeah, so given that there is a time lag here and you now in Q2 had a 5% margin, what are the chances then that you during H2 can get these costs under control sufficiently to reach the 7% target for the full year?

We regard them as good, you know, otherwise we would have changed the target. So we see that we can shrink ourselves down to maintain the margin where we are now. H1 7 or 6.99 if you really count. LTM number 7.1. We should be able to. We of course have asked, we do this bottom up since we are off of our budget track. We have each and every daughter company to revert to their budgets and replan now for H2. And if we sum that up, it looks absolutely doable, absolutely doable. But then, of course, if it breaks even further, yeah, then we have to chase down even further. And that is, of course, a $10 million question. Will the Xiaomi sort of go from here and flat out or will it drop further? If it drops further, then it will be difficult. If it goes from here and then catch up towards the end of the year, then it's absolutely doable. And that we don't know. And we really try to talk to our customer and be close to them. But they are difficult. As I said, I think both last presentation and the one before, a lot of these people are very optimistic. But they don't place orders. So that is the paradox.

So that kind of touched on my next question here. You wrote that book-to-bill has improved quite significantly since the Q4 low, but it's still below one, of course. If you could just elaborate a bit on that and whether you think that underlying demand is in an improving trend? Or are there more timing effects with you know, orders being delayed and placed now instead of back in q2, q4 and q1? And also what you're hearing from customers started talking about?

Yeah, and there is fragmented pictures. I mean, we have customers that is doing well and ordering more. And we also have on the other side of the scale there, we have big, super big international, well-known customer names that they say, maybe we don't need anything for the whole 25, which I don't think is true, though. But there is we have so much on the shelf, Fredrik. Is that really true? So there is a big scale here from the ones that are ordering and are moving forward to those that are really bashing this and are extremely cautious. But as a total, I think The way we judge it now with our revised plans for H2, that is pretty stable, pretty stable. That is how we revise it. So meaning then that now during Q3, we need to see, of course, that the book to build comes back to one. Otherwise, this will be a further shrinking system. So and yeah, that's where we are.

All right. And you mentioned that you think the 2.4 billion sales target is challenging but still achievable. Do you think you need additional M&A to reach this target or is it still possible to reach it organically from here?

It is challenging to reach it organically, of course. And then the way we have formulated it, it is about 2.4. So it is challenging. No, M&A is not in that thinking at all. We have, as I said, we have a handful of contacts, but now it's mid-August already. The likelihood for us closing any of those deals affecting the top line for 24 is not zero, but it's limited because there is wise from the history it takes a few months you know half a year or even longer to actually close the deal and we are not we don't have any we don't have any we are not engaged in any negotiations to put it like that yeah okay and how dependent is your margin target on reaching this 2.4 billion sales target would you say No, we don't need to do that. That is really the internal communication. We really have to cut down cost now so that we can reach that on 2.3 or 2.25, we should be able to reach this 7 anyhow. That is our ambition. That is our ambition. Because as I said earlier, we don't have a size problem. And now, since we have actually working on this, that not only Ignition being a little bit bigger company, but also the daughter companies the average size of the daughter companies are shrinkable, if I put it like that. But then, of course, also, I think with the Enedo program, where we recently, two years back, we have half the organization in Italy. There are functions that is where we only have one now. And to cut that even further and Now with this limited time program, then we can cut costs, but then it's not permanent. And the cost you actually save is also less compared to if you really shrink. But then to shrink further in Italy, that is time consuming also. And we want to move forward. We also don't want to shrink. We want to move forward. That's the balance act we have there.

All right. We have some questions from the audience as well. One audience member here is asking if you could give some more color on the M&A pipeline and why you're remaining a bit cautious there. Are you afraid of a potential recession or why is that?

No. My experience from the M&As we have done during the initial time is that we have a lead, either that is someone we find and those are normally the best, or there is a sales process going on. We have been quite cautious due to our balance sheet and our net debt situation. Now that has improved, so we don't think that should be a problem. But also we have been bidding, but we haven't won the bids because we are cautious bidders. But now we think that the price expectations actually are coming down. So we think we can close deals. But then also we have a little bit of a shift since we think we are done in Sweden. We think we are done in Norway. We could do something more in Finland. We have been in contact there. Unfortunately, though, some of those, some were out a little bit too of the scope. Some was more like, again, these turnaround candidates. And we really tried to avoid those. But then we want to move further away from our home, meaning going down to Poland. Germany, Austria. And that may be also a bit of the reason why we are cautious. We are a little bit trying there and it's not home turf for us. So we have engaged consultants and we are looking at names and we have discussions ongoing. So sooner or later we will do something in, I think, in Germany. That would be my preference.

All right, another question from the audience. Do you have any comments on your construction customers and how they are commenting on the current situation?

Yeah, our sheet metal factory, especially our sheet metal factory in Tallinn have a big account in Danish customer that is in ventilation of office buildings and big buildings and they are running extremely slow. So that is hitting the operations there quite a bit. The customer and the customer that we really have a good cooperation. We do a lot for them. And so when the construction business coming in and we have other those companies. And that is a cheap method, but we have also other electronic customers that is also construction related that is really slow now. And I don't have any prognosis when that turns back, but I think that is a lot related to interest rates. And now we see interest rates coming down. We see valuations of real estate stabilizing. We see and also hear that the financial market is back to actually provide that type of companies with capital and the immediate risk of a big failure there or companies going bankrupt is over. So step by step it will be a stabilized situation. That is our opinion there. But for the moment it's very slow.

Alright, a final question from me while we wait and see if there are any more questions from the audience. I was just wondering if you could go into a bit more detail about these new bank terms that you negotiated. What kind of effect will that have and from when do these terms start?

a better deal when it comes to the margin, meaning measured from the base interest. We pay the bank less margin on the program. That is very beneficial, of course. But then also structure wise, we have cut out our factoring program. We have been borrowing on our invoices. Meaning that we are sending the invoices to the bank and we get 80% the day after. And that has been our way of financing this company. And then we have had a cash credit on top to take variances. But the big money has been coming from the factoring program. And since we have been a little bit we ever had a balance problem, net debt, EBITDA. And then if we sell the invoices, we have been discussing this with the bank because we think if we have an invoice to Epiroc or ABB or ASSA or whatever you know, we think and we have borrowed on that, it should be pretty safe. So they could go in the bank covenant thinking it could go off balance sheet, but they don't think it like that. But then we have done a small portion. We have actually sold those invoices. We have insured them and sold them to the bank. And by insuring them and selling them, we have had a neutral cost level. But what we have done now, we have cut that out also. And that's actually the way cash flow is measured. Of course, if we sell invoices, then if we stop selling invoices, that shows up now. And that can clearly be seen. Our receivables have almost exploded, but they have gone up. quite a bit even though sales have gone come down so and that we can't say by decimal but we estimate that to about 30 million that that has costed us in cash flow in Q2 and it will cost us perhaps another 30 cash flow and then that is how cash flow is reported because if we The invoices that we have in the factoring program, they are very similar and they are also cut out, but they are in our balance sheet. So they are not measured as cash flow, but both selling and factoring is meaning that we get the money immediately. But now we have a cash credit that covers for that. And the big earnings is less costly. And then there was a lot less administration. So we have a cleaner structure now, much cleaner. Optical, it looks worse. But operational wise, it's much better. And that I also think that is, and we big Swedish banks, we had three or four bidding here. And that is new for a nation as a company. They always earlier in history, they wanted to have the invoice as the base for the security. Now they trust the company on next level a little bit. We also judge it like that.

All right. Thank you very much for that, Fredrik. That's all the questions for this time. So I'll leave the word to you for final remarks, if you have any. Thank you, Henrik.

And thanks to all the listeners that we are done for today. No further remarks than that. Thank you for listening and take care. Goodbye.