Inission AB (publ)

Hello and welcome everyone to Editions Q3 2024 earnings presentation. I'm Henrik Hindse and I'm an equity analyst at ABG covering the company. We'll start with a presentation from Fredrik and then we'll follow up with some Q&A after that. Please feel free to write any questions you have in the chat during the presentation and I'll make sure Fredrik answers them afterwards. All right, go ahead, Fredrik.

Thank you very much, Henrik. Good morning, everyone, and welcome to Inition Q3 presentation. My name is Fredrik Berghild. I am one of two co-founders and one of two principal owners of Inition. Myself and Ole, we started this company 17 years ago and we are still both active, myself as CEO and Ole is the chairman of the company. Initian Group today consists of Initian EMS, Contract Manufacturing, Industrial Electronics and Old Initian, Initian EMS, Contract Manufacturing of Industrial Electronics. And now we also have Enedo in the group, and they are an OEM company developing, marketing and selling, producing power supplies. Both these business areas are operating within customized, high end, high mix, low volume industrial electronics. Today, I will present our Q3 financial performance, go through the main items for the quarter. I will also comment on our revised target. And then as Henrik said, we will end the presentation with a Q&A session. So please come in with questions and we'll try to do our best to answer those. Yes, reported sales for the quarter decreased 9.1% to 468 million Swedish kronor. However, adjusted for access sales 33 million, sales decreased 80 million or 15.5%. A high explanation of the Q3 result. If we take the total sales value and take away the material, what I refer to as the net added value, it was actually 9 million higher in the quarter compared to last year. But if we actually adjust those numbers, it was 6 million lower. Meaning really that the material share is significantly lower or our gross margin is higher. The other way of seeing this. And that is partly due to product mix, but it's also partly due to that our price increases have caught up now and material prices have stabilized and we have catched up increasing our prices. We also have a cost level going up 23 million. And if we take away those that belongs to Axel, 12 of those, we still have a higher cost level compared to last year, even though we are shrinking step by step now. And we can clearly see this in our personnel cost that is actually lower for the quarter. The total comparable units initial to initial is actually 1 million lower this quarter compared to last year. So we are shrinking towards a smaller company since we have the lower revenue. This all in all gives an EBIT of 26 million, which is then 18.5 million lower than last year. And in the quarter Axe contributed with 3.7 million. Of course, it is very difficult to maintain the margin here now when top line is dropping so much. We also have lower financial net cost with 1.6, making the EPS earning per share dropping from 1.4 to 0.6 Swedish kronor. And as I said last quarter, it's now, of course, really important for all the Unison units to simply adopt the spending income here. So shrinking in cost is still high in focus throughout our units. Some more and some less, of course. If we zoom out a bit and look at the longer timeline, I think Unison had made a fantastic journey, earning money and growing fast. If we look at the LTM numbers, we are just below 2.2 million Swedish kronor or 2 billion, 172 million to be super exact. And we have an EBIT earning in the LTM of 135 million coming out as 6.2 percentage as a margin. Meaning that we are running slightly slower compared to full year 23. And the EBIT margin is somewhat lower compared to last year, 6.2 versus 7.2. So even in this challenging market, we are reasonably well, I think, if we look at the year to date or LTM numbers maintaining the profitability. uh if we put it really simple we have added we are 11 factories now and one year ago we were 10 factories so we have added one factory cost to the program but we we run slightly less in top line and that is a challenge of course and then we have to shrink to make this work the ems portion of this company is doing reasonably well the reasonably well the first nine months Uh, and, and also here, I think it makes sense to look at the little bit longer time spinal time span, also seeing where we are coming from and where we are moving. We have an organic decline in Q3 alone of 14%. And as I said just before, it is difficult to maintain the margin. So we have a margin in the quarter alone for the business area of 6.3%. And of course, then same goes for initial EMS as for the total company. We need to come down in cost Inedo is also shipping much less volume Q3 compared to last year, 23.5 million or 17%. Gross margin have improved also here. So the NAV net added value is less. It's not as small as could be expected. That is what I wanted to say. And we're also saving backing costs all in all. On EBITDA level, we are 3.7 million lower compared to last year. Cost cutting, I've also said this before, it's a little bit of repeating, but cost cutting, since we have recently shrunk in Edo, quite odd. It is of course difficult compared to initial EMS that has been growing for a while. Then coming down in cost is comparatively easier compared to here where we are coming closer and closer to the bone, really. But I also think it's worthwhile to remembering where Inedo is coming from with many, many years of losses. And then in 2022 we had a break-even year, had a reasonably well year last year. So if we're seeing it in that picture, I think it's quite okay anyhow. Okay, let's move to some happenings that we have had during the quarter. We have hired Elisabeth Nilsson as our new MD for Initiant Innovate. Elisabeth has previously worked for Volkswagen Group in Germany. She also worked at McKinsey as McKinsey consultant. Innovate is our engineering company. And Elisabeth's focus now, because to make this good, we have to grow. So Elisabeth's focus is really about growing this unit within the group. We have also hired Charlotte Jansson as our CDO, Chief Data Officer. Charlotte has a background from key positions at Ericsson, H&M Group and Epidemic Sound. Charlotte shall maximize the potential of our data to be used in business development and strategic decision. Apart from, of course, also upgrading our IT infrastructure and IT security. That is also an important task for Charlotte. In Finland, at Inedo, we have replaced Hanno. So we have a new CFO working together with Kalle there. And Tommy has been a previous CFO roles and the deputy managing director at the Louis Nordics. He also has experiences from Patria in Finland and NanoCamp. We also continue the work, of course, with our changing to Nasdaq main list that is ongoing and a big project for a company like us. We have delayed the schedule somewhat. Now we are planning to change the listing early, early Q2 next year. I said earlier, but this is also one of the main items that we are working on. So I'm mentioning this again. We are moving our factory that belongs to a business area in Edo to Inision EMS, the factory in Tunis, meaning that in Edo will be a focused product development, marketing and sales company. And on the initial EMS side, we will get the broader offering, having a low cost factory close to Europe where we can offer our customer running a little bit higher series at a little bit lower cost. changing of our financial working capital has impacted our cash flow. More optical than in the real world perhaps, but still the way it's measured, since we have quitted factoring and quitted sales of invoicing, we are losing out in the quarter 46 million SEK, the way cash flow is measured. Year to date we are losing out 78 million SEK. This change will result in lower financial costs and a lot of less administration in our factories. So we will have a clean structure now with cash credit. I think it's also worth mentioning if we look at our cash flow year to date. that repaying the covid loan early this year impacted our year to date cash flow with 82 million. So then totally we have these extraordinary negative effects here of about 160 million. Yesterday I was in Malmö taking part of our grand opening of our extended factory. We had a great celebration there. with our co-workers, community officials, ribbon cutting, a lot of customers, suppliers, and we also had the board of directors of ignition at the site. Then over to our revised targets. The board of directors of ignition have decided to revise the targets for 2024. Sales for the full year is expected to be between 2.1 and 2.2 billion Swedish krona as compared to the old target of 2.4. EBITDA margin we expect to be above 6% as compared to the old target of 7%. Our capital structure and equity ratio is well in line with our targets. Also, of course, however, slightly affected of this when we have stopped invoicing sales, which are off-balance treatment. For our mid-term targets regarding growth and profitability, we have not changed. The board of directors has not changed the target. So we still think we can reach these levels of 15% annual growth and EBITDA level of 9%. We are systematically and have been working on this for a long time. The growth parameter has never been a challenge for us. We have been growing much faster than this over the years. On the other hand, the profitability level has been high. over many years. On the EMS side, we have increased it to eight-ish couple of years and seven-ish last 12 months now then. Inedo is also on a change turn here. Inedo being a product company, we expect actually even double-digit EBITDA numbers from Inedo. when we are coming through this slower economy and the stocking that a lot of our customers is up to at the moment. The key items here are we are going towards larger business units, We are working step by step. We have done a lot with central sourcing, but we are moving on further. Same goes for sales. We are on a journey on centralizing, especially hunting a new customer. We are doing more there also. And this shift from acquisition growth to organic growth will also affect the profitability. And then we see the mega trends here coming with nearshoring, automation, robotization, digitalization. All of this is actually creating more need for industrial electronics. And then, of course, mentioning electrification. It's a huge driver for electronics use, even though we are in a recession now with lower demand. The underlying trends is still there, absolutely. And then consolidation in the market. We are acquiring company, but so do also our colleagues. So there will be less and less player. And all of this has created a market pretty much in balance, which is beneficial. So that was all for me and really sorry for this camera debacle there. Over to you, Henrik. Do we have any questions? Yes, we do.

Let's start with some questions of my own, maybe, and give the listeners some time to type their own questions in the chat. You started reporting order intake and order book this quarter, and I can see that the order book is down almost 30% year to year. I was wondering if you could give any comment on if and how the duration of the order book has changed year on year.

Yeah. Uh, what happened really, uh, 20 and 23, that was, that was, it was an expected, uh, shortage, especially on, on component level. Uh, not so much on, on, on production capacity level, because normally if we have components, we will be able to, to fulfill our, our, uh, customer's needs, but the, the, the shortage of components. had an impact on us that we had a lot longer lead times. And then our customer booked orders, they placed their order with long, long lead times and that has shrunk back. So a big portion of the lower order book is more that It's shorter in length, not necessarily in height, but it has come down in per week or per month also. But it is not as severe as it looks like because we have a much shorter order book now compared to one year ago. A big difference. And you can also see one example of that. You can see that we were running high speed all the way or good speed all the way Q1 out and that was actually eating up some of that. It's too big order book I would say.

So is the length of the order book now sort of in line with what it was before the shortage?

Absolutely. This is exactly what has happened. Now we have a situation. 22 and 23 have been exceptional in that sense. So now we are back to the old situation with with normal components, three months, and then customer place orders with three months, six months, some customers also nine months. But now we have a much more normalized time horizon or time visibility, you can also call it, of the order book. Yes. Yeah. But we have also, we are now, of course, if you don't ship so much, then it's easy to get the high book and build. I realize that, of course, but still we are close to one now and September was actually over one. So there is slowly, slowly, slowly, there is customer coming back now and placing orders. And then some of our factories has actually, even though I just talked about sinking, some of our factories is actually hiring back now to cater for this. It's not massive, but there is a slow demand increase somewhere, somehow in the market. Yes.

Okay. So you also wrote that you're reducing costs at an increased pace to match the lower sales levels now. Could you just give us some detail on how far you've gotten in this process and when we can expect your costs to reach a more appropriate level matching the current demand?

Yeah, absolutely. We have chunks step by step, mainly when not key position, but because then we have to replace, as I just talked about, CFO for Inedo, for example, or managing director for InnoVate. We have to replace. But other positions, if they go out, we don't replace. We have If we have temporary contracts, we don't prolong those. We have sort of slowly shrunk. But now we have hard programs, factory in Tunis, for example. There we are negotiating now and that will be severe. Severely much, very much smaller cost in there. So we are talking about in the magnitude of one out of three in our Tunis factory. And that will affect the cost level somewhere Q1, because there are some lead times and there are also, yeah, it has to be done also in balance. And we also have other factories where we are negotiating with the labor unions about cancellation of contracts. So it's boring and it's sad, but it has to be done. So I think the full cost impact will be, you will clearly see Q1 and definitely Q2 next year. Then we have adopted to this lower cost level.

Okay, very good. So you also said that on demand it differs significantly between different customers. Did you notice any changes during Q3 with regards to which types of customers you're seeing stronger and weaker demand from?

Yes, we have those. We have had an overheated EV charger market, which is almost still stone dead. We have not been very exposed to that, but those type of customer we have had there, very, very slow. If we talk about perhaps, if we call that infrastructure, we have a lot of other long term, more infrastructure kind of customer, you know, and they are coming back now. Those that is more perhaps on a long-term investment level, when their customer in on the next level, if they are putting up a grid systems, for example, ABB is a good customer. For example of that, they are building that type of long-term infrastructure project. They are coming back. Yes. All right.

Then let's take an audience question as well. We have an audience member asking here, how are contract manufacturers in Europe going to be affected by potential raised tariffs versus the US? Assuming that a large part of manufacturing has ended up in Europe to get into the US cheaper than if it's in Asia, for example.

Yeah, it's a very good question. Of course, we had a conference in Poland a couple of weeks ago where there were a lot of EMS colleagues that I was meeting. Of course, if we see a China that is They are subsidizing and boosting their manufacturing industry with a lot of subsidiaries and a lot of support. We see what is happening in the US also with this inflation reduction act. They are pouring out billions after billions of US dollars to support the US manufacturing industry. And if that means that our customer moves out of Europe, that is, of course, bad. That is bad news, of course. And then, as you exactly said now, if we put tariffs on top of this, yeah, it's not promising. On the other hand, I think maybe this will... Europe, the conclusion really is that Europe has put their act together in a much stronger way, supporting their industry, but also since we are also buying U.S. products. So there has to be a balance in this and hopefully Europe, if we unite and do it good, we can actually play the game with versus China and versus US and bargain there. So the total effect shouldn't be that severe. But of course, everybody would understand that free trade, especially for a country like Sweden, free trade is what we are living from, you know, competing on a free market. And if that is restrained, that is not good. But maybe also it will be over a longer time. Yeah, we will see. It's a very good, but also very difficult question.

Yes, definitely. All right. That seems to be all the questions from the audience. So if there are no more questions, then I thank you all for listening and leave the word to Fredrik to say some final remarks here.

Okay. Thank you everybody for listening in and thank you Henrik for helping out. That was all from us now and thank you and goodbye.