Inission AB (publ)

My name is Henrik Intse. I'm an equity analyst at ABG who covers the company and I'm here to moderate today's call. First we'll have a presentation from the company's CEO Fredrik Bergel and CFO John Granlund and after that we'll move on to a Q&A. If you have any questions for management please type them in the Q&A chat and I'll read them out after the presentation. And with that, I hand it over to you, Fredrik.

Thank you very much, Henrik. Welcome to Inision Q2 presentation.

My name is Fredrik Berger. I'm one of two co-founders of Inision and one of two principal owners. Myself and Olle Hulteberg, we started this company 18 years ago, and we are still both active. I am the CEO of the company and Olle is the chairman. Initial today consists of two business areas. We have old Initial EMS, contract manufacturing of industrial electronics. We also have Enedo, which is a company developing, marketing and selling and producing power supplies. Both these business areas operating within customized, high-end, low-mix, low-volume industrial electronics. Today, I will present the Q2 financial performance. I will shortly describe the highlights during the quarter. I will also comment. on the financial targets. And then as Henrik said, we will finish with the Q&A. So please type in questions and we will do our best to answer those. So reported sales for the quarter decreased 6.2% to 534 million Swedish kronor. And since we have no acquisition adjustments, it's all organic. To explain the result on a very high level, due to the lower volume, the net added value are 13.2 million lower, which is partly saved by a little bit better gross margin or a little bit lower material share as we measure it. Cost level has come down, both personnel cost and other cost. Deprivation a little bit lower. Cost level has come down 8.4 million. This together gives an EBITDA of 24 million, which is then 4.5 million lower than last year. We have not obviously been able to fully compensate for the lower volume, and I will revert to the comment when I present the business areas separate. Lower financial net with 6 million, including a small currency profit of 1.6 million, gives an earning per share of 0.6 kronor, which is the same as last year.

Picture number five, John. So then we move on to picture number six. One up further. There we go. Okie doke.

Year on year, as the last picture shows, is perhaps not so encouraging. If we look at the quarter in sequence instead, we can see that the profit level has flattened out and we can also even see a small recovery there, if you are a little bit optimistic. And I think really that we have passed the lowest point when it comes to profitability. I also think that the cost saving program that we are implementing. It sort of kicks in step by step. And we have decent volumes, what we can see in the order book, for the quarters to come. So we think there will be a recovery second half of the year. Next picture, please. So looking at last 12 month numbers. We have a net sales of just above 2 billion SEK, and we produce an EBITDA of 88 million, which corresponds then to a margin of 4.4%. Next picture, please. So looking at the business areas separately, old ignition or ignition EMS, I think all in all that we do a decent quarter, turnover slightly up compared to last year, four or five 459 million Swedish kronor compared to 455, which gives a small organic growth of 0.9%. EBITDA amounting to 28.8 million kronor compared to last year, 25.3 in the quarter, which gives 6.3%. This is a little bit below our target of 7%, but I still think it's decent. Volumes for the autumn looks stable. And as I just said, this together with the cost cutting program kicking in step by step make us believe that we will reach our EBITDA target. Enedo has, in my meaning, a totally different situation. Sales is dropping, dropping quite a bit. They have a much lower volume compared to last year. They are shipping for 75 million compared to 114, which is 34% lower. Compared to Q1, if we follow in sequence, the drop is not that bad, but still dropping 8 million or 9.4%. We have a similar gross margin as last year, meaning that NAV is dropping 15 million kronor. We are also cutting cost, and the cost that has come down has actually come down on the Enedo side, and that is also where we have the NAV drop. But obviously not enough. So all of this together gives a profit of or an EBITDA of minus 4.5 million kronor or minus 6.3 percent. What we have done now differently compared to earlier in the year that is that we have shifted from temporary to permanent personnel reduction. We had the idea of doing this temporary reduction, but it didn't give the cost reduction that we aimed for. So now we have switched tactics here and are cutting down personnel in Italy and in Tunis. And we will see the full effect of these both reductions end of Q3. Also for Enedo volumes for the autumn, they are improving compared to quarter previous quarters, but still compared to last year, they will be much lower than last year going forward. So that was the financials. Then we move on to the highlights of the quarter. I showed you this picture last time when I presented the Q1 numbers at our annual meeting. Still, I have to do it again because We have been public now for 10 years, and on the 28th of April, we changed from Nasdaq First North to the main list in Stockholm. And it cost quite a bit of money, as we have been writing about. It cost quite a bit of energy, but I Still think it's worth it going forward. We have a better, more well-documented, a lot of better procedures in place now. So we have taken the next step here. And we have done that to be able to attract more investors and perhaps especially international investors later on in our history. Short term doesn't make too much difference, but longer term, we really think this was the right thing to do. I also showed the next picture, our Tunis factory. We had in the quarter an inauguration of the initial Tunis. What we have done is that we have transformed the Enedo only factory into a full-scale EMS factory. Tunis as a country, I think we're not so used to it up here in the north, but if you come down to Italy or France, they use Northern Africa as their low cost. So there are quite a bit of electronic industry in Tunis, especially for the automotive sector. So having this as a new offering really to our customer, I think this will pay off in time. Still, though, we have had a few quotations going out. We have had the small test orders, but we are in the beginning of that journey. We have also finalized an acquisition at the really end of the quarter. It was the last of June, and we announced it's first of July, and that is a company in Lithuania called UAB Celteca, and they have a long industrial electronic history there. They had a turnover of €16 million last year, earning close to 9% EBITDA. They are situated in Kaunas, Lithuania, with about 280 employees. We really think Celteca has a good strategic fit to our criteria. when we evaluate possible acquisition. Customer base is totally complementary, and they also have quite a few very interesting customers. They have a very stable financial history, stable earnings, stable profitability. They are also complementary when it comes to geography. Inision is a Northern Europe company, and this fits in well in there. We also think that the size of the company is quite right. Regarding the size, I said it's a 16 million turnover last year, but then one has to remember that they have a substantial share of the customer there is actually providing material. So turnover, if it would have been also supplying material, would have been almost double. So you can't say for sure, about 300 million seek operation that is we are talking about and that's that is also how it fits with these 280 employees meaning that net added value to come back to the same net added value they have a strong lean culture with very efficient production they do really smart things there smart flow setups and that is totally in line how we do things at ignition Also the owner, which is the MD, the management culture and the value. This is an entrepreneur company, have a perfect fit in that sense also together with Inision. We're also glad that the seller took a quarter of the payment in Inision shares, which shows really that he also have a trust in our common future. So if we take the next picture, I just summarize here the bullets for the quarter. The only thing I haven't mentioned is that we also in the quarter have celebrated our new opened factory in Borås, which is very modern, very very well-fit purpose for our operation. The factory we had before, the ratio between office and production floor was not that good. It has several stories and so on. So this is in the central boroughs along the highway here, and it's new and modern. So we have all the possibilities here now actually to expand in the western part of Sweden. So over to our financial targets. Next picture, please. As a base for our financial targets, I would like to show our historical performance. And if you look at the time span since we became public, 2015, we have an average growth of 25%. And we have an EBITDA here, as you can see, hovering around five, sometimes six, sometimes five. And then we have the exception year when INEAD was fully consolidated, And after Enedo turn around, we are back on the five-ish track. So now Enedo have further a little bit of problem, but we still maintain this five-ish track. So this as a base for the next picture showing our short-term financial targets. When it comes to revenue and profitability, we have a strong belief that the EMS part of the company will reach that. It will be more difficult to... It is more challenging, that is how I should put it, to reach the EBITDA target for the OM part here. But it's a balanced act. Now we are doing the things that we need to do, and hopefully EBITDA will come up and show a small plus towards the second half of the year. Regarding the capital structure, After the acquisition of Celteca, where we actually borrowed then 66 million kronor, our net debt EBDA ratio has come up 2.9 if we just put in the numbers. The way we calculate our covenant, we can actually use pro forma accounting. So we also put back the Celteca EBDA for 12 months. And then we end up on 2.7. So we have some headroom to three, but not super duper much. We had a strong, I would emphasize that, we had a strong cash flow in the quarter. We also had a decent or even strong cash flow in the first half year. Still, though, paying out this or borrowing these 66 million kronor and paying them out has hired this KPI a little bit. Yeah. When it comes to equity ratio, yeah, we are well above target. Last picture, our long-term financial targets. Here we target for an annual growth of 50%, where we foresee and have the ambition to grow organically, 10%, and with acquisitions, 5%. We also have an ambition on a little bit further down the road to reach 9% EBITDA. And there are a lot of things that actually are going our way when we see the megatrends with nearshoring, electrification, automation, robotization. All of this is driving the use of industrial electronics. And that is exactly where we are, both in Edo and initial EMS. We are also having a program internally to make things more efficient, steering towards larger business units, using digital tools for more improved and centralized sourcing, centralized and also using digital tools for improving sales quality. And also shifting here, I have talked about that a few times now, but shifting from focus from acquisition growth to organic growth and really put back money there and put back energy there. That is for the medium term will improve the profitability from our five-ish to this nine-ish. That is our ambition. So all from me.

So Q&A.

All right, let's move to the Q&A. Please, everyone, type your questions in the chat. And while we wait for that, I'll start off with some questions on my own. So looking a bit at order intake in the quarter and the book to bill, this was a bit lower than the past two quarters. And seeing as we don't have that much history on your order intake figures, which only started reporting a couple of years ago here, how should we view this? Why is it lower now? Is there typically any seasonality in your order intake that should be considered when looking at the company?

Yeah, we have. Yeah, if we if we if we move back a little bit over one year, we ended 23 with extremely low booking, 0.5 if I recall it right. And then it recovered a little bit, Q1, 24 to 0.7. And then we have from that point increased. And of course, that low booking that we had end of 23 and then during 24, that is why, of course, the sales have come down. Now we have had a positive book to building since summer last year, really. So it has improved step by step. And yeah, we had really good numbers, Q4 and also Q1. And there are some bigger customers putting in these big frame orders. So there are variations coming from that. So perhaps now that Q2 came in very close to one. At least we are running at that speed. And there we also have a small difference because Inedo has steadily now, coming from a low level, of course, you have to remember that, but they have steadily booked a bill over one. So they are a little bit better than the MS portion Q2.

Yeah, so that was a follow-up question I had to that on Enedo which has obviously had a weaker sales development. Could you just give some more detail on what has been driving the weak sales development there and now what is driving the stronger book-to-bill relatively in Enedo?

We have had The customer base on Eneado is much smaller than for the EMS business area. And they have a few substantial customers that spent a lot of time last year, 24, to do destocking. And some also of the important customers have been keep on doing destocking during this year. But now we... I actually had... I took part of a sales meeting a couple of weeks ago with one of the biggest Inedo customers, and now they have realized that they are quite low. So now when their demand is going up, they have difficulties with the delivery capacity and they have destocked too much. So for that, I think there is a pendulum swinging. You really want to destock because you really want to squeeze out cash. and then stock is shrinking and shrinking and shrinking, and then you reach the point and the combination of demand going up, perhaps not dramatically, but still going up, and you are buying too little to defend that. So now this particular customer, they were in big trouble now, and we will do our outmost, of course, to assist them in shipping. But in the end, we have the same challenges as EMS. that sense that components have long lead times so so if you all of a sudden realize that you need goods and we order components they are a few months away so so we will start to ship more to that particular customer now and and and but there will be a build up so so i think that's where you see it um this customer uh lower demand from their customer in their turn together with destocking, that has really crashed the situation for Inedo. These are the initial, we also, initial EMS, we also have those customers that have dropped severely, but our customer base is much more fragmented. And also we have other customer that is picking up instead. So we are balancing out much better on, we are less sensitive. That is another way of putting it, having a much wider customer base.

All right. There are a couple of questions on the Celteca acquisition from the audience. So let's move on to that. First of all, could you give some more detail on Celteca's revenue? You mentioned that their adjusted revenue is around 300 million. And do you think that you can get more than 6% EBIT margin on those 300 million?

Yes.

To compare Apple to Apple, that's why I mentioned that, they have a very low material share and the EMS industry in that part of the world would typically be 70. So if you just do that theoretical exercise, moving from their 40-ish to 70, you will end up with almost double the turnover compared to the reported turnover. I think we have to be careful, though, and measure profitability against real turnover. And we absolutely think there will be room for improvement. We will be able to assist them. They are very, very smart and they are very strong on the production side very very lean focused as i said and very strong there but we think we can help out and assist with our purchasing power for the items that they are actually purchasing because they are also purchasing quite a bit we can help out there and we will also i think be able to help out when it comes to commercial thinking pricing strategy and things like that because the The owner there and the management there, they are engineers and service-minded, looking after the customer. And we love our customer, and we always do the utmost for our customer. But we also, in detail, on a detail level, we also have to make sure that all customer pay their bills in that sense, that they produce a decent margin measured on customer level and also measured on article level. So I think there will be room for improvement there. for Celteca coming into the bigger and more organized, perhaps in that sense, commercial side of the business.

All right, and the second question on Celteca is, does your guidance include the contribution in H2 from Celteca?

Yes, we have targeted for 2.2 and we think we will reach there and then Celtica will contribute second half year. We just put the big number there, 75. So yeah, that is included. But that is also the size what we are talking about. So even without Celtica, we still are close to our targeted number. But Celtica will make it easier to achieve if you put it like that. Or less challenging. That's another way of wording it. They are included, yes. And as a comment to that, I think we are a company that is continuously doing acquisitions. And as mentioned, we have the idea of growing and we have the idea of growing continuously with acquisitions. So when we guide, that is acquisition including. But then, of course, acquisitions, they come in blocks. You don't

seldom do a quarter or half acquisition or we don't we don't acquire like that we like to buy whole companies at least as much of the company so that we can fully consolidate it yeah and then also since since there be seems to be a slight confusion here on on celtic just to be very clear there is a question here from the chat asking in in revenue, how much should we assume from Celtec and at what EBITDA margin?

Yeah, we should... We are thinking if they just go as they have been doing, they are on 15 million, 16 million SEK. So in our thinking, we have put in 75 million for the second half of the year and at an EBITDA margin about 6%.

Okay, very good. And there's also a question if you have any comment on the previous acquisition of Axe and how that has developed since.

Fantastic. Axe is a star in Innisengroove, sorry to say. They are performing extremely well. They are not performing, and I have seen it before, They are not performing according to what they showed us when we are negotiating about the price. No, they are not performing that well because they were extremely optimistic. But we also didn't put in those numbers when we calculated the price. And as presented earlier, we have this earn-out structure with ACSEC. We have acquired so much so that we consolidate it and then we will pay for almost the second half, 2026 then. They are doing really well, both cash flow and profitability, extremely good. They are also suffering from from customer, they have a very interesting customer base, not so perhaps mature customer. So they are doing extremely good, still they are suffering from customer not developing according to plan. But as a total, if you sum it all up, they're doing well.

All right and some more questions from me while we wait to see if there are any more from chat. So a bit of a technical question maybe but when exactly was the Tunis factory moved from the Aneado to the Anishin segment and how much internal sales should we expect between the segments due to that move?

We had this inauguration, I said here, Q2, but since we have had only symbolic sales so far, to make it simple for the finance department here, we will shift and you will see the Tunis numbers going into the business area EMS from Q3. So we made a clean cut there. The numbers from the Tunis factory has belonged to Enedo Q1, Q2. And then we shift now in Q3, even though the sort of the formal handover was in the middle of the quarter. Pure financially, we haven't moved it yet.

Yeah. And roughly how much internal sales will you be reporting in addition to Enedo?

Extremely difficult to say. We have a handful or perhaps even a little bit more than a handful, close to 10 RFQs out there. And we know that lead time in sales for EMS industry is two years, could be three years until you have substantial business. So I think for H2, we are talking about limited numbers. That is nothing that we have in our plans. We are working to break through and to start to get orders, and then we will see how it will build up. But we don't have anything in our prognosis for the second half of 2025. It's a matter of sending out quotations, inviting customers to go there, and also be very careful so that we get the right type of customer. And of course, especially are we looking among existing initial customers, bringing them to Tunis, explaining that this could be an alternative for when they are using other EMS companies today, which have this low cost alternative. So you could put zero second half of the year.

Yeah, but now you're talking about external customers for the Tunis factory, right? I was sort of wondering now that you're moving to the initial segment, what the internal sales between the segments will be.

Sorry. Yeah, that we will sell to Enedo. EMS will sell to Enedo. I don't have that number and we haven't presented it. I have to come back there. I don't have that number, but that is basically the Italian proportion of the Enedo sales.

uh three quarter of the sales three quarter of the sales okay very good another question from chat uh now what h2 margin are you aiming for in enedo and how is your revenue as visibility for uh for this segment in h2 uh we have more or less uh the book there um maybe we we we need we

We have to put it like this. When it comes to the Italian portion, which is about three quarters of the operation or two thirds, they run with longer lead times, very close to the EMS system. When it comes to the Finnish portion, which is more stable and both profitability and revenue wise, And that's why they have increased the share of the total company. They run with shorter order horizons. They get projects that we can actually deliver out just within a few months. So that is the visibility. So we have good hopes that the turnover level have have come to its bottom and it will in sequence improve during H2. We have that good visibility. So we can see that now. Yes. And profitability wise, we think we will make a plus minus zero. And then I put it like that. We will have restructuring cost. for the Italian, and since it's really a little bit complicated what we pay and per person there, but we have decreased with 17 persons in Italy, 15 of those have now signed. So, but excluding restructuring cost, we think there will be a break-even case, Q3, and a small profit, Q4. That is how we see it.

All right. Next question is, with the current B2B in EMS, is H1 a reasonable run rate to assume for sales in H2, maybe adjusting for a seasonally bit slower Q3?

Yes. Yes, I think that. with where we think actually that there is an upside there are tendencies for an upside so so we think that there are reasons to believe that it will be a little bit faster h2 um all right um and then of course as i said already on top of that yeah yeah and uh

Another question from me then. How is customer interest for the new Borås factory that you talked about in the report and how long do you think it will take to get the utilization of this new factory up?

As we speak now, we have just moved the operations. We were in Borås earlier, so it's not a green field in that sense. But it's larger, right? It's a new building and it's brand new. And we have a different ratio, as I said, between production floor and office floor. So we are able to run a lot more here compared to at the previous site. But we will not sell more and it's really sales that is the limiting factor here and when sales come back and we are ready here and we will have the capacity to be able to move in more customers and yeah almost as difficult as the last question how much we will sell from Tunis because We are working constantly on this, of course. But again, lead times are long. And if it would have been easy to just bring in new customers, but it's also tough competition. We have very good and very active colleagues in this business also doing also very well. So it's a fight there, bringing in customers. But of course, we are optimistic, otherwise we wouldn't have done it. And we think we have the idea of proximity at the nation and being present in the western part of Sweden, Gothenburg region, because it's really what it is. We think that is important and it should be possible.

All right, very good. I don't see any more questions from the audience. So with that, I thank you all for listening and ask Fredrik to say some final words.

Yes, thank you. Thank you, Henrik. And thank you for all of you that have been listening. I think as a final remark, we are perhaps not totally out of the woods yet. But soon, soon we are getting there. Absolutely.

Thank you very much. Take care.