Incap Oyj

OMXH:ICP1V

Earnings Call Transcript 2022-Q1

[Joonas Korkiakoski, analyst]

Hello, everyone, and welcome to this Incap's first-ever webcast event. My name is Joonas Korkiakoski. And here with me, we have company's CFO, Antti Pynnonen and remotely from Sweden, company's CEO, Otto Pukk.

[Antti Pynnonen, executive]

Good to see you, Joonas.

[Joonas Korkiakoski, analyst]

Good to see you Antti, as well. Today's agenda is as follows: we will start by summarization of AGM Resolutions and after that, move on Q&A session. And please remember that you can send questions on live. We have the chat below the actual video.

But Otto and Antti, the stage is yours.

[Otto Pukk, executive]

Yes. Thank you very much, Joonas, and hello here from Sweden this time. So we have -- just finishing our AGM and then we were thinking that perhaps starting this meeting and so we'll go through some of the main action points and/or decision points there. And so we have that. So Antti we have some presentation as well, if I recall it, prepared for this. Isn't it so?

[Antti Pynnonen, executive]

Yes, we are sharing here the slides.

[Otto Pukk, executive]

Super. Yes, again, for the presentation have gone out and I guess that all the shareholders have been voting already in that sense. And the resolutions that were taken was -- yes, which one should we start within that [indiscernible] that is a big topic that we will now get out a little bit more shares on the market and hopefully through that get a little bit more liquidity in the shares.

Then we -- there was also a decision about dividends. And the Board have now the possibility to pay out dividend. So the final decision is in their hands. And the total amount of the dividend is then up to EUR 0.16 per share. So it depends on the Board's decision.

And then the Board was reelected. So the same Board will continue in Incap that we have had them. And we also got a little bit updated this kind of origination package. So that was. And then the auditor also will change on for us. We have been with Ernst & Young for a long time. And to ensure that everything is transparent and with hope to objectivize them, we have changed the auditor and PricewaterhouseCoopers will be working with us now in the coming years.

Antti, do you want to comment on the numbers, sir?

[Antti Pynnonen, executive]

Yes, sure. Probably we skip a couple of slides from here. January, March first quarter, very strong start for the year for Incap, strongest actually start ever for Incap. So revenue side was 41% up, recorded EUR 53.3 million. And operating profit, EBIT was EUR 6.8 million, that is 12.7% of the revenue, and that is 23% up. Adjusted operating profit was EUR 7 million, 13.1% of revenue.

And here, a little bit trend in the past. So like mentioned, it was a strong quarter. And here, a little bit the background. The past 5 years, revenue growth has been very strong for Incap. Last year, organic growth was significant, over 60% organic growth, and currently, we have stated about the outlook for '22 is that the revenue and operating profit will be higher than year before. So those were the key numbers from the Q1.

[Joonas Korkiakoski, analyst]

Thank you, Otto and Antti. I think we are then ready to move on to the questions and answers session.

[Joonas Korkiakoski, analyst]

Let's start from the first one. This is maybe to both of you. What is the current capacity utilization of the Incap factories?

[Otto Pukk, executive]

Yes. No, currently, we have capacity in all factories. And we don't see any big limitations. Of course, when we have an increase in demand, then we also have been working on increasing the capacity. And I think that is also something you see now, for example, with the expansion that we have been doing in India and also the new factory. And yes, for those that are watching the new factory, you can see behind Joonas and Antti on some of the pictures. So then you get maybe on what we are currently creating in India. So we're in exciting times.

But yes, capacity, we don't have any restraints with them, and we have currently free capacity in all of the factories. And we work with always having some capacity free so we can offer services to our customers and [indiscernible].

[Antti Pynnonen, executive]

And in the past, historically, when we had these capacity issues and bottlenecks in our factories, we have demonstrated that we can quite quickly actually increase the capacity. And if we think about our India factory, there has been expansion in the past, then we actually moved into another expansion. And then lately, of course, last year, the release regarding investments in India was that we're going to build a whole third factory in India. So that demonstrates that we are -- actually as an organization, we are able to take those key investment decisions pretty rapidly when we see that there is a need for the increased capacity, and there are signals from our customers that the amount of production is increasing. So that's one proof of our agile-efficient and flexible like way of working organizational structure.

[Joonas Korkiakoski, analyst]

Great. Could you elaborate a bit about the actual investment process, how rapid it is actually to have a new SMT line, for example?

[Otto Pukk, executive]

Yes, we -- of course, I think nowadays, the markets have changed. When I started with the industry, [indiscernible] was neither big CapEx investments and so. But now there is different kind of rental solutions out there for technology rent. And so it goes fairly fast. So within a 3, 4 months period, you can always -- from decision, you can have a new line in and even have the staff trend on during that time in that sense. So it's quite quick.

And as Antti said, we are very quick in our decision processes as well. We have very much our delegating decisions down in the unit, that helps. But also on the management level, the Incap's Board is very quick. So it's easy in that sense. The decision process is quite easy and quite rapid in that sense.

[Antti Pynnonen, executive]

Yes. Maybe a little bit -- also practically, we do several simulations of business case scenarios. And then obviously, we used the ROI, NPV, these kinds of measurements, but indeed, it's our units who are responsible for preparing those business cases. They are having the best understanding about the local markets and how does the business will develop. And then obviously, myself and Otto's role is to sometimes challenge those assumptions behind the business case.

Actually, we have a quite broad funnel of investment proposals coming from the units, not only around the budgeting phase, but also around the -- yes, around the -- every week, more or less, there are ideas coming to us to discuss. And then we have very strict funnel. So only the best performing business case is actually we are bringing to the next level. And then it's a tight funnel what we have in place. So -- yes, so far, it's demonstrated to have worked very, very well, actually for us.

[Joonas Korkiakoski, analyst]

Good. What kind of key performance indicators you are using in order to select the best business cases?

[Antti Pynnonen, executive]

Yes. Like I said, there is, of course, the ROI, NPV, those kinds of relative measurements. Yes, overall, we look also from the strategic perspective, and there are certain elements sometimes like the level of service that are we able to improve the customer experience to Incap and those, along with the hard numbers, of course. So it's a combination of several things.

[Joonas Korkiakoski, analyst]

Exactly. Talking about investments, what is the status of your M&A activities? Did you already identify potential targets?

[Antti Pynnonen, executive]

Yes. Yes. We work constantly with M&A. So like you have probably seen from Incap's releases. So we always mentioned that we are looking for ways to grow inorganically as well. So we have a team in place actually also supporting M&A work. So we have, of course, a broad pipeline of interesting companies. And then, yes, we are working actively in order to get something closed as such.

But yes, the market, of course, it's currently with the corona in place and so on. So we saw in some of the cases we worked that a little bit the valuation levels have increased. And yes, now it's probably a little bit more stabilizing in terms of the, for example, EV EBITDA multiples when it comes to EMS businesses.

So let's say like we have discussed earlier as well, Incap is, of course, growing very rapidly at the moment. And we have organic growth in place. So as such, we don't have any kind of gone in the head to do any kind of deals. Every single deal has to be very strong from the value creation perspective towards the shareholders, and we have actually very, very strict and tight criteria starting from the cultural fit and geographical fit and the customer base and proven track record.

As Otto has mentioned earlier, we are not looking for any kind of turnaround cases. It's in Incap quite challenging because we have very, very lean organization and so on, plus there is also some sort of risk in those kind of turnaround cases. So that's a little bit...

[Otto Pukk, executive]

I think in that sense, we're all keeping on looking. So it's not that we don't work with it. We have a team in place as Antti mentioned and so we're not quite sure eventually, when we get something on the hook, but we're growing very, very nicely organically as well currently and we shouldn't forget that.

[Joonas Korkiakoski, analyst]

Exactly. And then another question. How much did price shifts to customers from increased raw materials drive your sales in Q1?

[Antti Pynnonen, executive]

Yes, we did that analysis, of course. And yes, prices have been increasing very widely, actually, all of the key cost elements have increased, also our own personnel cost, but logistic components, materials, raw materials. In general, there is still an increase in the price levels. And then yes, we estimated that first quarter, there was a 6% growth due to the fact that we are forwarding those cost increases to the end customer as well. And that's also, as you can understand, when we forward without margin those costs to the end customer prices. So there is roughly 1% impact in operating profit line in Q1. So we have -- it's not uncommon in our industry that there are price increases.

In the past, there has been freight costs increasing. And then we have -- in every single Incap unit, there is our own team regarding supply chain and all these matters, and they are, of course, monitoring this actively and doing the price increases for the end products efficient way. So...

[Joonas Korkiakoski, analyst]

Good. You already partly answered this question, but I will ask it anyway. Have you been able to increase prices to watch your customers such that we won't see the same margin pressure from pricing shifts in Q2 and for 2022?

[Otto Pukk, executive]

I think Antti answered that in the sense that we are forwarding the increases to the customers. There might be some smaller delay in that sense, that is in it. But in principle, we are transparent with the pricing towards the customers. Margin is -- of course, it has many elements. And also, we mentioned before that the product mix here also plays in a lot. Even if there is, as Antti mentioned, some dilution in when we are forwarding the cost increases for materials towards the customers and then not adding on margin on top of those, I'd say, spot increases to the customers. But the margin is -- but I think that if you look in general, Incap's -- our setup allows us to operate in double digits and that, of course, will continue. But then the margin can vary a little bit between -- yes, from quarter-to-quarter, and that's depending very much on the product mix.

[Antti Pynnonen, executive]

Maybe I also want to highlight here that the price increases, our customers very much understand they are in the same position that the prices increase. So international business is also a lot of about trust between, in our case, Incap and our end customer. So it means that they understand the price increases and they accept those price increases that are forwarded to the end product. But simultaneously, when there is, for example, through economies of scales and Incap is able to get better discount prices or the prices at some stage start turning down, then we are also open towards the end customer, and our customers are then enjoying on this like reduced prices as such. So it's going up and down both ways. So actually, those kinds of things enforce the relationships with the customer and trust is a very important part of the business nowadays. So just...

[Joonas Korkiakoski, analyst]

Yes. Good. Let's then move to order backlog or order book. Could you talk about the development of your order book during the quarter?

[Otto Pukk, executive]

Yes. No. I think that we still have very strong order book. And the demand continues on a very high level, so we don't see any decrease in that. Of course, it's a tricky situation. The material situation is still as it is, and we feel it as well as I think every EMS company. So some -- there is some pushouts and replanning and so all the time element of that in the business. But the demand hasn't dropped, demand is still there. So even if there is -- might be some delays, then still the customers want it in a later stage. So order book looks very strong currently.

[Joonas Korkiakoski, analyst]

Good. Do you see any bottlenecks for growth during this year?

[Otto Pukk, executive]

Yes. I think the main bottleneck still is the material availability, and we haven't seen that end. And there's still -- the mortgage situation is tricky with -- you have the geopolitical situation now in Europe with a war in Ukraine, and that will have some kind of impact on the supply chain as well, even if it's early to say exactly to what extent. Then you have the COVID pandemic still going on in China with the lockdowns and the harbor lockdowns in Shanghai and so on.

And on top of that, China has been also struggling with energy in general, have had lockdowns in different regions due to that. So we are not in a normal business environment yet and there's still a lot of challenges. That said, I think we have managed quite well if you look at the past years and so with our team and have a quite strong confidence in our team and that we will continue to be able to manage steer-through these kinds of challenges.

[Antti Pynnonen, executive]

Actually, on this topic, I would use the opportunity to explain how Incap is really working so as probably most of the viewers understand we are very lean in the top management. Our resources are allocated in the units. So there are own teams working for these material challenges in each unit, supply chain teams, purchasing and so on. And that's actually a huge strength in this kind of extraordinary times that we have allocated teams to all our customers locally. So we don't have bottlenecks. In -- like in classical metrics organization, you might have a challenge to prioritize your customers because there is now a lot of work to do in order to get those materials to production and solving where to find those in the first place and what price and so on.

So in Incap, we actually have -- yes, very strong purchasing teams in all the units. They are prioritizing [indiscernible] customers there locally. We have also supported in redesigning of those products. And I think our very flexible and efficient model actually shows its strength on this kind of extraordinary times. And yes, that's part of the -- how we see the benefits of the decentralized organization model that there indeed are enough of those resources and solving those problems. And I think that also a little bit makes Incap different than some other traditional EMS companies. And EMS' one word is S like services. And I just wanted to also highlight how the decision-making is very fast and agile in Incap's way of working, especially now when you have a lot of things to solve with the customer. They appreciate that there is quick decision-making because, of course, the time to market from the end customer perspective is really important. We can't sacrifice on being late in our deliveries. If that would happen, sometimes even the market is actually gone already for the customer. So that's why it's -- we call it hygiene factor, like on-time delivery, like Joonas, you very well know.

So those are actually now like why also Incap is performing so well that we are lean in top management. We don't have this classical pyramid like decision-making process, which would make us quite slow. But on the contrary, we have teams in place in all the units, which actually then supports the -- like very entrepreneurial mindset as well. And of course, our units are very proud on their performance. They are measured all the time how the performance look like and they feel really proud when we see the -- for example, the numbers are growing.

And so there's a huge proud in their doing, and that's also showing the commitment and motivation in the local level. And that also then -- it's like a positive cycle then it shows, of course, in the service mindset and the service level towards the customers. So that is a little bit -- it's something that we haven't discussed also with investors that much that usually we talk about investing in machinery, latest technology. But actually, we have 2,500 experts and professionals in Incap, and they are superb in customer service and solving those problems and a lot of engineers tackling these challenges currently. So I would like to also highlight that it's due to our fantastic teams in Incap while we're also struggling and overcoming these market challenges currently.

[Joonas Korkiakoski, analyst]

You already mentioned the importance of people. How do you maintain the culture that you have currently in Incap?

[Otto Pukk, executive]

I think very much our model helps to maintain it. We empower people to take responsibility and to take part of the business. And as Antti very well described that we are driving the business from the units. And that is motivating for people. Either you can work in companies where the decisions are taken for you, and you just follow orders or you can actually be part of the value creation and part of the business. And I think that, that is -- the key motivator is to give the possibility to people to do what they are good at. And that is the key here in Incap's culture. And of course, we work a lot with our values and so as well communicate this internally and try to get the people from the different units involved in this work, and that work very well for us.

As Antti said, we have fantastic people. There are 2,500 drug stores in -- all over the world that work under the Incap flag, and it's always a pleasure to come down to any of our factories where actually the action [indiscernible] and see what the people have been up to and what are their future, I would say, projects and so that they are working on it. It's always exciting to feel this entrepreneurial mindset.

[Joonas Korkiakoski, analyst]

Then we have a new question on chat. Have you got any new customers during Q1? How long it usually takes to ramp up customers' production to full speed?

[Otto Pukk, executive]

We have new customers during Q1 as well, and we're working with new customer acquisition all the time. It varies very much how long time it takes to ramp-up. In some sectors, the time to market is in general, longer like medical sector, for example. And so there it takes more time. But otherwise, I would say that we did a 6-month period or so we can already see where we're going towards. We are prototyping up to some kind of small production and then we can continue on in some cases, even quicker up to mass production with those. So it varies very much on the different customers.

But still fairly quickly, it's possible to ramp up if there's I'd say, idea or their product is ready for it. You should bear in mind that Incap works very much also with prototyping and with only stages with the customers where we are part of the product development or at least the process development around the production. And then, of course, the cycles can be longer if the product itself is not ready for the market yet or is just getting ready. But it depends on the product.

[Joonas Korkiakoski, analyst]

Yes. What kind of customer is an optimal one for Incap?

[Otto Pukk, executive]

No, I think what is fun working in Incap is that we have these bigger multinational companies as customers, but we also work with start-ups and there's a lot of different kinds of customers, and that makes, of course, the work even more fun.

But I would say that a good match for Incap is a customer that appreciate the quickness in our service offering and service delivery that we do. And it's a little bit perhaps also organized in a modern way like we are with a flat organization and can take full advantage over the quick decision-making and so that Incap offers.

And I think also that Antti mentioned it is a lot about trust in the business. And we see that when the customers that outsource -- I would say that outsource almost all the processes around manufacturing tools, those are those that gain the most and also Incap warrants them the bigger margins in that sense, once you go all in.

So it's a win-win situation where the customer makes the biggest saving and we get the possibility to money when you outsource in full in that sense the scope around manufacturing. But of course, it takes time to come there and to gain that trust and so -- but yes, and when you don't double the organization or the resources between the both parties make the biggest -- or get the biggest benefits.

[Joonas Korkiakoski, analyst]

Yes, exactly. We don't have any further questions on chat. So maybe we are ready to wrap the event up. Do you have any final words Otto and Antti?

[Otto Pukk, executive]

That these kinds of webinars are useful for you guys that are listening and have -- we're going to continue with this now every quarter. And in the coming events, we will try to focus on one of the locations a little bit more. So you have the possibility to dig deeper into our different business units and also to get our people there evolved only not see me and Antti, but other people in the organization as well. And if there are any ideas or any, I would say, suggestions on the format, shoot us an e-mail or give us a call in that sense and we for sure, evaluate that, that I think the key is that we have open communication, and we are simple guys in that sense and very much available for all of you.

[Joonas Korkiakoski, analyst]

Thank you, Otto. Thank you, Antti, and all the participants as well.

[Antti Pynnonen, executive]

Thank you, Joonas.