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 Pynnönen, and remotely from Sweden, company's CEO, Otto Pukk.
Good to see you, Jonas.
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. Please remember that you can send questions online via the chat below the actual video. Otto and Antti, stage is yours.
Yes. Thank you. Thank you very much, Joonas, and hello from here from Sweden this time. We have just finished our AGM, and then we were thinking that perhaps starting this meeting with going through some of the main action points and/or decision points there, so we have that. Antti will have some presentation as well, if I recall it prepared for this, isn't it so?
Yes. We are sharing here the slides.
Super. Yes, the agenda for the presentation have gone out, and I guess that all the shareholders have been voting already in that sense. The resolutions that were taken. Yeah, well, which one should we start with in that sense? Perhaps the share split 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 now we ...
There was a decision about dividends and the board has now the possibility to pay out dividends so the final decision is in their hands. The total amount of the dividend is then up to EUR 0.16 per share. It depends on now the board's decision. The board was re-elected, the same board will continue in Incap that we have had then, and they also got a little bit updated this kind of remuneration package. That was. The auditor also will change on.
For us, we have been with Ernst & Young very long time and to ensure that everything is transparent then with how it will be advised, then we have changed auditor. PricewaterhouseCoopers will be working with us now in the coming years. Antti, you want to comment on the numbers or?
Yeah, sure. Probably we skip couple of slides from here. January, March, Q1 , 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. 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. Here a little bit trend in the past, so like mentioned, it was a strong quarter. Here a little bit the background. The past five 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 2022 is that the revenue and operating profit will be higher than year before. Those were the key numbers from the Q1.
Thank you, Otto and Antti. I think we are then ready to move on to the questions and answers session. Let's start from the first one. This is maybe to both of you. What is the current capacity utilization of the Incap factories?
Yes. No, we currently have capacity in all factories and we don't see any big limitations. Of course, when we have 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 in that we have been doing in India and also the new factory. Just for those that are watching, the new factory you can see behind Joonas and Antti on some of the pictures, so then you get an idea on what we are currently creating in India.
These are very exciting times, but just capacity we don't have any constraints with, 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 in that sense.
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. If we think about our India factory, there's been expansion in the past, then we actually moved into another expansion. Lately of course last year the release regarding investments in India was that we're gonna build a whole third factory in India. 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's a need for the increased capacity and there is signals from our customers that the amount of production is increasing.
That's one proof of our agile, efficient and flexible like way of working organizational structure.
Great. Could you elaborate a bit about the actual investment process? How rapid is it actually to have a new SMT line for example?
Yeah. Of course. I think nowadays the market have changed and when I started in the industry then very often it was needed 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. Within a three to four months period, you can always from decision you can have a new line in and even have the staff trained on during that time in that sense. It's quite quick and as Antti said that we are very quick in our decision processes as well.
We have very much are delegating the decisions down in the unit that helps but also on the management level and the Incap board is very quick. It's easy in that sense. The decision process is quite easy and quite rapid in that sense.
Yeah. Maybe a little bit also practically we do several simulations of business case scenarios and then obviously we use the ROI, NPV, these kind 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 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 cases actually we are bringing to the next level and then it's a tight funnel what we have in place. Yeah, so far it's demonstrated to have worked very well actually for us.
Good. What kind of key performance indicators you are using in order to select the best business cases?
Yeah. Like I said, there's of course the ROI, NPV, those kind of relative measurements and, yeah, overall we look also from the strategic perspective and, there are certain elements sometimes like the level of service that we are able to improve the customer experience at Incap and those along with the hard numbers of course. It's a combination of several things.
Exactly. Talking about investments, what is the status of your M&A activities? Did you already identify potential targets?
Yes. We work constantly with M&A, so like, you have probably seen from Incap's releases, so we always mention that we are looking for ways to grow inorganically as well. 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, yeah, we are working actively in order to get something closed as such.
Yeah, the market of course is currently with the corona in place and so on, so we saw in some of the cases we worked at, little bit the valuation levels have increased and, yeah, now it's probably a little bit more stabilizing in terms of the, for example, EV/EBITDA multiples when it comes to EMS businesses. Let's see. Like we have discussed earlier a lot 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 gun to 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 strict 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 lean organization and so on. Plus there are also some sort of risk in those kind of turnaround cases.
That's.
Yes
a little bit.
I think in that sense we're all keeping on looking. It's not that we don't work with it. We have a team in place, as Antti mentioned, and I'm quite sure eventually we will get something on the hook. We're growing very nicely organically as well currently, and we shouldn't forget that.
Exactly. Another question. How much did price shifts to customers from increased raw materials drive your sales in Q1?
Yeah. We did that analysis, of course, and yeah, prices have been increasing very widely actually. All the key cost elements have increased, also our own personnel costs, but logistics, components, materials, raw materials in general there's still an increase in the price levels. We estimated that Q1 there was a 6% growth due to the fact that we are forwarding those cost increases to the end customer as well. That's also, as you can understand, when we forward without margin those costs to the end customer prices, so there is a roughly 1% impact in the operating profit line in Q1. It's not uncommon in our industry that there are price increases.
In the past there has been freight costs increasing and we have in every single Incap unit there. There's our own team regarding supply chain and all this matters, and they are, of course, monitoring this actively and doing the price increases for the end products efficient way.
Yes. Yes.
Yeah. Good. You already partly answered this question. I will ask it anyway. Have you been able to increase prices towards your customers such that we won't see the same margin pressure from pricing shifts in Q2 and for 2022?
Yeah. I think Antti answered that in that sense that we are forwarding the increases to the customers. There might be some smaller delay in that sense that if 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 would say spot increases to the customers. The margin is...
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. The margin can vary a little bit from quarter to quarter in that sense depending very much on the product mix.
Maybe also want to highlight here that the price increases our customers very much understand. They are in the same position that the prices increase. International business is also a lot about a trust between, in our case Incap, and our end customer. It means that they understand the price increases and they accept those price increases that are forwarded to the end product. Simultaneously, when there is, for example, through economies of scale 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.
It's going up and down both ways. Actually those kind of things enforce the relationships with the customer and trust is very important part of the business nowadays.
Yeah. Good. Let's move to order backlog or order book. Could you talk about the development of your order book during the quarter?
Yeah. 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, there is some push outs and replanning and so all the time element of that in the business. But the demand haven't dropped. Demand is still there. So, even if there might be some delays then, still the customers want it in a later stage. So order book looks very strong currently.
Good. Do you see any bottlenecks for growth during this year?
Yeah, I think yeah, a main bottleneck still is the material availability and we haven't seen that end. There's still. The market situation is tricky with you have the geopolitical situation now in Europe with the 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 horrible lockdowns in Shanghai and so on. On top of that, China has been also struggling with energy in general and have had lockdowns in different regions due to that.
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. I have a quite strong confidence in our team and that we will continue to be able to manage steer through these kind of challenges.
Actually on this topic I will use the opportunity to explain how Incap is really working. 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. 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 matrix 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. In Incap we actually have, yeah, very strong purchasing teams in all the units. They are prioritizing all customers there locally. We have also supported in redesigning of those products. I think our very flexible and efficient model actually shows its strengths on this kind of extraordinary times and, yeah, that's part of how we see the benefits of the decentralized organization model that there indeed are enough of those resources and solving those problems.
I think that also a little bit makes Incap different than some other traditional EMS companies. EMS, one word is S -like services. 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 a 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. That's why it's. We call it hygiene factor, like on time delivery like, Joonas, you very well know.
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. On the contrary we have teams in place in all units which actually then supports the like very entrepreneurial mindset as well. Of course our units are very proud of on their performance. They are measured all the time how the performance look like. They feel really proud when we see the for example the numbers are growing and so. There's a huge pride in their doing and that's also showing in the commitment and motivation in the local level.
That also then it's like positive cycle then, it shows of course in the service mindset and the service level towards the customers. that is a little bit, it's something that we haven't discussed also with the 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. A lot of engineers tackling these challenges currently. I would like to also highlight that it's due to our fantastic teams in Incap why we're also struggling and overcoming this market challenges currently.
Good. You already mentioned the important importance of people. How do you maintain the culture that you have currently in Incap?
Well, I think very much our model helps to maintain it, that we empower people to take responsibility and to take part of the business. As Antti here very well described, that we're all driving the business from the units and that is motivating for people. There, 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. I think that is the key motivator is to give the possibility to people to do what they are good at. That is the key here in Incap's culture.
Of course we work a lot with our values and so as well and communicate this internally and try to get the people from the different units involved in this work, and it does work very well for us. As Antti said, we have fantastic people. There is 2,500 rock stars all over the world and that work under the Incap flag.
It's always a pleasure to come down to any of our factories where the action is and see what the people have been up to and what their future projects are and the sort of projects they are working on. It's always exciting to feel this entrepreneurial mindset.
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?
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. It takes more time. Otherwise, I would say that within a six-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. It varies very much on the different customers.
Still fairly quickly it's possible to ramp up if their, how to say, idea or their product is ready for it. You should bear in mind that Incap works very much also with prototyping and with early stages with the customers where we are part of the product development or at least the process development around the production. Then of course the cycles can be longer if the product itself is not ready for the market yet or is just getting ready. It depends on the product.
Yeah. What kind of a customer is an optimal one for Incap?
No, I think what is fun working in Incap is that we have these bigger multinational companies as customers, but we also work with startups and there's a lot of different kind of customers and that makes of course the work even more fun. 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 is 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.
I think also that Antti mentioned it's a lot about trust in the business. We see that when the customers that outsource almost all the processes around the manufacturing to us, those that gain the most. Also Incap earns them the bigger margins in that sense once you go all in. It's a win-win situation where the customer makes the biggest saving and we get the possibility to earn money when you outsource fully in that sense the scopes around the manufacturing.
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 all the resources, in between them, both parties make the biggest or get the biggest benefits.
Yeah, 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?
These kind of webinars are useful for you guys that are listening and we're gonna continue with this now every quarter. 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 involved so you know not only see me and Antti but other people in the organization as well. If there is any ideas or suggestions on the format, shoot us an email or give us a call in that sense and we will for sure evaluate that.
I think key is that we have open communication and we are simple guys in that sense and very much available for all of you.
Thank you, Otto. Thank you, Antti.
Thank you, Joonas.
All the participants as well.