Pauliina Tennilä: Operations across Europe. My name is Pauliina Tennilä, and I will be hosting this webcast today. Before I hand it over to Otto, I would like to remind you that the management will be happy to answer your questions after the presentation. You can post your questions at any time during the presentation using the chat function. With that, over to you, Otto.
Otto Pukk: Thank you very much, Pauliina, and hello and welcome from my side as well. Always a pleasure to have so much interest around Incap. As Pauliina said, we are happy to answer questions once we have gone through our little bit mandatory report. Today we have a treat as well, where, as Pauliina mentioned, we have Ralf from our German team, or nowadays European team, in this webinar as well.
Otto Pukk: Let's hear a little bit more about what he's up to and what we're up to in the different European units. Yes, let's go to the numbers. So all-time high, guys, EUR 80.7 million in revenue. We're back in double-digit EBIT and in overall picture, I think we can be very happy with 18% organic growth. So clearly what we're doing when it comes to our organic growth effort here is getting some traction.
Otto Pukk: Overall, I'm quite happy with the quarter. I think we have had excellent result and also excellent work done by our people. If you look at the main drivers of this growth, of course, we have the Lacon acquisition in, but as I mentioned, we have also significant organic growth. The growth in general is driven by the defense sector foremost. We see also some development around AI and AI data center, as we mentioned before, that influence the numbers positively. But defense, of course, leading the way when it comes to the growth in this quarter. We have focused very much on organic growth and of course, this including, I would say, growth on existing customers, but also on new customers and new customer projects. We see this in the quarter.
Otto Pukk: We see it starts to give traction, and I think it's in general a positive development, both when it comes to new, I would say, customers and also existing customer accounts. For us, disciplined capital allocation remain key. We are very much focused in what we're doing. We're not looking at large scales M&As currently with the share price being what it has been lately.
Otto Pukk: We have done share buyback program here, and we have been focusing very much on the organic part. Antti will talk a little bit more about the outcome of share buyback program. But our commitment when it comes to value creation for our shareholders and disciplined capital allocation continues. This is by far not gone in that way. I think that little bit summarizes the quarter. I give it away to Mr. Pynnönen and take it away when it comes to a little bit more detailed numbers.
Antti Pynnönen: Sure. So thank you so much, Otto, for the great introduction. So here is first 3 quarters of the year. January and September, we recorded almost EUR 211 million. There is a significant growth in the figures compared to the previous year of 32.4%. Our profitability remains close to double digit in 9.6% cumulatively, and that is EUR 20.3 million. In the top line development, as Otto already mentioned, the impacts of the Q3.
Antti Pynnönen: We also see the first 3 quarters, the Lacon acquisition impact coming through nicely on the top line and in the profitability as well. And then, of course, the defense sector is playing key role when it comes to the organic growth. And then there was increase on the earnings per share as well of 53.1%. And there was one item that impacted positively on this number, which was the earnout adjustment on the Lacon acquisition. Shareholder returns.
Antti Pynnönen: So like Otto mentioned, we started the beginning of August, first time ever in the Incap history, share buyback program. And here you can see the statistics. So quite solid development week after week. On average, if you calculate the total consumption of the cash on the buying back of the shares, it is about EUR 200,000 per week. In the form of the graph, this is the development from the Q1 2023 onwards.
Antti Pynnönen: On a quarter basis, we have the revenues development here. Of course, now it is all-time high quarter. As mentioned, this is very much supported by the great organic growth in the defense as well as the Lacon acquisition impact on the Q3. And then, of course, the profitability is following the nice, I would say, the product mix we had. Defense customers tend to have better margins.
Antti Pynnönen: This also shows here, of course, always the utilization of our plants is essential in order to be able to pull over these kind of figures in the profitability. And some of the key figures, new thing here to mention here is, of course, what we follow always is net working capital items, and then the inventory being the biggest topic here. It shows some growth, and there are 2 main reasons for inventory build-up here.
Antti Pynnönen: Of course, one is the high level of the expected volumes from our customers going forward. And then obviously combining it with the situation we have currently some challenges, of course, in the global component and materials supply chains. So then these kind of material delays, et cetera, tend to impact also negatively on the inventory levels. You cannot turn over the inventory as fast as possible if there are challenges in the supply chains. But overall, our financials are very strong. Cash level is strong here. We have some debt, but overall, the financing situation is very solid. This is a very good, I would say, status for continuing towards the end of the year.
Otto Pukk: The outlook we have kept unchanged from last time we have given it. As Antti said, there is still some more uncertainties when it comes to material availability and so on the market. That said, we have had continuous strong order intake, and I think it supports a strong Q4 as well in the big picture. But a little bit early to say, and the forecast we have kept as it was the last time. That said, I am happy to introduce for you guys, Mr. Ralf Hasler, our dear colleague from Germany. Take it away for the first time, Ralf. Good luck.
Ralf Hasler: Thanks, Otto. Again, my name is Ralf Hasler, and I have been acting as entrepreneur and manager for more than president, which is very exciting. The German EMS market is by far the largest EMS market in Europe, and in the past, many leads could not be satisfied properly due to capacity and volume capability. These leads can be served now. We now, as Incap Germany, have access to mid-volume production facilities in India and to PCBA manufacturing in Eastern Europe. We can explore the market much better than before. Our German sales teams route many leads from German customers to the Incap sites in Slovakia and India. Also, the AS9100 certificate of Incap UK is utilized for serving the German aerospace customer. Another attractive play field for profitable growth is the leveraging of our German design and engineering capabilities.
Ralf Hasler: Other Incap sites are asking for our services, and we enable them to create ODM business for small and medium applications. Mainly some kind of industrial IoT application, for example, like a control system for a vending machine or a control system for a scaffolding robot. Incap Germany is doing the engineering and design work and then hands over the design to the Incap unit owning the customer. As Otto mentioned, Incap Germany is profiting from very high defense expenditures of the German government.
Ralf Hasler: We have developed, over the last years, a very good footprint for assemblies, for armored vehicles, and for drones. Our main activities are PCBA, cable harnessing, and to a large extent, box build. We possess a special certificate, the VG 95211, which enables us to do or to manufacture cable harnesses for military vehicles used at NATO forces.
Ralf Hasler: We have large and long-lasting contracts with renowned German manufacturers. Also in railway, we experience significant growth. We have gained a large project for digitized freight control and automated train coupling, and we already introduced these references to Incap India, since India represents by far the largest market for rolling stock and signaling. Another topic where I personally dedicate lots of energy is AI. We are just right now opening an AI sandbox for AI enthusiasts at Incap, which means no customer data on-premise hosting, data not allowed for training the models, and the most promising applications then will be scaled and implemented. I am convinced the usage of agentic AI will increase efficiency and speed for many processes, like searching parts with appropriate compliance data, BOM optimization, capture of BOMs in ERP systems.
Ralf Hasler: This is where agentic AI will provide significant process acceleration and higher responsiveness to customer needs. To sum up, Incap Germany is now an integral part of the Incap group, and we are well prepared to grasp market opportunities and to develop more interesting projects in the fast-growing markets for electrification, for medical devices, and as mentioned, for defense applications. Thank you.
Otto Pukk: Thank you very much, Ralf. It is a pleasure to have you and the German team joining us. Pauliina, I guess it is time for a little bit Q&A.
Pauliina Tennilä: Yes. Thank you all, Otto, Antti, and Ralf. We will move on now to the Q&A session, and let us take the first question. So great result in Q3. How did the order intake develop in Q3, and do you expect that growth in defense to continue in Q4?
Otto Pukk: As I mentioned, we have the continuous strong order intake also in Q3, and I believe that defense will continue very strong during the Q4 and onwards as well, looking further. Defense is a hot topic currently in Europe and even with some constraints when it comes to materials, for sure, it is still a vital part in both Q4 and then moving onwards.
Pauliina Tennilä: About the outlook, it seems quite easy for you to reach the upper range of your guidance, both in revenue and EBITA. What would need to happen for you not to reach your outlook?
Otto Pukk: It is never easy to reach any outlook in that sense. It is always a challenge to do good business. That said, no, I think if you look at the bigger picture, then we should be able to hit our outlook very well. What would need to happen, of course, there are problems with materials, in different kind of materials, PCBs and so on the market. If there would be some unexpected delays or so, then of course that can have an impact.
Otto Pukk: Currently we do not foresee it, and I have said it before, we have been through several different crises when it comes to material and other issues, and we have excellent people all over the world working with these issues in a very professional manner. I am quite sure we can find a solution in one way or another. Yes, of course, there can always be surprises, but nothing we expect currently.
Pauliina Tennilä: How about your profitability? Your EBITA jumped now over 10%, so was this related to volume increase only, or was there also a mix impact?
Otto Pukk: There is always a mix impact. I think foremost, the higher utilization rate we have, the higher will also profitability be. We have in our model still very lean overhead on top of this. If we can get utilization in somewhat higher level, then immediately the profitability goes up, and I think that is what you have seen now in this quarter as well. That said, as I have mentioned many times, double-digit EBIT, of course, or EBITA is nice to have. It is not a target by itself for us. Earning as much money as possible is of course what we are after. We are not internally looking or staring us too blind on the EBIT percentage in that sense.
Pauliina Tennilä: Regarding your lost business with your largest customer, you write this is expected to balance the impact. Does this mean the AI data center orders will fully offset the lost business of your largest customer in Incap India?
Otto Pukk: Yeah, no, what we expect currently is that we will be able to balance that out with other customers. We have been ramping up large international customers now in Incap India, and we have high expectations for them here moving forward the coming year. We expect it to be balanced out. I look in that sense positively on that development as well, even if it will be a challenge, of course, and a lot of work for the team, but yeah, we have cards to play.
Pauliina Tennilä: And related to this topic, do you expect a margin deterioration in Incap India going forward?
Otto Pukk: No, not directly in that sense out of the change in this where we, as I mentioned before, these are good customers. We do not have, how to say, exceptionally high prices or so in Incap India or anywhere else in the world. We are competing on the same market as everybody else, so prices are hygiene factors. I expect that business to be on the same margin level or somewhere around the same figures in that sense.
Pauliina Tennilä: So you mentioned that there will be compensating factors, but would you still be planning some kind of cost savings in Incap India?
Otto Pukk: Cost savings, no, I do not see any, how to say, we are not implementing any program or so for that. The cost level, I expect to be on the same level. So it is not so that we need to now, I do not know, cut down a big part of the factory or something like that. Some products we will produce less and some others more. It is as simple as that.
Pauliina Tennilä: So obviously the defense business is growing and that is causing also or has some implications. Do these long-term defense contracts tie up more net working capital than your traditional business?
Otto Pukk: It depends now also very much on the different contracts. Ralf, if you want to comment or anything on that.
Ralf Hasler: Once the projects are up and running, then no, there is no negative impact on net working capital. However, when it comes to postponement of larger projects, which happened last year, then of course, we pile up a little bit of material.
Pauliina Tennilä: How do you see the capacity? Will it be a constraint for your future growth?
Otto Pukk: No, I don't see. As I mentioned many times, when we are all looking into investments, we always plan with some kind of excess capacity. We have something to sell in times. Also, I want to emphasize, I think that the capacity discussion is from the past in the EMS business. When I started my career there, it was always big corporate investments to enter the EMS business. Nowadays, you can rent people, you can rent machines, you can rent facilities. Starting up or expanding an EMS business is not rocket science anymore with very heavy capital, this kind of investment. So I think that question itself is a little bit in the past, and the industry has developed.
Pauliina Tennilä: Do you have some kind of estimate what share of your total business with the largest customer in Incap India would you currently expect to lose?
Otto Pukk: No, I don't have any estimate. I know they are, how to say, increasing their supplier base, and from this, we expect that some of our volumes will be targeted in that sense. At the same time, we are, as I mentioned, ramping up other good accounts as well. So overall, we are currently looking at being able to balance out this eventual decrease.
Pauliina Tennilä: Maybe one question related to Incap Germany. Do you mostly serve German customers from Incap Germany, and do you share the same customers in German and Romanian factories?
Otto Pukk: Larf.
Ralf Hasler: Yes, indeed. Customer proximity is something which is very important. Most of our customers are in Germany. Since the Romanian factory is, how to say, the competence center of cable harnessing, yes, also their customers are mainly German customers.
Pauliina Tennilä: Going back to defense sector still once more. Is the defense business a higher margin business for you?
Otto Pukk: I think it depends on the projects again. Depending on what we are producing. If you are looking at defense, you have both, I would say, more classical defense projects, where Ralf was talking about fighting vehicles and others. Then you have, for example, modern drones and so on, and if you look at how these are used on the modern battlefield in that sense, then some are, how to say, shoot and forget, and some are different, how to say, multiple time usage. Put it mildly, tens of years of usage. It all depends on what product it is in that sense. The defense sector is very broad nowadays with both old established companies and younger startup type of companies, and there is a lot of different products there. If that answers the question.
Pauliina Tennilä: Talking about profitability and returning to double-digit margin, can we expect double-digit margin going forward?
Otto Pukk: I have said it before that I think that our default, or how to say, how we are set up with our decentralized organization and very low overhead levels in general, that puts us in a good position to have good EBITDA levels in that sense. That said, it always depends on the product mix. For us, the percentage itself is not the holy. If, for example, we see a good business opportunity with a lower margin that would a little bit then dilute the percentage but make sense and we are earning money for the shareholders, of course, we are not going to turn that down. The percentage itself is not a target. It is more of, how to say, the fruit of our work.
Pauliina Tennilä: Then a question about the cash flow fluctuation. Was the development in Q3 in line with normal seasonal variance, and do you expect seasonal capital release in Q4?
Otto Pukk: Antti, finally a question for you as well.
Antti Pynnönen: Yeah, I have been waiting this whole time. This is a good question, and then, of course, we have had that since Q2 already, good growth in the business, and that ties already working capital items in the form of first inventory buildup and then in the form of receivables and so on. Of course, now we are also seeing when inventory levels, as I briefly explained earlier, has built up to EUR 90 million. That is also because of we are expecting good solid Q4. In that sense, of course, then the growth is expected to continue in that sense. Of course, it ties on the cash, and the cash flow is under stress.
Antti Pynnönen: This is the nature of the business, very logical, this cycle goes often also in the history of Incap as we have seen the years we have grown. This is the similar pattern here. Once the business is stagnating, there is less stress, for example, if the material situation improves, then we get the inventory levels down, then we start seeing the cash returning back to Incap. That's how it goes.
Pauliina Tennilä: Maybe one more question, this relates to M&A. How does the M&A market look like right now from your perspective?
Otto Pukk: We are currently not focusing on large-scale M&As. I would say the share price has been traded as we see it with a discount compared to our competitors. We have initiated the share buyback program that we have currently active. In a climate where we see very high multiples in the market in general, then of course it's hard to make different M&A deals value creative.
Otto Pukk: We are focusing on organic growth, we are focusing on share buyback, I am quite sure that M&A will be a part of our future at some point again when, I would say, the market situation in general look is more favorable, if we put it like that. That said, of course, organic growth, we are looking also perhaps on smaller bolt-on acquisitions, we are not closing the door entirely. The main focus is to continue organic growth and continue on the path that we have set off.
Pauliina Tennilä: Okay. Thank you all for your questions and being active. I would like to remind everyone online that you can subscribe to Incap's releases and IR calendar at the investor relations website, and there is a lot of information there as well. Otto, would you like to wrap up with final comments on the Q3?
Otto Pukk: Yes. Once again, I want to thank everybody for the interest in Incap. I think we had an excellent quarter and it looks like we are set off in a good way for the Q4 as well, and we expect that also to be strong. Before I forget it, we had one more slide when it comes to that I want to share with you, and it is the Capital Markets Day. I hope all of you are going to be joining us live, and if not, then tuned in when we have our Capital Markets Day on 17 November in Helsinki this year, where we will open up a little bit more when it comes to our strategy and strategy development and what we are set up to do.
Otto Pukk: I am looking forward to having active discussion with all shareholders there. After, there will also be a possibility to do some networking and talk to me and others in Incap management. We will have most people in management on site. You will have a lot of people, including, of course, Ralf and Antti that you saw already today. Please come to that and, yeah, from my side, thank you once more and see you next time.
