Incap 4Q 2024: Questions and answers
INCAP 4Q 2024 webcast on 28 February 2025 at 11:00 a.m.
In 2024, revenue grew by 4% and in Q4 by 40%. What kind of growth can we expect from 2025? Do you still expect quarter-on-quarter growth?
We expect a somewhat cautious start for the year 2025, as the market is anticipating the impact of the changes related to tariffs, taxes and geopolitical challenges, mostly linked to the new US administration. We will see how the different supply chain channels work to tackle different tariffs and other obstacles in the market. But overall, I think the market is picking up.
When Incap gives guidance and outlook, it’s always based on the current organizational structure we have in place and no acquisitions are added or simulated on top of it assumed. If we acquire new businesses, we look at whether the guidance remains unchanged or if we need to adjust the outlook.
Your EBIT has bounced back in 2024, and in Q4 it was 14,7%. Is this the new normal level?
The EBIT always varies depending on our product mix. The higher the utilization at our factories, the lower the share of fixed costs is and the higher the EBIT. The normal is in between the different numbers that, for example, we have seen here in the past year, and it will vary a little bit quarter on quarter.
Incap’s strength is the extremely lean and efficient organization, not only in headquarter level, but also at all sites. That gives us the possibility to manage overheads optimally to achieve this kind of levels. When we had an all-time low point in Q4 2023, Q4, and we had low levels in some of the units, we still made very close to double-digit, 8.7%. And that’s just the background of Incap’s model and strength, which allows us to do great profitability. The business model and the product mix define whether our profitability is 13%, 14% or 15%.
You highlight new customer acquisition in your report. What sectors/countries did you get them from?
If you look at our units, we had growth in almost all of them, growth in many different sectors, but perhaps we could mention one: the defence industry. It does not represent a big share, but it has been growing. We also see cross-selling opportunities, for example, in our Indian unit and in the US. Also, there has been good development in the US market in many sectors, including industrial, utilities and other sectors. In general, there has been good development in many areas.
Incap has three factories in India. How would you describe the capacity utilization in those factories in Q4?
All of our three factories are in use in India and the utilization has increased. We still have the capacity to fill up our third factory, and we are working with our customers on that. We always try to have some kind of overcapacity, so we have a possibility to grow. But it doesn’t mean that we have an empty factory – if you walk around there, it is quite busy, but there’s still plenty of room.
How did the seasonal variations affect Q4? Could you explain a little bit what has been the driver for the strong Q4, including the strong cash flow?
In Q4, the holidays have an impact, depending on whether they are on weekends or mid-week. We also had quite a long Christmas break, and we have had several of the units resting for a week or even two weeks.
Strong cash flow was driven by very good profitability in the fourth quarter, and the change in some of the net working capital items and, for example, the inventory levels went down and had a positive impact on the cash flow. We have continued to grow and grow profitably and also to collect receivables. We have had no credit losses or long-term customers who have deferred their payments.
How about the largest customer and how much was its share in Q4 of the revenue?
We didn’t disclose it as a part of the Q4, but it’s around 40%. More customer-related information will be announced within our annual report in the financial notes.
Could you elaborate on the type or size of acquisitions that you are looking at and how do you think about valuation, including potential synergies?
We may look at smaller acquisitions, which are close to our existing unit size, ie. so-called bolt-on acquisitions. On a more strategic level, we want to be able to operate our decentralized model. Then the unit needs to be around 20-25 million in revenue at the minimum, to be able to handle the accounting, engineering, human resources and other various support structures it needs to operate independently.
The work our team does with due diligence is the same for a unit around 25 million in revenue or a bigger factory of 50-100 million. So, of course we prefer bigger targets but there are not so many out there. EMS industry in general has lots of small companies and not so many large companies. But when we are hunting, we are hunting big targets. What is equal to all targets, is that we don’t want any turnaround cases. We want profitable business and business that will bring value to our shareholders. As we do not calculate in synergy effects, the standalone unit also should be able to contribute and create value. We have had so far successful acquisitions, and we want to keep it in that way.
We have a clear plan and a robust M&A pipeline. We are constantly working on acquisitions, and we have a good network with different stakeholders like advisors and analysts that support us in different M&A phases. We have targets in our pipeline in different phases. We will naturally inform the market as soon as something gets completed.
Regarding geography – we don’t exclude anything. Of course, in Europe, Germany and Central Europe are areas where we are not so well represented today. And of course the US market, where we now also operate – a market with excellent potential and growth opportunities. South-East Asia is also something we are all looking into. We are quite confident in the work we are doing and sooner or later something will work out. Of course it takes both sides to negotiate and agree on our evaluation and if we do not want to overpay then that is also a negotiation point. But I am optimist.
At the moment we have seen that the activity on the M&A market is quite busy. We have a lot of things going on at our end as there are targets available.
Is it easier to agree on the valuations as most of the EMS companies have weaker figures in the books now?
We look at a lot of different multiples when we do the valuation. If the owner has a privately owned business, they don’t care so much about market evaluations. It is never easy to agree upon a price that makes sense to both parties. Incap in general is considered a good buyer because we run a decentralized model, and we do not want to come in and kill the existing business. We want to keep the management, keep the business, and that is less frightening compared to other companies that have other intentions.
When it comes to structuring mergers and acquisitions, when we have a different view of the near future compared to the other side and there is a gap, we often want to establish some kind of earn-out structure. We try to bridge both parties and mitigate the risk this way. Two cases from the past both have had an earn-out structure, and that is a good way to get a common understanding and get the deal done.
A topical question about possibilities in the defence industry and space technology. Do you see possibilities for new customer acquisitions or orders in these sectors?
We have seen growth in our existing defence customers, and there are also possibilities with the new ones we are working on with our teams. We are exploring those new opportunities.
What’s the rationale behind not paying dividend?
The Board decides on the proposal of dividend at the Annual General Meeting. We still see ourselves as a growth company, and we have an active pipeline with M&As, so from a management point of view, it’s positive that we have money to operate with. We will create value with those funds as well.
You mentioned that you have little exposure to the Nordic EMS market. What are the benefits of that, and what do you mean by that?
Compared to our Nordic-listed peers, Incap has only one factory operating in the Nordic market, and that is the Estonian factory. We have a turnover of about EUR 30 million in the Nordic market, and the rest comes from elsewhere around the world. It is not always fair to look at Incap and compare it with the market development in Scandinavia. We are only slightly affected by the slow economy in Scandinavia. So, even if we are a Finnish listed company, our business is mainly located in the other parts of the world.
Are there geographical differences in demand outlook for 2025?
We stated in our outlook that the market is hesitant, and I think that’s the case all over the world at the moment. We don’t know how the tariffs and the different trade relations will develop. We and many of our customers have alternatives to selling to different markets from different channels, and we are well positioned. We have units within the US and outside the US, within the EU and outside the EU, and we have some playing room there. I’m not worried, but the market is a little bit hesitant, and that is like that all over the world. There are positive signals on the market, and as our outlook states as well, we believe in growth this year, but a slow start until the shakedown has settled.
