Welcome to Inderes TV to follow the interview with Aspocomp's CEO Manu Skyttä following the company's Q3 earnings release. Hi Manu!

Hi there.

Quite strong figures. If you would summarize how Aspocomp did in Q3, let's start with a very brief summary.

Let's not empty the bank right at the start. Yeah, as was said, quite a good figure. We are told that we aren't popping champagne bottles over this. This was a good interim milestone really to show that now this is the level that Aspocomp is at, and now as we get the investments finished, we'll reach yet the next level in terms of both revenue and the rest. A thoroughly solid performance, nothing magical. We managed to remove those so-called low-margin jobs there in Q2. This is what it looks like then.

This is the situation, and the market situation is quite wild indeed. Would I say that the demand situation is only rising. Of course, it shows in our risks on the raw material side, but. The market situation looks good, and a thoroughly solid performance. Now we will catch our breath for a moment and focus on equipment investments. But then again, we will reach the next level. Regarding Aspocomp.

Let's make sure that there really wasn't any bullseye in that margin, that you see that this is in its own way a relatively neutral level now in this kind of demand situation.

Yes, indeed. Of course, there was that 15,700 that came actually from a customer bankruptcy in 2022 a bit unsolicited and unexpectedly to us as waste. I'll open up these facts: we got a bit of a plus there in August, but even without that of course we were at a margin level of over 10 percent, and this now shows the current capability of Aspocomp and the market situation. Where are we now? Nothing magical.

If we think about the production side, is it of around 9 million? What the Oulu factory was then able to push out during that quarter and then the rest is brokerage.

Yeah, 9.5. It is actually a bit over nine. That kind of three plus minus is on average over 3 million in months. Oulu is now able to do that kind of volume. Of course as said, this involves so much pricing and model prices in the future. But. If normalized to this situation, that is the magnitude we are going with then.

Yeah, then still if one looks for something weak in this right now, operating cash flow was indeed negative. Could you tell a bit about what this is due to?

And it really as was brought up a bit there. The raw material situation has changed quite significantly in the market actually from the beginning of the year when we talked in January about our laminate delivery of even four weeks. Now we are talking about 16 to 26 weeks, and of course as our order backlog grows, our order backlog lengthens, we must ensure raw materials for customer deliveries. And practically actually why it shows in the cash flow that way and which shows in our covenants as well.

Practically right at the beginning of the summer we were forced to order raw materials for the whole autumn and early year as a safeguard. And then of course when invoicing comes with a delay, it turns the cash flow that way, but it is as they say an upgrade. In that inventory level, which then shows in our net working capital as a significant increase actually compared to the comparison period.

Yeah. You have however succeeded in customer contracts in carrying these over there. And have you gotten some kind of margin into it as well, that in its own way as compensation for this?

Yeah yeah, that is indeed how it is, that of course pricing in this situation, when market prices and raw materials are very volatile indeed, of course mechanisms are important to us. Such things go into already confirmed orders as well, so it shows then in our order backlog as well, and of course so that we strive to keep relative margin, that we won't start compromising on it if raw materials rise.

Well how would you then comment on new orders now? Were we there a bit like even calming customers down so that they don't order yet? Or how would you comment on the level?

Well actually no. In this we have actually had to ensure to customers due to the raw material availability situation that remember that 6 to 9 months is the minimum order backlog so that raw material can be ensured. That of course partly drives that order backlog, and a couple of things of course, demand in both semiconductor testing and the defense industry. But then of course that raw material availability, which also shows. And these two things actually drive the order backlog.

Price increases hardly show there yet, they will probably show then during the end of the year. Price increases will then show as a third element in the order backlog. But these things are driving the order backlog for us right now. But we aren't really hesitating regarding that, with those customers who are strategically significant to us, the long-term order backlog is indeed promised to them within the limits of their capacity. Of course that extends that order backlog then timewise.

Well, now we already went to the year 2028. Apparently this order backlog stretched. How? Are all those agreements in their own way ensured then precisely regarding these price increases and other similar things? And are there some kinds of sanctions there? What have you paid particular attention to if something cannot be done, even now during the next 6 months?

Yeah yeah, of course. Of course it means that now at the longest it seems to go even to the second quarter of 2028 those tails that are currently confirmed customer-specifically then. And of course the most important thing for us in this situation is to ensure that the mechanism works so that if metal prices rise, they also go into the order backlog along with it. Otherwise we would be facing quite a big risk. If significant increases in raw material prices and delays in delivery did not show there in the order backlog.

Yes! Well let's go then. When I read that report, actually everything looked good until we reached the CEO's review and the final paragraphs, where it was told that the next half year is this installation period and it apparently causes some kind of dip in revenue and earnings. How would you yourself describe in your own way the effects to you, that what are the next two quarters of installation. Effects related to installations.

Yeah. This is indeed a conscious decision, and it's good that it didn't take a stance on how big of a hole we're talking about. That leaves it up to the reader to figure out. We're not talking about tens of percents. We are talking about around 10 percent of revenue that we have prepared for, primarily by not taking in orders for this Q4. That reduces it slightly. And of course, we know that the earnings are quite sensitive to revenue, because a large portion, especially with such a short cycle, practically a large part of the costs are fixed, meaning in a way the leverage on earnings through that is very strong.

We are aiming for Q4 overall to have been our biggest risk in terms of installations. We have succeeded in buffering production in such a way that there is sufficient buffer so that, for example, regarding our intermediate floor production, we have a four-week production buffer reserved for disruptions. Meaning four weeks from the expected start can still go wrong. We still have enough material in the process in a way, so that the process flows and is sufficient when we get it started again around mid-December. But.

I assume that these biggest risks are now focused on this Q4. And then actually quite a bit we return to a situation where, regarding Q1, we have also consciously held back the order backlog a little bit there too. We can clear any potential backlogs, for which there is catch-up capacity if we fall behind for some reason, and we can start next spring from a situation where we don't have any significant production lag, and we can then gradually start operating new equipment and lines.

Well, if we think about this entire investment program, a large part of the machines have already been bought earlier and even installed, so if one were to take this perspective, where do we stand now?

Probably let's put it this way, that monetarily speaking, a large part has been bought and ordered, deliveries confirmed, and installations underway. Actually, the biggest and most significant ones for us relate to our new patterning line. Which is a line the size of our entire warehouse, meaning a production line measuring 35 meters by 14 meters, and its installations. The mechanical installations are in good shape. We will probably get that installed by the end of the year, and now this intermediate floor production line is the other major significant one. If we are talking about line investments in the millions, the rest are more individual machines and equipment that ensure the throughput capacity. And now we have these two biggest installations going on right now.

Yes! And when this whole thing is rocking with these, 50% more capacity in the second half of next year. Is this a CEO promise?

Well, computationally this is certainly even more, but what we are setting out to do is 50% more. Revenue from Oulu then during H2. Next year then.

Yes! And if we think about the bridge, we already talked about Q4. Q1 is apparently a bit better than Q4, still ramping up in its own way, or how should one think about this?

Right now it is reserved for ramping up, but we have built a good buffer there so that it's enough. We will get everything by summer. But let's see. We'll come back to that in the spring. So at this point the order backlog is of course what it can be. If things go faster than we have expected and assumed and no disruptions occur, then we can deliver from there even earlier. But. Let's start from the fact that we are calming things down now to get the investment through. This is really, really significant. As we discussed, this was a pretty good performance, but again not where we want to be. And this is not like our future performance. So our goals are much higher than what these Q3 numbers were in a way.

Then, as an analyst, one always tries to think about the risks as well. Something like this is always a big risk in the sense that it doesn't go as planned. So, apparently there is indeed some leeway in a way, that every bolt and nut doesn't have to fall precisely into place at that exact moment for you to be able to handle all customer obligations.

That is indeed the case, and truly we probably know. When we go through the Q4 earnings, we will actually know critically how this Q4 went. And we already have a good idea of the whole picture at that point, as to how it is, yes, and actually the only thing is this intermediate floor production, which is such a big risk production-wise that in a way, if we don't succeed in that, production halts. Everything else is mostly additional investments. Or then we still have the old equipment in use, so it's only removed once the new one is definitely working, so it wouldn't be dropped somehow. So actually this November-December we will know that we might have made sure that even that risk has been handled well and ensured that it doesn't cause us any significant losses.

Got it. If we think about after this, how would you describe your competitiveness and the modernization level of your equipment, or in a way, is there still a lot to invest in to reach the top level, or are you competitive at least on a European scale?

On a European scale, in terms of the capability we have, especially in the segments where we are in demanding printed circuit boards. Especially for the defense industry's missile defense systems, radar systems, satellite communication systems, and also on the semiconductor testing side. We are at a good level, both qualitatively and in terms of capability. Or above all, it naturally gives us new capability, but it also ensures our quality and delivery reliability as well. It qualitatively makes our printed circuit boards even higher quality, but we are qualitatively where we want to be in our strategy. We have said that we are among the most significant printed circuit board suppliers in selected segments. And perhaps the demand also shows that we are indeed starting to be there already now, but it will strengthen our position even further.

And then we actually have a planning process where we systematically start renewing equipment that is at the end of its lifecycle as continuous investments. Then after 2027 in other respects.

Could you recap this year's outlook for the viewers, and then I'll ask about it?

Well then, good. We kept our guidance unchanged. Last year we had a revenue of just under 39 million and earnings of 0.9 million, and we said that we would improve both revenue and earnings this year. And this is evident. We kept it unchanged despite the strong Q3, and I can almost guess what you're going to ask next, but.

The question was, does it relate to Q4 in its own way. Understandably it involves more risks than normally in this situation, but isn't there now a pretty unreasonable amount of margin in a way for us to still achieve that improvement?

Well, of course we start. From the premise that we achieve a positive earnings result in Q4 as well. But as said, right now, both regarding installations and others as well as the production outage, the variance is quite large for the end of the year, and we didn't touch it. If we naturally have internal boundaries where we are within the guidance in our year-end estimate, that's why we didn't interfere with that year-end estimate and outlook in those respects.

Well, for next year there is of course no guidance yet, but that's what investors are more interested in anyway. If we think about Q1. Apparently the indication is that it's still relatively weak. Surely profitable though, Q2 should probably move in a better direction and by the end of the year we would already be at a completely different pace. If this now goes. Could we? Can you elaborate a bit?

Or actually there isn't terribly much to elaborate on. Pretty much. You read our plans. Where we are right now? And roughly that's how it looks to us, since we have practically already since the autumn of 2024 played a long game through quite difficult decisions with capacity allocations. Once the investment program has been launched, we are playing for 2028 and seeking the level we will have with it. Quite many of our customer choices and capacity allocation choices and others that we make are aimed at that increased capacity which will then be available to us at the end of the year.

Well, let us move on to the demand outlook then. That apparently is not the limiting factor for you right now, since both the semiconductor industry and the defense industry would apparently take on significantly more right now if they could.

Yes, indeed. This is quite a dynamic demand market right now, if you consider the entire European field, where actually within our competitor landscape, the Oulu investment is the largest investment currently happening in the market. We have no indication that anyone is planning significant new investments at the same time as demand is growing, so naturally that places pressure on the customer to secure capacity well in advance. And those discussions are taking place. Actually, they have started with customers now right at the end of this quarter and during this quarter, regarding how customers view that long-term plan.

And it certainly looks that way from both the customer perspective and the market perspective. What we actually said at our CMD, the Capital Markets Day, is that capacity in Europe is not significantly increasing; perhaps more capacity is exiting than new capacity is coming in. The assumptions we made about demand a little over a year ago— well, actually, demand has arrived even faster than what we— there, it was believed that—let us put it this way, that this investment certainly was... It was the first opportunity for Aspocomp to make it, but probably also the last moment to do so, so in that sense it was important. We accelerated our investment schedule. We are doing this. This major investment project over the next year and a half, and then we will look beyond that. What to do after that.

Yes, I remember when it was still being considered back then whether that capacity would be filled. Now there is no such concern. Indeed.

It does not look like it. It definitely is. The fact is that it is actually replacing available capacity elsewhere. The customer has no availability. And I think I mentioned somewhere... at an investor event that we are now the bottleneck of the defense industry, the entire printed circuit board industry, and we will continue to be, and according to market estimates, customer estimates, and estimates by NATO and the EU, demand will continue well into the 2030s and accelerate, so in that sense, even the long-term outlook for a printed circuit board manufacturer with Aspocomp's capabilities looks... It looks like there are indeed opportunities to seize.

How about the automotive industry in practice here? You mentioned that you are giving up these long-term contracts there, which have nonetheless been significant in terms of revenue. In terms of earnings, apparently not so much, but is the automotive industry apparently not one that has gone through this critical production of yours, or how is it? How much does this in its own way free up that capacity?

Yes, this automotive production of ours, we opened up about it a bit at the Capital Markets Day, that it is somewhat like a separate cellular unit. Perhaps it would describe a part of production rather than a circuit, where we do not manufacture the actual printed circuit board ourselves, meaning it has not consumed our printed circuit board manufacturing capacity, but it has consumed our competence resources. It has consumed our limited space, which has been needed for this investment project. And as you said, yes, significant in terms of revenue. We are talking about hundreds of thousands on a quarterly basis, though. But as was said between the lines there, it has no impact on profitability. Naturally, back at the initial stage when the contract was made, those margins were obtained. But perhaps from the perspective of the European automotive industry, it is a bad situation that the pressure they face comes entirely from elsewhere as cost pressure, and perhaps for printed circuit board manufacturers at the moment, the pressure looks very different and quite from that direction. In cooperation with the customer, it was agreed that now is probably a good time to transfer this production to other suppliers.

There are still suppliers out there who will take it.

From the customer's point of view, I certainly hope so. They say they do. I hope they manage to secure a replacement supplier through that route.

I will bring up another negative issue that was already mentioned here. Namely, the financial covenant was breached. Let us not dwell on it further, as the dynamics are quite clear. But since this investment program still requires a significant investment. The next two quarters are expected to be slightly weaker in terms of cash flow, do you have enough comfortable leeway in your own calculations to ensure that no liquidity or financing crisis arises here?

Yes, yes, we certainly do. And perhaps let us not return to that covenant breach. It looked until the very last moment like it would not. But then indeed, due to minor differences between FAS and IFRS, it ended up this way.

But indeed yes, we are also monitoring cash flow. Naturally. In a project like this, when we are growing and investing significantly, cash is what we at the management team level monitor on a weekly basis and look at, alongside related matters. But of course, this also involves things like it being in the customers' interest to secure the availability of materials in advance. And naturally, for a player of our size here, when we would purchase a year's worth of materials in advance— so it is. Naturally, customers are ready to join in on this and we can shorten the cash-to-cash side a bit, and it likely looks and hopefully will be that by Q4 we will be. Net working capital will then already look different.

Yes, Inderes at least had a dividend estimate for this financial year before this, so do you think it makes sense to keep that dividend estimate there?

Well, well, we will look into that, of course. No, it is not up to the CEO. It is likely the CEO's decision, of course. What we... What we will plan then? Now that this investment project is underway, what outlook we will then have in the spring regarding the strategy beyond that as well.

Yes! Then regarding strategy in general. Perhaps that brokerage business has now been left in a bit of an awkward spot. Is it still in your long-term plans and does it have a clear role in this? At Aspocomp?

Yes, it has lagged behind a bit too much for us. Perhaps, let us put it this way, that its share has perhaps moved in tandem with how our own production volume has moved. The revenue share is very stable despite various growth companies. We have tried simply increasing the quotation volume and contacts. It is largely a volume business, and the market situation... Printed circuit board manufacturing is currently such that even our large partner companies that we work with— demand is currently at full capacity for them, and they are doing the same as us, meaning small customers with no growth potential have to be dropped, which of course complicates our trading capacity.

And this is the kind of thought where, let us say, a year ago the situation was different, and the market was different. Now we will probably have to look at those during next year when we return to things after the Oulu investment. Whatever the next strategic elements to be undertaken are, at that point we must revisit the trading business targets, regarding what to focus on and what the market situation looks like. But right now it is very stable, purely in terms of revenue.

Is it still quite profitable?

Yes, it is. And of course, our threshold is that it yields a contribution margin higher than what we target. EBIT percentages are where we start from, so it is quite, quite profitable. A good, good addition to our business right now. But of course, if our manufacturing business or revenue grows by 50 percent and price increases and everything else rises, that other part might make up such a significantly larger share that we need to examine what the share of trading is. But this is perhaps the strategic deliberation that we will say by the end of next year. We will need to do this here, but there are no such decisions that we would abandon it. It is not like that. And we have shifted it precisely towards operating more as subcontracting for Oulu's excessive demand. Demand that can then, let us say, in a weak economic environment be diverted back to the Oulu factory, so we have shifted trading more toward a subcontracting mode rather than actual trading.

Is there significant volume through that or anything that can be moved elsewhere and then potentially brought back?

Well, we have certain customer relationships where we can handle temporary demand spikes, and of course, perhaps when we outsource, it has to be circuit boards that are on the lower end of our capabilities. What our partners are then also able to do? But. This again is the kind of temporary, perhaps a substitute for temporary spikes rather than any long-term strategic one. The fact that a significant part for some customer would come from outsourcing for years.

Right! Then the final question. A big one like this, where you get to paint with a slightly larger brush and for a longer timeframe. If I remember correctly, one hundred million was the strategic target, or to exceed that in terms of revenue. If we now calculate with current volumes, current prices, Oulu is probably growing to the size class of 60 million. Of course, if those prices rise drastically, that automatically means growth there. But I suppose even in your papers Oulu doesn't achieve that solely with this current trading. Or, as a matter of fact, trading is included in that, sorry. So what could the next steps practically be when you report back next year?

This is very good and also topical, but of course we have to go through the next six months. We are focusing very much. Management's focus has completely shifted. This investment will be brought to the finish line before we start. In a way, planning the next one in more detail, but of course those alternatives are constantly on our minds. We have said that we are ready to make acquisitions.

Then when we go to look at the European competitor landscape or circuit board manufacturer landscape again, unfortunately even those that have come under our review, where we have perhaps visited and received some information, they are indeed there. The investment debt is quite large. And pretty much here margin-wise there are also full circuit board shops where there is investment debt and not really such clear growth potential, so it's perhaps difficult rather than us buying revenue for a euro where there is no growth potential, or old equipment that you have to invest in.

Of course, one must then consider whether there are alternatives to start expanding organically with our own investment. Increasing our own capacity further, but on the current site that is not possible. That is certain, but other alternatives are certainly under consideration, and we will see what comes up next.

I can only imagine how full it currently is, that site, because the last time I visited, it was quite full.

It hasn't become any more so. Space hasn't magically appeared anywhere. In addition.

Right, thank you for these comments.

Thank you.