Basler Aktiengesellschaft (BSL) Earnings Call Transcript & Summary

So even though some participants are missing, I will start the call, and welcome you again to our 9 Months Earnings Call of the Basler. My name is Hardy, I'm CFO, COO of the company. And I'm very happy to present you today new records of our top line, and also very high growth rates for the third quarter, and also giving, let's say, you a more clear picture in these, yes, turbulent geopolitical and economical times. After making this note here of a disclaimer that we are doing, or I'm doing forward-looking statements that we can't be liable for. I would like to switch over to the agenda. It's a standard agenda that you are used to from former calls. And we start with an executive summary, giving you the big picture followed by more specific financials. Then a quick lens of the share performance over the first 9 months, and then we come to the outlook. And last but not least, we will then have approximately, I would say, 20 to 30 minutes for Q&A. So starting with the executive summary. First of all, the environment. So the market highlights here the industry. So the year-to-date German industry for vision components grew single digits and billing 6% and bookings 8% and in the first 9 month of this year. The chip supply has recovered over the course of these first 9 months, and the market situation is definitely changing. The market demand has been cooling off since Q2. I mentioned this already in the last call. And the lead times are still high, but they are shortening. We see that particularly CapEx investments in the -- that are related to consumer electronics has been weak and remain weak. And Asia, specifically China, has been mostly affected by the slowdown. And what we also see is that the consolidation trend is ongoing, so we see M&A transaction happening. And we are part of it when we come to our performance within this market, maybe first of all, we drive the consolidation trend. At the moment, as you know, we have acquired, or we closed 4 transactions over the course of the last 9 months. [indiscernible] months, we acquired 2 of our Korean distributors, 1 of our Italian distributor, and we went into a joint venture with our French distribution partners. The post-merger integrations are ongoing, and we are very satisfied with the progress of the post-merger integration and also especially on the Korea side, where the financial numbers. Korea has been consolidated over the whole 9-month period. Italy is only in the numbers consolidated in the third quarter. So our fast organizational growth, we continued that with 150 additional FTEs that we increased over the course of the first 9 months. Roughly half of it came from the acquisition. Another half were organic hires and replacements. Our bookings were down by 12%, I come to this more precisely later. But we see definitely lower demand in Q3. We see cancellations happening. We see reduction of order horizons because of improving supply, but I will mention, or we'll dig into this deeper in the second paragraph of the presentation. Our billings over the course of the first 9 months were up 25%. Even the third quarter was up about 50%. Our order backlog due to the high booking -- high billings and slowing down bookings shrank, but we are still on a very high level with approximately EUR 124 million. This is approximately twice as high as normal. So the backlog is considerably high still. The gross margins and earnings margins bounced back to solid levels in Q3 after a temporary weakness in Q2, and the year-to-date earnings before tax margin is around the upper end of our guidance. It was at 11.8% over the course -- over the period of the first 9 months. We recently, you might have seen us increased our guidance, so we are very confident for the remainder of this year. Yes. Here, you can see the organizational growth. The picture is, we had approximately 900 full-time equivalents on board when we started the year. A little bit over -- we were at 1,065 employees by end of the third quarter. We continue our hiring program, so we get several new employees on board until the end of the year. So we will approach approximately 1,100 full-time equivalents by end of the year, a little bit less. And this is a mixture of organic growth and 70 people that we got on board in Korea and Italy due to amortization actions. As you can see, the splits have not much changed. Worth to mention is the high spending level on R&D. 26% of our employees of the number of full-time equivalents is working in R&D, and this was in the first 9 months approximately EUR 25 million that we invest in R&D. We significantly -- not significantly, we increased the portion of sales and marketing employees. This is mainly due to our acquisition in the distribution channels. From a product launch perspective, yes, we are doing a lot, quite a lot, increasing our portfolio, firing the transition from, let's say, a single component to a full-line provider. In this endeavor, on this journey, we increased our lighting portfolio significantly. So here about 200 new lights, so high variety of lights. Also smart lights that has certain synchronization functions between the camera and the lighting itself. We also launched a full new line of ace 2 cameras equipped with the latest generation of 5-gigabit ethernet interface, so a higher bandwidth so that the cameras can transmit higher frame rates and/or higher resolution images over the very famous gigabit ethernet connectivity. And on the higher-end product line, we increased the number of boost cameras and fitting frame grabber technologies. This is what you see in the lower part. So here, we talk about very high resolution, very high frame rates that are connected to special preprocessing cards like you see them and where we already preprocessed the images before they are finally processed in the PC. We are investing heavily on the software side, the -- and what is called pylon software development kit. Also recently, we made a big announcement here that pylon is not only a frame tool any longer so that connect the camera to the application or can connect different components with each other. We also now offer the so-called vTools. These are image processing algorithms that the customer can use within pylon. You see some examples on the left-hand side, for example, on the pharmaceutical side or on the -- where the PCB board inspection. So there are analytical tools also available now and pylon is becoming, let's say, the central part of our offering for our clients, which is typically the R&D engineer at an OEM machine builder. These engineers can work with pylon as the main API or software development kit. And around pylon, there are many, many different hardware products that can be easily connected and integrated by the customer. We recently showed all the new products and also our nice journey towards a full-line provider on the Vision Show in Stuttgart under the model of accelerate your vision. And I do have a video with me just giving you some impression how we [indiscernible] ourselves because I think it is a very good demonstration of our journey from a single component to a full-line provider. We demonstrated a lot of components and interaction and applications. We connected different components. We showed the new software, as you can see here, recently. And the relevance on the feedback on the customer side was very good. We were very satisfied with the show, and I'll let you watch the video here and give -- to get some feedback, how our products are integrated in solutions. [Presentation]

So having this shown, I'm coming to the second part of my presentation, financials, and I will start with the picture of the bookings and billings, and it certainly needs some further explanations. So first of all, this -- from a big picture here, what we are seeing is the bookings and billings and the ratio of those are changing. We come from 2021, where we had very high booking levels and due to the chip supply, limited revenue levels. So we had very high book-to-bill ratios and the picture started to change beginning of this year and especially, in Q2, where we had kind of a tipping point where bookings and billings were more or less equalized. And in Q3, the picture is changing. We have a negative book-to-bill ratio, and there are normalization and corrections happening. So looking first at the blue bars to our revenue stream. What you can see is, we were -- due to the better supply situation, we were able to continuously ramp up our production and increase our sales. So up to a level of -- in the last quarter here in Q3, EUR 74 million, so which is actually roughly a 50% growth rate compared to Q3 the year before. So what is also can be seen is that on the bookings side, if we look at that, the high level of bookings stopped in Q1, and then it went down. And we see now the correction happening of a very high book-to-bill ratios and very high backlogs over the course of the period until Q2. What we have done to give you better transparency is that we show you here and we give transparency of the orders that we have received already back in the calendar year -- in business year 2021, and that were canceled due to the fact that customers need to wait too long because of the chip shortage. So we show -- because normally these bookings would be negative and you would just see the total results, but we decided here to give you insight because actually, this gives you a better insight on the real booking level because the cancellations that you can see are from very old orders, and these are more cleaning up of the systems than recent business situations. But what you can see, even by doing that, we had relatively weak bookings of EUR 50 million a quarter. So the situation, if you compare Q3 2022 and Q3 2021, is kind of the opposite picture. High revenues, but low bookings compared to higher bookings and low revenues in Q3 the year before. All in all, this is no surprise to us. I gave you already insights in the last call and also in the Q2 report or half year reporting that we definitely foresee now a phase of normalization happening, and we see this happening. We see that the raw demand is lower. We see corrections of -- cancellations of old orders, and we see postponement of orders and longer and shortening of order horizons from our clients because our delivery performance is getting better. All in all, we still sit on a relatively hard here order backlog of EUR 124 million. I mentioned in the beginning of the call, this is roughly twice as high as normal. So normally, we would have a business -- booking level or a backlog level of approximately 2 to 3 months. That is kind of our normal lead time, but we have a backlog at the moment by end of Q3 of 124. So looking at the regional split of the revenue. So in total, EUR 205.2 million. So this means 25% growth. And the majority of the sales has been achieved in Asia, 56%; then EMEA, 26%; and Americas, 18%. When we look and zoom in a little bit into Asia, there is a very mixed picture. China, which is normally our, let's say, growth driver was pretty weak over the course of the first 9 months, especially in Q2, Q3. And we were able to compensate this by higher growth in Korea. So we definitely see here that the COVID situation that the high exposure to consumer electronics in China, also competition situation is a situation where we see under proportional growth or even decline within the first 9 months of this year. Whereas in other regions, we see a nice growth. So looking a little bit further down the P&L on the gross profit margin and the gross -- absolute gross profit. So here, we come back to our normal levels. This is good news. As indicated, after the special effects of the M&A transaction, after special effects of higher pressure from spot buys and later kicking in results or impact from our own price increases. We see now that the -- our gross profit margins get back above the 50% line. So our operating level between 50% to 55%, we are getting back to this. And we had also a record in gross profit and absolute gross profit in the third quarter was EUR 38 million. So this also means then for the earnings before tax and earnings before tax margin. After a weaker Q2, we are back in very sound levels here closely to, again, 13% earnings before tax margin. And overall, here also with EUR 9 million in earnings before tax, absolutely, in the third quarter. Again, a strong value. Yes. If we sum it up, the main KPIs of the P&L for the first 9 months. So all the entries minus 12%, but still high-level EUR 209.7 million. So sales EUR 205 million, 25%-plus. So this means that we have a slightly positive book-to-bill ratio over the course of the first 9 months. However, you have seen that the trend is definitely going in the direction of weak bookings. I come to an outlook in the last portion of the presentation. Gross profit also increasing by 17% to EUR 102 million. Gross profit margin over the course of the first 9 months due to a weaker first half year, 49.7%, but close to 50. So this is a decline EBITDA, EBIT and EBT are all on the same level compared to the year before -- or not the first 9 months, the year before. So you see the effect here. We have increased the organization on the one hand. On the other hand, we have also increased sales, but the net effect is equal out more or less and the net income is a bit higher, EUR 19.2 million. So the tax rate were a little bit lower. Earnings before -- earnings per share is EUR 0.64 versus EUR 0.62 for the first 9 months. Let's have a look at the cash flow. Here, you see that we are in the situation that we have strong, let's say, negative free cash flows. They are mainly influenced by 2 effects. On the one hand, all the acquisitions. So 2 acquisitions in Korea, 1 acquisition in Italy. Fourth JV investment in France. This is the one effect. The other effect is due to the high growth and due to the very challenging times on the supply side, we increased significantly our working capital. So the increase in accounts receivables and the increase of the inventories together is about EUR 35 million. So this is also the reason why the operational cash flow in the first half year -- on the first 9 months, especially the first half year was relatively weak, but now it's getting better. So the increase in inventory was much lower in Q3, but we are still having due to the very high billings, high increase in -- or had high increase in accounts receivable in the third quarter. Next quarter, we foresee that the cash flow will be much stronger because we don't have special M&A effect, and we will also have a reduction of working capital due to better supply and also due to the -- especially cashing in the accounts receivables that we have built up due to the very high billings level. Yes. Looking at our cash flow and our cash account and also the net cash situation to give you some insights here. You know that we work normally on a relatively conservative net cash or net debt position. Looking first at the development, we started the period with a cash account approximately of EUR 55 million, due to the weak cash flow in operations, due to the very high investments, especially on the M&A side. We had a strong negative free cash flow in the first 9 months of EUR 38.6 million. We increased our bank loans. So we have a positive effect on the cash flow from financing, and we ended up with a cash count by end of September of roughly EUR 24 million. On the right-hand side, you can get cash or net debt position. Last year -- end of last year, we had a net cash position of almost EUR 19 million. And due to the special effects, that we were talking about, we are going through a high investment phase, and we are run the company at the moment with net debt of approximately EUR 32 million. Yes. Coming to the share development of the share price. So we started the year with a very high share price of 53% -- EUR 53, and we ended the period with EUR 23.3. Today, we are approaching EUR 30 or around EUR 30 over the course of the first 9 months. So in the third quarter, also to remind you, we did a share split. Actually, we did -- we issued bonus shares. So we issued 2 bonus shares for -- every share that is in the market, which meant actually is provided then the share price by 3. And yes, you can see that we -- from a performance standpoint more or less developed parallel to the market. But if we take the year -- at the beginning of the year, we are still underperforming compared to the TecDax Index. Yes. Then I'm coming already to the outlook before we start the Q&A session. So for the remainder of this year, we expect that the demand will still be weak. So the original demand, but we also see that the order horizon of our clients will be reduced because our delivery performance is getting better, the chip supply is getting better, and we also anticipate that at least in the fourth quarter, we will see also further backlog corrections from old orders, mainly from last year, but also from beginning of this year. We anticipate to have -- to continue our path of Q3 of sound production output, but we will still be limited in the production output by a few missing critical parts. We talked a lot about them -- those parts in the last calls. On top of those parts are typically the so-called FPGAs, Field Programmable Array. So the main processor and chips in the camera. So they are still sure there is a structural shortage still in the market that also will continue over the course -- most likely over the course of the next quarters. We will also have to anticipate limited sales in December due to a holiday season, but also due to this situation that we are changing, or we have plans to change from to SAP-R3 to SAP-S4. So our very long, and I have to say, also painful and challenging project on SAP is coming to the go live. And therefore, we will close a bit earlier the system, and we have only half a December left for shipping and creating revenues. So then last but not least, I mentioned this already. The organization will further grow, and we see increasing OpEx and HR costs. They are all anticipated in our guidance. And the guidance is the one that that we confirm here or recently increased one, revenues between EUR 262 million to EUR 270 million and earnings before tax in the -- margin in the range of 10% to 12%. This then will be a good milestone towards our midterm goals. Our 2025 goal to grow the company to EUR 400 million at a sound profitability of 12% and also a high cash flow -- cash conversion of 70%. So the free cash flow should be 70% of our earnings after tax, if we exclude M&A transactions. So the organic growth should be here, also a strong cash contributor. Even though we see the challenges and the turbulent times in the market at the moment, we see the geopolitical challenges, we are very confident about these 2025 plan. And the recent guidance increase of this year is also a step forward on this journey. Having this said, I'm coming to the end of my presentation and would like to switch over to the Q&A session. You can either just use the audio or you turn on your mic. Or -- please also feel free to write some questions in the chat. So here and my colleague will then read through the chat as well. Are there any questions?

Yes, Hardy. The first question is arriving. First of all, hello from the chat side. Mr. [indiscernible] is -- would like to talk to us. So you can talk to us now. We can hear you. Would you unmute yourself, you can talk to us now? We can hear you.

Hardy, it's quite difficult to understand what you are trying to say because one way you are telling us slowing down of activity and less orders. And the other way, you are very optimistic. And frankly, I cannot reconcile the two. And what I see is, if I compare to all the quarters since, let's say, end of '20 or beginning '21, I see a deterioration on the EBIT margin. I see -- I mean revenue, it's -- I mean up and down. The size of your company has grown, but we cannot feel why you will rebound? And why -- it seems the market is declining, so you will decline with the market. What will be the turnaround? Why suddenly it will change? That's very difficult to understand. I might -- I don't know if I'm clear.

Yes. No, I think the question is very clear to me, and I would like to give you more insight. I mean, obviously, and this is what we have seen in the past, the market is cyclic or cyclical. So we will see up and downs. And what we have seen now is, we have tremendous bookings increase. The last year, we have still sound and strong bookings beginning of this year, and now the kind of correction, kind of the [ bull ] what is happening. So negative book-to-bill ratios are kicking in. And what we are seeing is, definitely at the moment, we see that the market is slowing down. And if we anticipate 2023, most likely, we will have after 2 years of strong growth. So we have okay growth in 2020. We have 2021, 2022 then strong growth, far beyond our 15% compound annual growth rate that we have targeted for. We most likely see a more challenging year 2023, and hopefully, after that, we anticipate that we will see again CapEx investment increasing and also our growth increasing in the years of 2024 and 2025. And this is what maybe -- what I want to give you as an insight here. We are confident about the 2020 -- about this year, 2022. Even of all challenges, I mean we kept our guidance. We even increased guidance, and we are also in our midterm planning. We are still confident because we see that structurally, the market of vision is growing, and we are confident of our strategy in moving from a single component to a full-line. However, the next, let's say, 12 to 18 months, I mean, we are -- I mean we can all read this in the press. We are seeing all the challenges, yes? Geopolitical challenges, economic challenges, and we definitely will or consider this at the moment and see also a weaker year 2023. Hopefully, this gives you a better understanding.

It's very clear because we could feel in the last call that we will have a slowdown somehow some time. When you spoke about the semiconductor industry, for example, you explain that very clearly. So that's -- I understood. The problem now is to know where we'll be at the bottom and that's very difficult to understand.

Yes. I can -- unfortunately, I would like to give you a clear answer on that, but I can't. I can only tell you that we see -- the markets are very weak, especially all CapEx markets connected to consumer electronics. There are some exceptions in solar and in electric vehicles. So battery inspection, for example, but in general, they are very weak. In the short-term, we also see no turnaround actually in that segment. But I mean, normally, if we look into the past, typically, these kind of weak phases, we -- they are lasting for 3 quarters, 4 quarters or so, and then the -- it goes into the other direction. I'm just closing my shades here because I think should be good, but [indiscernible] There's more questions.

So the next speaker will be Mr. Lukas Spang. You can talk to us. We can hear you now.

My first question is related to the cancellations. It's very helpful that you showed us the development of cancellations. But if I got you right, you just referred to orders that you received in 2021. So what about the cancellations within orders from this year?

Yes. Actually, they are in a similar size because orders that we have received in Q1 and Q2, even in this -- there was still this hot phase of ordering. We had also cancellations. So roughly, you could say, they are even -- in total, the cancellations are double the size. We have not shown you this year because we don't want to confuse also too much because we want to have a clear cuts of one business here and the other one. But as an indication, it's a similar amount actually. And especially in 3 because it's then shifted, we could also see quite some impact from Q1 -- from orders placed in Q1. But they are in the bookings that you see as a negative value.

Yes. And then you talked about the weak development in China. So the first part of the question would be, can you please remind us of the revenue share in China? And the second part would be, when do you expect the improvement in China again?

Yes. So the revenue share in kind of booming years, in strong years is between 25% to 30% of our sales. At the moment, we are more in the range of 20%. When do we see improvement? I mean normally in China, as there is a high relation to consumer electronics, we see kind of a peak season kicking in, in Q1, Q2. And we need to see whether at that point in time, then the investment start to come back. But at the moment, due to the COVID lockdowns, we see that the whole, let's say, consumer electronic industry is having challenges. I mean, on the one hand, due to the world demand and high inflation is going down, but also due to shutdowns. I mean you could recently read also the press news about [ Foxconn ] situation. So at this moment, we need to consider that the Chinese market, as long as the lockdowns continue, will remain weak over the next, let's say, 2 to 3 quarters. So then also this means that the peak season in the first half of next year will be flatter than normal. This is at the moment our expectation.

So the next question is coming from Mr. Van Der Horst.

So 3 of them actually. The one is maybe a little bit difficult to answer, so please be creative if you know a way to help me, and it's about the order intake. Because I think there are, of course, 2 effects. One is the real demand in decline, especially when it comes to the electronics and semiconductor industry. On the other hand, we have a normalization of lead times. So if we have a normalization from, let's say, like ordering 2 quarters in advance to ordering 1 quarter in advance, what the rationale that this alone would kind of kill your orders for a quarter. So I don't think that the demand is actually went down 40% in Q3. That will be a bit much. So if you have any way to help me understand how the underlying market is really developing kind of adjusted for this shortening in lead times effect? So this would be the first question. Now the other 2 are just quickly boring one. So maybe we start with the first, and I'll ask the other ones later.

Okay. Maybe for the first question, I can share again the picture because it helps a bit to visualize how the bookings are relates here. I hope you can see them.

Yes, of course.

So if we look at the EUR 50 million roughly, so then there was a question beforehand, so what was also the overall cancellation? So you can -- you could say that roughly another EUR 5 million to EUR 6 million in Q3 were cancellations from earlier quarters, but in the year 2022. So this would -- then the real demand would be around, let's say, roughly at least 55 in this quarter. And now coming to the effect that you mentioned, which is not -- I mean it's hard to give you a number, but at least I can give you a better understanding. The question of, okay, why -- what is the impact in Q3 because customers adjust their buying -- the order horizon because our delivery performance is improving. And I would say that this effect is another 2 to 3 weeks of business within this quarter so that we improved. And so this would mean, let's say, yes, roughly maybe another EUR 10 million or so, EUR 10 million to EUR 15 million. So we would then be in the range of EUR 65 million to EUR 70 million in normal times, but it's -- please just take this as an indication because this last parameter you asked for is very hard to quantify.

Yes. I understand that completely. Just 2 boring questions. One would be, can you quantify the first-time consolidation effect? And the second would be G&A went up quite a bit. Is this due to the EUR 2 million in provision buildup you mentioned in the quarterly report?

Yes. G&A, that's absolutely correct. There is -- the EUR 2 million provision is an offset in that. So this you find under G&A is the main factor. And the second question was regarding all M&A transactions or...

Just the first-time consolidation effects. So I think mainly the 2 subsidiaries in Korea, and also maybe Italy just to give me an idea how the organic growth would look like.

I need to check this and come back to you later.

So that's all from the chat. For a moment, we have no more questions, Hardy.

Okay. Then I thank you very much for your attention. And in case you have questions that come to your mind later, please do not hesitate to contact us after the call. Thanks a lot, and wish you a nice afternoon.