Basler Aktiengesellschaft (BSL) Earnings Call Transcript & Summary

We warmly welcome you to our first half report for Basler. We do this together today with Dietmar and we will share the presentation as follows. I will do the executive summary, the financials, and give a quick glance at our share performance. Dietmar will do the outlook. And we do together then the Q&A session, where we have lots of time. Before I start with the executive summary, I just would like to remind you here on our disclaimer, some legal stuff that all the statements we're making today, our views and assumptions made by us using information available at the time today and the forward-looking statements we are making by nature are subject to significant known and unknown risks and uncertainties. Yes. Starting with the executive summary and starting with the market environment, we see that on the chip supply, this is mostly over. What we are seeing now is the opposite effect we see on the chip inventory levels in the whole supply chain and our suppliers and us and also our clients we see extensive stock levels at the moment. But the availability of chips is much better. There might be some exceptional cases, but in general, the chip supply is much better than the last quarters. On the demand side, we see significant regional differences. Starting with China, here we see that the rebound is still waiting. We only see the solar verticals and the battery equipment verticals where demand is good and all the rest of the market is still in a -- it's very muted and it's very weak. So there is still no real rebound after COVID in China. In Asia-Pacific, we see also here extremely weak demand especially due to the reason that this whole area is very much dominated by semicon and consumer electronics customers and these end markets are pretty down. On North American side, it's mixed. We have here on top of semicon and electronics also a relative weak logistics vertical. And in North America also, here our customers are giving us feedback of extensive inventory levels, they need to eat through. So also here the market situation continues to be weak. Different in Europe, totally different picture. We have in Europe a situation where when we look at the European -- the German vision components industry and some of those are acting globally, but many companies have a European focus. The industry, the billings are still up 1%, the bookings are down 13%, but what we are seeing here is the first half year was strong, but now we see also that bookings and billings are further apart from each other. And looking at the German manufacturing index, just recently from July 38% or 39%, so it's on a very low level and this means for us that we have to expect that while running European region in the first half year will most likely go into a different -- into a similar situation what we have seen already for months in North America and Asia-Pacific and also in China. So how have we performed in such an environment, our bookings are down by 41%. So significant reduction in bookings. If they are based on a very high-level first half year 2022, however, we see this decline in bookings and our billings down by 11%. So lower billings decline, but the [Technical Difficulty]. Strong regional differences, also here, as I described in the market situation, our billings in Europe or EMEA region were up by 35%. And on the contrast or to the contrast that in the other areas China, Americas, and APAC, we see double digit decline ending up in total blended mix of the 11% decline in billings for the first half year. Why is that? Because we have quite a strong let's say exposure to the weak verticals and weak regions, we will come to this later in the presentation. However, what we have also seen in the first half year was an ongoing of cancellations, so the aggressively placed orders last year were still canceled even in Q2, especially in China, it's mainly coming from China. We are through the worst year definitely. Looking forward, we don't expect strong cancellations happening, maybe here and there some, but not to the extent what we have seen in the last quarters. Our pre-tax earnings first half year 0.2% earnings margin, so we have a black zero in the pre-tax earnings. And as you remember, we were in the red zones in the first quarter, we were able to compensate this in the second quarter mainly due to our saving programs that we have initiated already within Q1 being impacting our P&L in the second quarter. Other than these financials, I mean, we successfully went through the hypercare phase and Hana, we reported about this in the last earnings calls. We flipped the switch over a new year and then we had a pretty intensive hypercare, where we successfully went through the system is running, the big box are out and now it's more, let's say, continued to improve this system, but everything is working on a normal level. So, as you know, a couple of weeks ago, we announced that we change our mode from temporary cost savings to a restructuring program and we would like to give you some more background information about this. The first background information is the why, so the rationale or the reasoning behind. So first point already mentioned, we see that there is a weak market outlook for the remainder of the year in China, in Asia-Pacific, and in Americas as our clients do not give us high hopes for demand that is picking up quickly and they also suffered from extensive stock levels. On top of this, we now see Europe turning into a similar situation or into a kind of recession. So we had great business in the first half year, so we can be very satisfied with that, however, we are seeing now the same signs we have seen 12 months ago from other regions, customers asking for shifting orders, order entries are going down and therefore we believe that Europe as it just turns into the downturn, most likely will be weak in 2024 compared to 2023. We don't believe it's just a 1 or 2 months effect, we believe this will have an impact also on next year's revenue in Europe. And we see the continuation of China's economic and geopolitical uncertainties. So we don't see these solved, so we need to anticipate the risks involved with that. So these are the external factors. And when we look internally, so our situation, we have to reflect that we had very strong organizational growth. So we grew by roughly 45% number of employees in the last 3 years, from 800 in 2020 towards 1,150 roughly 2022. This we have done because we anticipated especially last year that our growth path will continue the strong growth path. And what we have not let's say, expected, especially a year or 1.5 years ago was also the very high-cost inflation for material and also for personnel costs, as these are the main let's say cost tied in our P&L both are at around 35% to 40% of our sales. So now we are facing the situation that we have built an organization from a size for roughly a business of EUR 280 million in sales, but we foresee that with the current market outlook that this level of sales will not be reached before 2025. So this means there is a mismatch of organizational size and mid-term market outlook. When I mean, mid-term, it's mainly about next year's outlook. And this means for us, we can no longer cure this situation with temporary measures, we therefore decided to go into structural measures which mainly means to reduce the size of the organization. And giving you some more information about the how, much more information in Q3 earnings report, but what we are going to do now in the second half of the year, we keep a tight management with regard to OpEx and CapEx. As you could already see in Q2, we keep this mode of tight management, but on top we shift the mode that we reduced the number of employees or reduce the full-time equivalent number by and large 200 FTEs in the second half of this year. This reduction is mainly focused on the regional aspect in Germany and China as we have also the larger organization in these areas. And from a functional perspective, it's mainly realized by reduction in admin, in marketing, in operations, especially on the temporary workers' side on operations and R&D. So we have prepared ourselves as also mentioned in all public releases and also in individual calls with some of you before, we have prepared for these measures and we see us enabled to realize those reductions fast as a management team so the changes should all be implemented in the second half of the year, the strongest impact on the P&L will be in Q3 due to the accruals we will make and we are fully committed as a management team to go through this phase now in order to be able to start fresh into the year of 2024. Yes. Let's have a look to the team by mid of the year. You can see here, mid of the year we were roughly 1,120 people, so end of June. But the vast majority of the employees or not the vast, but the majority of the employees are working in sales and marketing functions, especially also due to our acquisitions we have made in the past year. This mix has shifted more towards sales and marketing employees, but also we have invested heavily in getting on board additional R&D people, 26% of our employees are working in that area and the R&D quota of the first half year was approximately 18%. So here you see exactly the effect, we have already invested and increased the number of R&D employees to an extent that would be healthy for much larger organization and we have to face this situation and work on this now to cure this misfit that we are having at the moment. Admin 15%, production around 21%. So we heavily invested as seen also in new product lines. The first half year, just giving you some impression, I mean, we have launched quite some products, normally also the second half for product launch is stronger than the first half, but on the mainstream side, we have launched a new 18-megapixel sensor or 18-megapixel camera versions on the ace platform with different interfaces. Also on the accessory products, we're continuously bringing new products into our product line. One of the highlights were the IP67 housing for harsh environment. On the embedded side, we worked on connectivity with Basler products and NVIDIA products on the chip side and made our products compatible to what is called the DeepStream Software Development Kit from NVIDIA who is one of the market leaders in high-end embedded processors, if not the market leader. So we showed a lot of different products on the recent Automatica Show, also presented ourselves in a solution provider profile, maybe you have seen on LinkedIn some of the videos around that. So it was a successful show under the module of accelerating vision we exhibited there. On the software side, as you know we are heavily investing more and more on the software side. We brought a new release of our pylon software with new functionality on the vTools, but also with a connectivity and compatibility to MacOS versions. Also here we are broadening the compatibility, we are increasing the number of image library functions the so called vTools in our software development kit, pylon. So to put this in a nutshell, all-in-all, we are making progress, on our journey from a single components company to a full line provider and a full line provider that is acting in different market fields. So we are continuously expanding our product line and using different kind of verticals and also bundling the products together in a way that we offer the customer not only the sort or a range of different components, we offer the customer also sub-systems bundled solutions where hardware products are connected with our own software and applications knowhow or support services at our end. Yes. Coming from the executive summary of the financial part, starting with bookings and billings. On the page you here in dark blue, quarterly development of the billings and more light blue or greyish bars are the order entry and we also have separated here the cancellations that you can see the effect of the cancellations from orders that came in the year and the fiscal year before. So clearly, to see, the revenue was in Q1 and Q2 at a level of EUR 55 million to EUR 60 million so lower than what we have seen in the second half of 2022 and also lower than in the first half of 2022. And what you also can see is after the booking started to decline in Q2 last year, it looked like in Q1 that we have gone through the worst and the bookings are picking up again, but after the experience of Q2 and the outlook that I have given you in the beginning of the presentation, we have unfortunately seen that the bookings fall down again to a level of EUR 40 million and a muted outlook. So this definitely then shows a picture here where we are still at a very low level of bookings, and it looks like it makes side moves for the coming months and we need to wait until the markets will pick up again. Looking at this picture, we reported also in the last calls, our let's say, backlog situation that was extraordinarily high. I can say you that now entering into the second half of the year, we have normal backlog situations. So there is no tailwind on our backlog anymore. The fresh incoming order entries are the indicator for the, let's say revenue stream of the coming months. Yes. In total, we realized EUR 116 million in sales. What is absolutely worth to mention is the regional split that have changed a lot; America 16%, Europe 38% coming from 25% at first half-year last year. So there is 11% shift towards Europe due to the strong market momentum that we're seeing compared to the other regions. And Asia fall down from more roughly 54% to 46% due to the market weaknesses. On the gross profit side, we are making sideways with little improvement, but making more or less sideways on a low level of 45 percentage points roughly. Main reasons continue, we still are suffering from spot buys in the past because we are sitting on high inventory levels and we need to eat through this inventory levels that were with material that was purchased last year for relatively high prices. We also have headwinds with regard to the weak Chinese Renminbi and the third parameter is the low production output, the low revenue that you can also see that means for us there is less economies of scale for the fixed cost in our production and material purchases. In absolute terms, when we look at this, we were at around EUR 25 million to EUR 27 million gross profit per quarter. And this means for us, even with the measures we are taking roughly a breakeven point. So looking at the earnings margin and earnings before tax, as mentioned earlier before I mean we normally come from a level of 12% earnings margin due to all the effects and the slow start of this year, we were able to be back in Q2. However, only because of strong measures on the cost side and we were able to compensate with that the negative the number of the first quarter. Looking and comparing the first half year to the first half year and going through the main parameters, order entry I mentioned EUR 94 million, minus 41%. On the sales side, less declined by a 11% decline to EUR 116 million. The gross profit EUR 52 million, so 19% decline. So the gross margin is going down, but also sales going down. So in absolute terms double digit. Gross profit margin 44.8%, down by roughly 4 percentage points. So then the EBITDA 10% or EUR 11 million plus for the first half year, so 50% down roughly and the other earnings are more or less around zero. The net income is also a net loss, minus EUR 1.7 million due to the different tax situations in different countries. We are still paying taxes even though we have the earnings before tax are more or less neutral. So on the cash flow side, we started the period with EUR 28 million or EUR 29 million roughly. Cash flow of operations minus EUR 1 million, cash flow of investments roughly minus EUR 8.6 million. So free cash flow was EUR 9.6 million in total, minus EUR 9.6 million, less negative than the year before, but a very different situation in the first half year 2022 we had strong operational results, but we were investing a lot in M&A transactions. So this was the main effect of the negative free cash flow last year. And this year it's more due to the operational business, so due to the lower revenue streams and the high-cost structures on the fixed cost side. With regard to our financing cash flow, we have increased our cash position here by 16.3%. There are 3 main activities worth to mention here. We increased our loan position, this was 1 element, we also sold treasury shares, but in Q2 and we paid all the dividends that reduced the cash position on the financing cash flow a bit. But all-in-all, we were ending the period with EUR 35.4 million cash account that enables us and prepares us for what's in front of us in the second half of the year and financing the restructuring program that I have explained in more detail, on the slides and the press section. Yes, you can also see here the quarterly development of the cash flow [Technical Difficulty] also shows that we are relatively stable on the investment side at the moment with EUR 4 million roughly, investing cash flow and we are improving. We have improved slightly on the cash flow side, and [Technical Difficulty] better operational. Yes, just have a look -- let's look to the share price development. I mean with the performance we have shown, it's not a surprise that our share price developed below the TecDAX index [Technical Difficulty] starting of the year from EUR 13 toward EUR 17 at the end of the period, and this is on the second slide in this chapter. We had a little bit of a change in our holding structures and with universal investment a new one coming in above the thresholds which we tracked and you can see that our treasury share position have been reduced. Formally was almost 5% and is now a little bit below 2.5%. So it's down, as shown here, 2% it's a bit more, it's almost 2.5%. The rest is still the same with our strong anchor shareholder family, Norbert Basler and family. We are also in this situation having a various stable shareholding structure supporting what our route is what we are taking as a management team. Yes, this brings me to the last section. And I will forward for the outlook to Dietmar before we both do then the Q&A session together.

Yes. Thanks, Hardy. And also a warm welcome from my side to this conference call. Yes. Like Hardy said, we are in weak market environmental conditions right now. As you see from the bookings and also from the billings, we expect those market conditions to continue for a while, we are talking here about the assumptions for the second half of the year. And as far as bookings are concerned, we are expecting new orders to stay on low levels given the low demand from the major verticals in semicon and consumer electronics, given the low demand from the regional markets in China and Southeast Asia and also in the Americas. Let's say, the good thing that we can report here is we see that the order cancellations, which have had a significant impact on our bookings over the course of the last couple of months that these order cancellations seem to come down now, so that we expect, let's say those negative influence or this negative influence to fade out over the course of the second half year. So from what we can see right now and it's not too much that we can see at the moment, as we are not getting a lot of visibility from customers. But looking back to former crises and market weaknesses, we expect, let's say, these demand slowness in our important verticals like the semiconductor and electronics and also in the logistics to come to an end more or less by end of this year. The interesting question is then going to be when exactly is this to happen and what is going to be the dynamics of that recovery? And that is very difficult to tell at the moment. But again like I said, looking back to historic patterns those data leads us to believe that the recovery can be expected within 6 to say latest 9 months timeframe. So coming to the geopolitical uncertainties, I mean, we see it every day in the news this morning, again news from the US limiting Chinese access to American high-tech, war going to continue. So those factors will remain, so no improvement, no positive momentum expected from there. We also expect that the -- let's say stiff competition in China is going to remain, especially given the weak domestic demand structure in the country itself. So as far as gross margin is concerned, we expect slight improvements here. So we see tailwinds from positive pricing effects and also from the clearance of inventories that we built up during the delivery crisis when we had let's say extraordinary high prices for critical components. So this inventory is going to reduce, so the blended mix of the pricing of those components is going to change to the better. On the other hand, we also see that the ongoing headwinds from the stiff competition in China, this is certainly going to continue. So other than that, we see that the operational business is facing pressures regarding bottom line margin, we see the market headwinds, we see the macro factors regarding cost of living, regarding inflation. On the other side and we did not mention this year, but it's very important to recognize we will also see the positive effects of the restructuring program that Hardy was describing in the last couple of minutes. So this is certainly helping. On the other hand, this restructuring program is also going to create significant one-time charges and most of them will be recognized during the Q3. So we talk about this next time when we meet here. So that brings us to the forecast and, as already announced recently, those factors led us to reduce our fiscal year guidance for 2023. So we have the weak half year 1 performance. We don't see much of an improvement for the second half of the year, we see these extraordinary one-time effects coming from the restructuring activities, so that cannot be ignored and that will, let's say, eat through like Hardy said to the bottom line, also to the top line. So we adjust both revenue and pre-tax guidance downwards. We expect revenues to end up within the corridor between EUR 200 million and EUR 215 million. And overall, despite let's say the slight recovery in the second quarter that we saw here in the numbers, there will be a significant pre-tax loss characterized by 2 factors. So the slower business, the circumstance that the order backlog is mostly consumed first of all and second of all, then the one-time restructuring cost charges. And as you see here on the asterisk those will, let's say, amount to a financial volume of something in the area of EUR 11 million to EUR 13 million, so significant as you can see. Yes. So that's it from our side here. And as you probably are going to have a couple of questions for us, we turn it over to you and we will be happy then to discuss your questions and the comments that you have to make. So please feel free to get started with the Q&A session. Thank you.