Basler Aktiengesellschaft (BSL) Earnings Call Transcript & Summary

Good morning. This is the Basler 2023 Earnings Call. We will wait one more minute to make sure that everyone is on board. So it seems to be that the majority is on board here to the call. Welcome again. Warm welcome, and good morning to our 2023 earnings call. For those of you who don't know me, my name is Hardy. I'm CFO/COO of the company. And before we go into the topic of our today's presentation, I would like to remind you on our disclaimer that the statements that I'm doing here are based on views and assumptions made by the management using information available at this time. These are forward-looking statements by nature. So they are subject to significant known and unknown risks and uncertainties. Yes, please read careful, the disclaimer and let's come to the presentation. The presentation is in the 4 different sections. We will start with an executive summary. We will then go into the financials, followed by a quick glance at our share development, and then coming to the outlook at the end of the presentation. And then we have at the end of the session today also time for Q&A. And I'm looking forward to have a lively Q&A session after the presentation. Starting with the executive summary, and starting with the market environment, and it has been, really a -- 2023, a very difficult and challenging year. The market surrounding, especially in North America and in Asia, the markets were very weak. This is due to a backslash in corona in the vertical markets of consumer electronics, laboratory automation, and logistics. So we have -- we were facing a significant downcycle, and this downcycle has been also or had been amplified in addition by high inventories at our customer side due to exaggerating order behavior in the years before due to the chip crisis in 2021 and 2022. So there was a lot of distortion in the market. And in China, on top of these distortions, we were also facing cancellation kicking in, especially in the first half year that were to this extent unexpected at that point in time, we come to this later on when we have a look at our bookings and billings development over the course of 2023. All in all, as one indicator here, obviously, it's not so easy in our markets to exactly quantify the development of the markets. But one good indicator that we are usually using is the VDMA industry tracker. So the monthly reporting of, German vision companies, vision component companies delivering into the world markets. And looking at this German vision components industry, billings were down by 14%, and bookings were down by 21%. So a double-digit decline in the market. We come to this also later. And the European market itself was stronger, but especially these numbers here were negatively impacted by the exporting business towards U.S. and also towards especially Asia. So how was the situation at Basler in 2023? It was definitely one of the most challenging years in our history. Our bookings in total were down by 33%. Our billings down by 25%. And next to the impact on the top line, we had also weaker gross margins. The gross margins went down to 42% due to low production utilization, consequential effects by the supply crisis, because we had to order quite some volume for high prices, and, we were -- then we had high stock then and we need to eat through the stocks. And we had also quite some price pressure in China due to the high intensity of competition there, but also due to the weak RMB -- due to the local -- weak local currency. So we also had due to this unexpected strong slowdown that hit us during an organization expansion, of course, we were forced by mid of the year to go into a restructuring. And this restructuring, we entered then into a situation where we reduced roughly our team by 190, 200 employees. And reduced our current, let's say, breakeven point down to EUR 200 million, roughly. And, with regard to the pretax results, we were -- we went into a loss of EUR 8 million before restructuring and EUR 22 million, including our one-off restructuring efforts. Yes. With regard to the sustainability, so the non-profit or the non-financial reporting, we made quite some progress on that side. We are on our journey to become net zero emission by -- in the Scope 1 and 2 by 2030. We also, I mean, have in our aim to significantly reduce Scope 3 emissions, but we relate this to sales as we are a growth company. And you also will see that or can see that we made -- here down on the slide, we made quite some progress on the different ratings with the different rating companies. So we are happy with this progress here. And you can read much more sound information in our newest sustainability report that is available on the website. I mentioned already we were forced to go into restructuring. It was definitely a strenuous process, no doubt about it. You see the -- with regard to the size of the team, you see how we reduced the amount of employees over the course of 2023. So we entered the year with 1,133 employees, and we went out of the year -- the fiscal year 2023 with 942 full-time equivalents. As you can see the split, has not significantly changed. So we were able to manage to keep also the balance in the company, even in the situation where we reduced by and large 200 FTEs within just 6 months of time frame. So the company is in a good balance mode to now shape further and work on the future together. You see a slide, increase of marketing and sales. This was by intention, also keeping our frontline towards customers strong, and that is definitely paying off. We are already seeing this. With regard to products, I mean, we invested heavily also last year in new products. Just to highlight some of the topics here. We invested, and continue to invest heavily in our newest platform for the mainstream business, so our bread and butter business in the ace 2 with new features, new sensors, also supporting new interfaces. We also invested in the higher end products that we are offering. The camera line is called boost. And typically, we combine this with so-called frame grabbers, so preprocessing cards that are able to process all the high amount of data that such high-end cameras create. And we also made a lot of progress with regard to our, what we call, accessories, so the cables, lenses, simple interface cards, and also lighting components. And the real beauty, that comes from this selection of hardware products is our -- as you know, our pylon software development kit that connects all the different hardware products and enables the customer to embed, let's say, the hardware products -- the vision hardware products that we offer with his or her system or device. We also added the so-called vTools. So we are no longer just, let's say, connecting the hardware products, just giving the framework to work. We also offer optionally our customers the possibility to work with our vTools and solve a vision application. Also on our service offering with regard to the website, we did a lot of progress. We have launched a new website in the second half of the year, supporting our, let's say, full-line provider positioning, but also -- and giving the customer a lot of tools in order to select the right products and find the good documentation and support the customer in the selection process and also in the design process of his or her system development. So also on that side here, we did quite some progress. This all in all, yes, is supporting our general strategy. This is a repetition we are continuously doing here. That we are on a journey from the lower left-hand side here of a single-component camera company, mainly focused on factory automation or to factory automation. We are on our journey step-by-step to increase the product line on the Y-axis here to become a full-line provider and also expand the markets that we address. So this is here from, let's say, factory automation to all in all, computer vision. We have already made a lot of progress the last years. We are fully convinced that this is the right strategy for the future, and we see there is no, let's say, correlation to the current market cycles that we are facing. That, obviously, we are much stronger than what we expected, but we are fully convinced about this strategy and move forward strongly on that route. Yes. Coming to the financials of last year, starting with our bookings and billings and here is a longer-term context. What you can see is, when we look at the last 2 years, we come from relatively -- we came from relatively high booking levels around EUR 80 million. And already in 2022, there was a situation that the order entries went down significantly. You could also see in 2022, we were able to increase the sales and keep it relatively stable. This was due to the backlog that we had in 2022 and also the delivery constraints that took us some time to clean up this backlog. And then in 2023, when we entered we still had significant backlog. In the first half of the year, we could also live from this backlog, but unfortunately, what you can see is the order entries went further down. We also got cancellations in Q1 and Q2 with a sizable amount that instantly also reduced further our backlog. And then we found ourselves in the situation that the markets did not pick up in the second half of the year. The backlog was more or less back to normal, and we had a situation that the revenue went down to a level here of EUR 41 million in Q3 and EUR 46 million in Q4. And this was then also when we were able to see and anticipate what's going on. We -- by mid of the year went into the restructuring. So looking at the different regions because the market situation was very different. We had a good business situation in Europe. So first half year even we grew by roughly 20%. In the second half year, the European market cooled down a little bit, but we were still making roughly a side move over the course of the year. And we had already a good year in 2022, so the year before. In contrast to this, whole Asia and North America went really into a significant downcycle. The regions were down by more than 30%, those regions. And this also created not only a reduction in top line and bookings level in total, but also a regional shift. So normally we are quite above 50% with our Asian business. Long-term, it's more in the range of 53%, 55%. This went down to 47%. Americas, typically, is in the range of 20% revenue share and it went down to 16%. And Europe went up from normally slightly below 30% to 37%. So we are -- the European region has made quite some inroads into that revenue distribution and that won into this situation. But overall, we ended up with EUR 203 million. The year before, we had EUR 275 million, roughly, or EUR 272 million. So a significant decline. Looking into our gross margins. So you can see on a long-term track, the last, what is it, 8 quarters, it has come down quite a bit. Especially, also in the second half of the year of 2023 it came further down from a level of 45% before to down to, let's say, 39%, 40%. This is a blended mix of different effects. We have spot-buy legacy effects. We have currency effects, especially in Japan, also from the Japanese yen and from RMB. We have price pressure in China. But we have also significant -- especially in the second half of the year, we had significant lower economies of scale in our fixed costs for the production. And we also -- and this is in Q4, we had statistical range reductions in our ERP system. So -- because on a statistical basis, range reductions are done, material is depreciated. As we are coming at the moment from kind of a bulwark where we have high inventories and a low demand, the statistics are kicking in and material is automatically depreciated. However, normally these materials are not useless. We -- most of it can be used later, but we don't know when, because that's depending on when the demand is picking up and the specific material is in demand. So we let the reduction done here. So with regard to the earnings, yes, you can see the effects of the restructuring in the second half of the year. So we kept the company around breakeven in the first half of 2023. But in the second half, we aggressively started the restructuring. The majority of the one-off effects we had already in Q3, so with a minus of EUR 16.3 million. And then we had another loss around EUR 4 million in the second -- in the fourth quarter. Yes, the P&L at a glance here. We talked already about order entries and sales. Gross profit also here went down by 35%, down to EUR 85.7 million. So you see the huge decline here. The year before, we had EUR 132 million roughly in gross profit. So there is clearly -- and there was clearly the mismatch of the size of the organization that we increased and the gross profit that went down that forced us into restructuring activities. The EBITDA before structuring EUR 8.5 million, so we kept this positive also after restructuring. But on the EBIT and EBT, you see that before structuring with regard to EBT, we ended up at EUR 8 million -- minus EUR 8 million loss. And we had EUR 20.2 million as we projected, including all the one-off effects of the restructuring. Net income minus EUR 13.8 million, and then accordingly the earnings per share at minus EUR 0.45. Yes. The development of the free cash flow. Also here, a little bit longer context. The year before in 2020, we had quite some M&A activities. This was in Q1 and in Q3. So there were extraordinary investments. So -- and then in 2023, so we were starting the year with relatively high investing cash flow. You can also see that in Q1, the operating -- due to lower sales, the operating cash flow was negative. Also, we got a lot of material flow in the second quarter. We were able, at least on the operational side to keep the cash flow positive. But the investment level was higher. So the free cash flow was still also negative in Q2. In Q3, we, let's say, reduced further our investments. And we in Q3 and Q4, we were on, I would say, now the low run rate we run the company with, which is around EUR 2.5 million investing cash flow per quarter. And you see that by end of the year we were able with the reduction in personnel and also slightly picking up revenues by end of the year also to increase again our operational cash flow. We also in this phase in Q4 were able to reduce our inventory levels. Yes. Having a look at the cash accounts here or a year-to-year comparison of the cash flow. So we started the year with EUR 28.7 million on cash account. We ended up with EUR 32.2 million. So we -- the free cash flow was negative with EUR 9.2 million, but we refinanced this on the one end with the increase of debts, but also with the sale of treasury shares, so with using equity by the beginning of the year. With regard to net cash, if we look at the net cash without leasing, it's -- it was by end of the year, roughly EUR 29 million. So the liabilities to the banks, EUR 61 million, roughly. And cash flow -- cash -- this should be cash and cash equivalents. There is a typo in EUR 32 million. Yes. With regard to the balance sheet, so the overall sum has been reduced a bit, but not substantially. On the asset side, there were some changes. On the one end, you can see this is in the fourth line that we have our new building that you now can see in the balance sheet since beginning of the year. So the expansion of the building in Ahrensburg and our headquarters led to an increase in the building here. You can see that we reduced the inventory over the course of the year. There is still more potential, but, at least we were able until -- since we had quite some difficult time in the beginning of the year and the second half, we were able to start reducing our material, our inventories. And also, obviously, the revenues went down, and so the receivables went down quite a bit. On the liability side, no big structural change with regard to the balance of equity and debts or liabilities, because we -- as mentioned earlier, we finance the restructuring by, let's say, additional loans, but also by additional equity by selling treasury shares beginning of 2023. Yes. Let's have a look to the share. I mean, obviously, in such a difficult year, it's no surprise the share price went down significantly from EUR 30 beginning of the year and we ended the year with EUR 11.5. I mean, this is clear, we have to bring back the company to our, let's say, used growth mode. And obviously, the share price at the moment is relatively low. With regard to the dividends, yes, we have -- we will propose. So as Board and as Supervisory Board, we have made the suggestion for the main shareholders meeting, and we will propose to pay no dividends for the fiscal year 2023. The reason behind is obvious. We have a quite a significant loss in the year. And also we want to, let's say, use all our liquidity in order to bring back the company to a sound profitability and to a sound growth path. And for that we decided to propose no dividends. I hope that we get from the main shareholders meeting and also from you support with this decision. It's in line with our dividend policy. Typically, we pay out 30% from our earnings after tax. So we have done this in the last years. There were always some deviations up or down, but this year, we decided to propose 0 dividend. Yes. Then we are coming to the section which I think is, yes, obviously of most interest for the participants of this call, to our outlook. So -- and how do we see the outlook? So first of all, the assumptions that we are having for this year. We believe that the markets will stepwise recover over the course of the year. It will not be a significant jump, it will be a step-by-step recovery. And we believe that the demand is expect -- is rising gradually over the course of the year. In the first half of the year, we will -- this demand will still be muted by excessive inventories. And as we have many customers, it's not that all our customers at the same time go out of their excessive inventory levels. It's a journey where some customers are already out of this excessive inventory situation and others are still in. But we are seeing that this is still impacting the demand in the first half year, but it's slowly getting out of -- or slowly less and less muting the demand. The recovery in consumer and electronics and logistics is expected for the second half of the year. Also here, we do not expect a super strong recovery. We see this more happening in 2025, but we are anticipating that the markets in the second half of the year in those 2 key verticals for us will be -- will recover and will be better than the situation we have seen last year. We believe the geopolitical tensions and uncertainties will remain. We need to maneuver through this. And we also believe the high competition intensity in Asia, especially in China will also remain since we have pretty aggressive competitors there and the markets are still very weak. So under these assumptions, we guide for this year a revenue of EUR 190 million to EUR 210 million and an earnings margin of 0% to 5%. So our aim is definitely to be in the profitable zone over the course of this year and be in the range of, let's say, low single-digit earnings margin and working full throttle ahead, preparing the company for a real recovery of the markets. And it will be also -- this is what we foresee, let's say, happening a step-by-step improvement. I'm giving you clear indication for the first quarter, we expect to be here in the range of EUR 45 million or a little bit less than EUR 45 million in sales. This is below our breakeven point. So the book-to-bill ratio we are seeing at the moment is around 1. So when you compare then the bookings that we had in Q3 and Q4, you see a step-by-step improvement. But unfortunately, the markets are not strong enough at the moment that we will be able in Q1 already to be back in the profitable zone. We also foresee to have gross margin improvements over the course of 2024 and this will start already in Q1. And just a side note from our side, the German organizations, they were in short-time work in the first quarter. Still, we will also end this with the 1st of April. So in the second quarter, we will have also the full capacity available of the company starting in the first quarter and the 1st of April. How about our mid-term plan? We are fully convinced that our markets, the computer vision market will come back to a growth level of -- by and large 7%, 8%, so high single-digit compound annual growth rates. We are also convinced that our strategy is the right one towards the full-line provider, the solution provider that I mentioned earlier. And this strategy will give us the possibility to differentiate better in the market, but also to address a wider market space, a bigger pie, and to create more share of wallet or get more share of wallet of our clients. So with this in mind, we are convinced that we can bring back the company to our growth track that we have shown before. And our aim is by 2027 to reach a level of EUR 300 million in sales and to reach this profitable with our -- with earnings before tax level of 12%. So this will then mean to bring back the company to a compound annual growth rate of 15%. Also, our cash flow, we guide that we can bring this back to a 70% cash conversion rate before acquisitions. So in order to get there, we also -- we assume that the markets at the latest will recover by 2025, and we also assume that at least, I mean, having geopolitical stress and also an intense competition in China, this guidance is under the assumption that we have still access to the China market. Yes. And given those assumptions, we are looking forward to reach those 2027 goals. And having this said, I am also at the end of the presentation and would like to open the Q&A session.

Before we start the Q&A session, maybe some organizational information. [Operator Instructions]

Any questions?

Yes, first question is from Lasse.

Maybe if we just start on the guidance. You mentioned kind of book-to-bill around 1, which implies, again, a sequential improvement in order intake versus Q4, roughly. How do you -- can you help us understand how you -- or what's your visibility for the rest of the year? We're now out of Chinese New Year. I guess, conversations with bigger customers in China. So if you could just shed some light on essentially a year of no orders from these bigger customers. How they think investing, especially in light of the semi-CapEx cycle for '25, et cetera. So that would be really useful.

Okay. Welcome, Lasse. So the situation at the moment when we look into the order structure and also customer feedback structure of the recent weeks and recent months is, we are seeing that the orders in Europe are still more robust than what we have expected. When we had earlier calls, I was telling you that we were expecting that Europe as being late to the downcycle, maybe further cools off. At the moment, we are seeing Europe still robust and Europe is then, yes, on the rise, let's say, a mix of applications. And then we have, what you were asking about the Asia Pacific region and some of our U.S. clients that are very much connected to the semi-con and especially electronic assembly machinery CapEx. With regards to this market, we are still lacking even after Chinese New Year, substantial order improvements. We get positive qualitative feedback, but it's not turning into order entries. So we are still having, let's say, a weak -- very weak situation on -- in those verticals and those countries that are specifically having big chance of electronic assembly or consumer electronics. How is the visibility? I have to say, I mean, all of the people we talk about are talking about improvement in the second half of the year and they are motivated and optimistic. But I mean, we have also to be careful and this is also why we are in our guidance, we choose the guidance -- as we choose the guidance, because we want to see substantial order entries. What I can tell you is we are not losing business. It's really a market situation.

Okay, understood. So...

It's as foggy as in Q4, actually, to be honest.

Yes. Okay, makes sense. Okay. So your guidance doesn't really assume a substantial uptick in the second half?

Yes. It's not a substantial uptick. It is an uptick, obviously. I mean, math is easy on that side, but not a substantial one. Because if these markets come back after, I mean, 1.5 or almost 2 years of downcycle, then they will most likely come back strongly, that I would suspect.

Okay, understood. And then just one more question, if I may, on gross margin. I guess, the ambition is still to kind of get back to that 50% gross margin that you had historically. What's the -- I mean, if -- I guess, if I take the period now until 2027, what's the path to get there? Are we going to see a big jump up in gross margin this year? Or is this more going to be a '25, '26 topic?

Yes. I mean, this is -- as you know, margins are really kind of a complex topic, but I would like to give you a feeling here. I mean, we will see -- what we anticipate is kind of a journey starting maybe with -- I mean, starting definitely above 40% in the beginning of the year and then step-by-step go into the direction of 48%, maybe 50% by end of the year. But -- and then you can anticipate a linear. It will be a step-up from last year to this year. So from December to January, this is what we anticipate because we have quite some -- done some homeworks. Also in Q4, we had the extraordinary effect that I mentioned that we had a statistical depreciation on a higher level. So we will see a step-up towards, let's say, about 40% and then step-by-step we will manage it towards the 50%. And my expectation is to be, yes, at least by end of the year at a level of around 48%. Yes. So it should be not a multi-year hike.

Next question is from Robert.

I would actually like to dig a little bit deeper into the last question on gross margin. If I understood correctly, I mean, on the one side, you of course have the lower capacity utilization that put pressure on the margin last year. But another big part was, of course, the aggressive pricing from Chinese competitors. So my original expectation was that maybe margins would remain depressed for the remainder of the year. So what exactly helped you or will help you to come close to the 50% at least on a quarterly basis in Q4 already?

Yes. So on the one hand if we are still -- as you know, we are step-by-step eating up material that we acquired for a higher price during the chip crisis. This will continue as a positive effect. Then what we have also done is a year ago, we have increased prices in certain markets, but when we had huge order backlogs and then the demand went down, this never fully materialized. Also here, we still have a positive legacy effect from all this turmoil in the chip crisis. So we see that due to those when now the customers' order for the higher price that we will have a positive effect. And then I can tell you, we are already working quite hard on also reduction measures since mid of last year. And the first impact of those measures, the cost reduction measures will also be already visible in the first quarter. So it's really also that it's not just the external situation, we also have done quite a lot internally to reduce our material costs.

Okay. But at the end, this means you still feel confident that aside from the temporary effect you just talked about, that you will be able to maintain the 15% gross margin even when faced with much more aggressive competition in Asia?

So this is at least, let's say, a goal that we are having. This is the working point we are thriving for. The answer towards this, let's say, price pressure needs to be to -- I mean, first of all, also make business in regions and verticals where the competition level is lower. And the other thing is the approach of our full-line provider/solution provider to bring in much more value add with regard to consultancy to our clients to not only compete on a single component level.

No questions in the chat. And I can't see any more questions from the audience. Maybe 1 or 2 more minutes.

Other questions?

Yes, we have one more from Lukas, please.

You seem to be still muted, Lukas.