Detection Technology Oyj (DETEC) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to follow Detection Technologies half yearly and Second Quarter results announcing. I'm pleased to present it to you. My name is Hannu Martola. I'm the President and CEO of Detection Technology. And let's go see what we got. So second quarter, we reached the sales of EUR 24.4 million, which is a decline of 7%, a disappointment from that point of view for us. We reached EBITDA of EUR 1.7 million, which is 7% of sales and also a decline compared to last year. Looking at these numbers, I think it's important to remember that out of the minus 7% decline, actually, the currency exchange differences represent about 4%. So the remaining 3% is sort of a net decline. Then if we look on the application point of view, yes, the sales declined. But on the other hand, we remain the market position strongly. So we did not lose business. It's just that there was not business. Industrial sales actually, we did quite well, especially in the flat panels in China, we had very nice growth. On flat panels, we even grew about 40%. Medical sales, biggest part here is China. That starts to be now in normal. So we had a nice 14% growth in medical sales when the markets now are recovering from the health care reform. And then the 2 disappointment was the security sales and security sales in Europe. We had a decline of 28%. This dip was much bigger than expected and led to a sharp decline, even 40% in Europe, Middle East and Africa sales. And the reason is that there was a halt in the security CT system installations in Europe and because of the so-called 100-milliliter rule that is now actually being lifted, but it still had a big effect on second quarter and will have effects on third and fourth quarters. And again, the market position remained intact. I think what's good in here is that if we look in big picture, it seems to be that actually now the big sort of, let's say, fundamental changes in the business are and negative changes since COVID are starting to be normalizing. Just we have to be patient that it takes a couple of quarters to get back on track. Sales by quarter, we clearly fell then below last year, as you can see, 7% decline as well as in profitability, 7% compared to 12.7% in the previous year. If you look at the regions, Americas, minus 5%. APAC was up 9%, driven by nice performance in both Medical and Industrial. And then Europe, as I said, negative 40%, which is really, I would call this as a halt, temporary halt and leading so that actually 75% of the total sales was APAC. And then looking on the applications. Industrial up 4%. And by the way, Industrial percentage-wise was nice 23% of total sales, Medical 14% positive and a bit over 40% of the total sales and then Security down to 34%. First half, I think we have very similar behavior, EUR 47 million sales, minus 4.5% net sales change, EBITDA of 3.1%, which is 6.7 percentages. And important to remember that actually first quarter, we did not have so strong currency exchange rate effect. So the exchange rates, of course, they go up and down and change and so on. But what was quite extraordinary was the speed this year in what happened in March, and that is something we will be seeing unless anything changes also in the coming third and fourth quarters. By business units, similar than second quarter, Americas, minus 4%; APAC, plus 6%; and Europe, Middle East, Africa, minus 28%. And by applications, Industrial up 4%, thanks to very nice behavior of especially flat panels, medical, 14% and Security is minus 24% down for the 6 months period. Looking a little bit closer into the financials. Something that to point out here, we had slightly higher R&D costs. We are developing these kind of very large panels that we are first in the market. We call the jumbo, the 1-meter panel, and then there are some costs related to that yielding so that with the lower sales, we had even 13% R&D cost. Cash flow, EUR 460 million. That's clearly down from previous year. Actually, 2 big explaining factors. One is, of course, the profits, less profits. And the other one is that we did not -- in '24, we did not have incentive payment, and we paid for last year for our employees' incentive, and that's now recognized in the cash flow affecting that. Investments are up to EUR 1.1 million. And the biggest driver here is that we did some long-term R&D investment that we have recognized as CapEx that is affecting here and then should help long-term growth possibilities for the company. Return on investment, still nice 14.7%. So this in a nutshell. On first half strategy highlights, flat panel, I brought it up, that's a nice behavior there, and we are very, very pleased how it has been going. We've been winning a lot of new customers in China and also starting outside. Several notable new products, the X-Panel 43108 the X-Cargo and actually -- and that's very much into the cargo inspection in Europe. We will see some sales already in the second half of that. And then a smaller panel 2520 panel. We also progressed in India. We have now tested the first products in our new factory. Production facility in India in New Delhi area is finished, and we did first testing late June as well as the first invoicing of our products to our India subsidiary. And as I mentioned, we made an investment into new technology. We have also been working on updating our strategy. I think core thing here is that we -- as a focus, we remain focused on X-ray -- digital detectors. We believe that this is a nice market of EUR 3 billion. There's still a lot of room to grow in this market. And our emphasis, our aim is to deliver smart X-ray detector solutions that drive customer success through exceptional usability to outgrow the market. This means more value added, that means more software in one word. So adding stronger software layer on top of our hardware. And we will be -- through this fall, we will be communicating more of our strategy and the execution of it. Other events, we successfully worked in the area of sustainability, increasing the use of green energy, promoted environmental work safety awareness on internal employee survey results were quite okay. We are working with the results from that and possibilities to develop things further. Working with the Lean Six Sigma, we have been doing that more than 10 years. That's essential for our quality performance and then continue to help the children -- and children rights with UNICEF and Ahlström Collective Impact. Then important sales expectations for third quarter and second half. We expect the industrial to grow in third quarter. We expect medical to decline in third quarter and security to decline in third quarter. And from regions, we expect APAC and Europe, Middle East and Africa to remain stable and in Americas actually have a fairly large decline by double digit in third quarter. And then total net sales as the official guidance, we expect to decline by single digit in the third quarter and second half. And a little bit things behind here, I think, is that, like I mentioned, that one headwind that we have for the third quarter, most probably also fourth quarter is the exchange -- Forex exchange rates. We have about 5% impact to our sales because of much, much stronger dollar and renminbi. And then -- on medical, actually, the medical market is moving nicely. Also in China, we have some supply chain limitations. We could sell more. But short term, we have some supply chain limitations. We are working with some changing our suppliers and so on. We are -- things are in control, but those will still have an effect before we get the improvements out. One of the things that also has changed in the world is that there's huge boom for data centers and then suddenly, there's very unique shortages that were totally impossible to be predicted affecting. And this is something that we also face in our supply chain, especially in this medical. So as total, single-digit year-on-year net sales decline for third quarter and second half because of these kind of internal things and external things. And then as I say, I think very good news is that finally, the Europe has lifted the 100-milliliter rule. So very late last week of June, they came with a new specification. There's already first company -- CT company has been approved, and we are back on where passengers in aviation can have their liquids with the handbags and so on, meaning that the installations for CT start to roll again. What we have heard from the companies in the industry and so on that they start to have record sort of order books and so on. So this is something that we also will see then starting possibly a little bit late fourth quarter, but starting then next year. And then as I mentioned that we also finally, the China health care reform is now sort of sorted out, and we see also growth there. And as financial midterm targets, we are not giving up. So the midterm targets annual growth is 10% EBITDA, 15% and then dividend and return capital between 30% to 60% of the net proceedings. So this is in short of an update on after second quarter. Thank you. And I would be happy to answer to any questions that might arise.

I'm Jukka-Pekka Pesonen from Nordea. To your best knowledge, you guide for sales decline in H2, but do you see it more in Q3? Or do you also see maybe a decline already in Q4 or maybe more stable in Q4?

That's a bit mixed. I think as total, we -- I think both quarters, we see decline. One driver is really this ForEx exchange rate, which affects both, of course, from today's point of view on forecasting. The possibly third quarter is a bit more affected by the still the dip coming out of the dip on security. Fourth quarter, maybe a little bit on supply chain, still on medical that we have recovered faster. But it's -- of course, from today's point of view, it's a bit hard to predict. So we better play safe than here.

On that topic also, what would be the main lever that could maybe change the end of the year to growth maybe in Q4? What would need to happen?

I think -- well, 2 things is orders for security for the CT installations and second is the medical to perform strongly in [indiscernible].

And you said that you're looking into cost measures or doing some cost measures to actually bring your profitability back to appropriate levels. So which cost items especially are you looking at or the cost level?

Yes, we are. I mean, short term, we are looking on the fixed cost. I mean, what are really the core things we need to be moving forward, what other things we can save. So basically, it's fixed cost savings, meaning that all fixed costs, including then also personnel.

Okay. And maybe last from my side, you stated that there's intensifying competition in China and this like new block purchase model. So could you open this up and maybe how DT has to adapt to these changes?

Yes. I think this blockchain -- not blockchain, but block purchase is it's interesting concept. This is an outcome of the health care reform. Before it was so that all the hospitals were buying what they wanted or what they needed and then they made the deals and so on. And that actually created also environment for possible corruption through these middle consultants in between, so between the OEMs and the hospitals. And now what -- how the system has developed it is that quite smartly actually that each of the hospitals can still maintain whatever the strategy is. They can be expert on something and also buy relevant equipment to be able to do the things they want to do. But all these needs are then area-based, pulled into blocks. And then these blocks are being tendered. So they are request for quotations for the blocks and then they typically select 2 or 3 providers on how they split. And also the block is then taking care of the money. And then the hospitals get more cost effectively what they need and then sort of the funding and so on is organized and managed on the sort of block level.

Waltteri Rossi from Danske Bank. First, on the margin side, can you give us any guidance on where you see EBITDA margins going this year now after these cost savings and also lower top line?

Well, what I can say is it's pretty hard now after these 2 quarters and also what the outlook is for second half to reach the target this year, which is 15%. And then I think as minimum, we need to be fighting so that we can deliver more than like 10%, which is at least be on the double-digit side there.

All right. On the recovery in the security business, what does that look like in your mind? Can you -- I think you already touched it a bit. But when do you see that starting in terms of actually seeing growth again? And did you say that you already have a record order book in the security side?

Yes. Thanks. If I take the last one, what you mentioned, I didn't say us. I mean, what we hear from markets from our customers. I mean we don't see it yet. It's pretty hard to be -- except -- I mean, it's a fact that the CT machines will be installed. There's -- can't say even rumors there's on, but it can be that it's very much next year. So at increasing speed. I mean this technology really is -- anybody can Google and so on, there's a lot of irritation and the airports are very angry on the officials on not being able to support. For example, it's been a peak travel season in Europe, a lot of families and so on going for holidays. And it's not just the Helsinki Airport, but also other airports have been a mess. And this would not have happened to happen. So there are a lot of drivers to smoothen this out and so on when we get into normal sort of orders. But the most important is that the decisions are there. I mean the rule has been lifted. The first company has been approved and now that there's more companies, OEMs are on the line of getting acceptance.

All right. Two quick ones still. On the margins and China, can you give us any color on how much lower are Chinese margins compared to the other business?

It's actually fairly complicated -- would be a complicated answer. I can't go into details, but actually very, very business specific. It's a little bit on how niche is the product, I mean, how -- of course, I mean, this kind of like the basic volume products that are being purchased through these block deals. They are fairly competitive, meaning that the margins are fairly tight, but also the volumes are nice. So it's -- and still then, of course, if you have a nice volume and you have even tighter margin, but still the effect can be on EBITDA fairly good. But it's very business specific and very much driven by the competition. You might have some area that there's some kind of challenger wanting and must to get into the business without -- I mean, we must remember that now there's even -- and this is according to Financial Times, I think 50% of the Chinese companies are on loss. And this is at an increasing rate. It's the huge deflation in China, which, of course, we see from the cost pressure and so on. And this has an impact to the thing. And there's companies or companies that are fighting for their life. And we are still making money in China. And we are in a strong position, of course, thanks to our balance sheet and also our history and so on. We just need to maintain our quality. We need to be learning a little bit more faster. We need to also be developing lower-cost products so that we don't leave too much room for the low-cost producers so that they get strong and can attack us later on. So these kind of things we have and those are part of our strategy.

All right. And lastly, as you know, it's quite difficult to estimate your sales in different segments from quarter-to-quarter. So do you see that trend kind of normalizing or stabilizing somewhere in the future?

Yes. And thanks for the question. I think we are on a journey of a more normal waters now finally and '26 then should be when we see the more predictable business.

It's Matti Riikonen, DNB Carnegie. A couple of questions still. When we talk about the Chinese medical new regime, isn't it so that the medical business is always kind of lower margin than the other segments. But of course, the volumes then compensate and perhaps on the EBIT margin side, you are fairly well off. But now if the situation is going to change in China for good and it will be more negative than what it used to be in China. Wouldn't that mean that in the big picture, longer term, everything that you do in the medical business in China would have structurally lower margin than earlier because the competition just keeps intensifying.

Well, I think first -- if I take your first part, this is, I think, yes, I mean, you have -- I mean, like health care, you have big customers, big OEMs. You have high volumes. And fairly, I mean, from our point of view, also the products are lower value added. I mean we don't have any software there and so on. So that is sort of building the business scale so that there's more pressure on prices and more buying power from the customer point of view. That's one thing. Another thing, I think, is that this has already lasted for a while, this kind of very intense cost pressure and so on. And there is -- let's say, there's a limit to that. So I would expect at least the trend to be, let's say, slowing down downwards trend. And then on the other hand, we are not out of ideas yet. So we also have ways to decrease our costs. It's just that this is fairly slow cycle of getting new products in also because of the regulatory authority’s approvals and so on.

But isn't it also so that in China, if you think that the competitive landscape is going to be like it is and unless there are exits from the players in the market, then the prices cannot kind of improve because everybody that still is in the game, they want to keep the volumes and then they keep on discounting until some are going bankrupt and then the others basically reap the benefits. But as long as that hasn't happened, then the price fight continues.

Yes. Well, that's market economy. I think probably there can be some consolidation. Not everybody can survive like you mentioned. I mean, maybe even some bankruptcy more I would think see that in China, they sort of have the companies to get together and let's say, consolidate and therefore, things -- the supply-demand to normalize.

Okay. But if you are not taking part of the consolidation, then somebody will get stronger and then they have -- then they basically have more ways to push against you and maybe other.

On consolidation, I think I was more talking on our customer level because I mean, these are like computer tomography, the most complex equipment probably after the space rocket and airplane. So small -- there's still some small players there, and it's pretty demanding and tough for them to continue in the race. So I was talking more on that level. And then we must remember that, yes, China is a large country. It's what, close to 20% of the population, but there's other countries and other markets too. And that's the beauty is that when we survive and prosper in this very high tough competitive environment, we are very strong in other markets. And that's why it's so important to be part there, face the competition and fight and get stronger. But this is not -- this is -- we are seeing future market now in China. The competition will get other places, too. for all businesses.

Okay. So what was this component shortage about? You mentioned something like AI-related demand mixing up with your sourcing plans, but what is kind of the source?

I think, yes, it's data centers. I mean it's massive amounts of money are being poured in data centers globally everywhere. I think the biggest one in Sweden is EUR 9 billion. And this is -- has increased demand, even basic print circuit board assemblies and so on. And it happens to be that when you have this kind of strong demand on certain area that is unique from the mix that was in history, the supply chains are not ready for this kind of fast pull. So that's sort of the answer. And this is short term a couple of quarters and then things get resolved.

So it basically means that somebody has to lift the capacity to do all the components that you and others are needing. Do you really think that, that would be a couple of quarters game?

Right now, it's -- I mean, we -- like I said, we have some changes in suppliers and so on. We look on suppliers that are not so, let's say, wanted for that. And so it's a bit structural. The truth is that, of course, from the demand point of view, demand will stay there. It is data center boom is not over in a couple of quarters. But we are now starting to work with certain other suppliers, like I mentioned, that have better -- are in better capacity situation. Remember that even the health care demand on components and so on is fairly small compared to the huge consumer electronics, which the data center is part of. So big companies and capacities are supporting the big booms and the big needs in priority first.

Do you also see that the component prices would have increased because if there's a greater need, it makes your kind of model...

That's a good question. At least I have not -- there's pressure, yes, but then there's huge also price downwards trend. So it's -- that's not -- at least it has not yet hit, and we don't see that as impacting our numbers.