Detection Technology Oyj (DETEC) Q4 FY2025 Earnings Call Transcript & Summary

Technology, and welcome to follow DT's fourth quarter results announcement. I'm pleased to be presenting it to you. Fourth quarter net sales reached EUR 29.7 million, a negative 6%. EBITDA was EUR 3.7 million and EBITDA percentage 12.4%. So, some couple of millions below what we -- or EUR 1.5 million, what we achieved last year. The biggest reason for the sales decline was the currency exchange rate, which represents about 5%. So, without that, the sales would be very much flattish, but we'll be explaining a bit closer what took place. So, if we look at the applications point of view, the sales in Medical developed quite well, but then in Security declined. Industrial sales was 7% negative, but very strong growth in flat panels, TFT was even 50% for the quarter and actually for the full year, 60% growth. And then -- and that was driven especially by battery inspection in APAC. And then line scan sales was declining. Medical sales, plus 19%, very strong growth driven by CT and also the health care reform in China has been now -- is in action, and that is then also driving the growth in China. Security, minus EUR 29 million looks a bit harsh, big number, but actually, this is very much an outcome of certain onetime events, and also, we must remember that the fourth quarter in '24 was fairly high, exceptionally high in Security as well as in '23. So, there's a little bit of this kind of seasonality explaining. The biggest single item for decline in Security was the European 100-milliliter effect that still was affecting fourth quarter. Now it's passed. And then also, we had fairly sizable inventories with a couple of customers, and that's now also passed. And then also relating to Security, the market was very soft, especially in China. By quarter, fourth quarter typically is the best, but I mean, this year, then it was EUR 25 million was minus 6% to the previous, which then also results into the profitability so that with smaller sales and especially the sales very much focusing on Medical, where the profitability is less, so then as an outcome, we have 12.4% EBITDA. On a markets point of view, Americas was flattish. APAC, a little bit decline, minus 4.4% despite that the Medical was strong there. But then on the other side, Security and Industrial were weaker, and then Europe, down 12%, clearly driven by the security point. I think worth to note here is that we have about quite precisely 2/3 of our sales are in APAC, and actually, the economies in APAC grow actually double compared to what typically in the Western world. So that's a good -- this is a good position to have. Then from application point of view, Industrial down, Medical up 19% and Security down almost 30%. And here, clearly, you can see that the Medical is representing 50% of sales, and that's exceptional for -- if you look also in our history. Full year, EUR 101 million, 6% down and EUR 9.6 million EBITDA and almost the same 9.5% in percentages. The net sales change, minus 6%. Actually, the biggest impact there is the currency exchange rate that affects clearly more than half of this decline. Full year, Americas, minus 22%; APAC, flat; EMEA, minus 16%. And both EMEA and Americas, by the way, are driven by the Security -- weak Security performance. Looking then more closer into the finances. EBITDA EUR 3.7 million versus last year EUR 5.2 million, EUR 12.4 million versus last year, EUR 16.3 million. We did not have any nonrecurring items, so this is clean from that point of view. And also, I want to highlight that we are actually recognizing all R&D as cost, so the full R&D spending, which clearly is an investment, but it's not capitalized. So as a cost was EUR 2.8 million and full year was 11.3%, representing 11.2% of our sales. Cash flow was down quite sizably. And the reason there is that we are -- on purpose, we have been increasing our inventories to be ready for supporting the growth in the challenging global markets where actually there are shortages of -- and sudden shortages of materials, for example. Investments were quite sort of reasonable, EUR 900,000 for the quarter and EUR 2.3 million for the full year. And then return on investment still quite okay, 9.2% and the earnings per share, EUR 0.22 for the quarter. We just launched our DT 2030 strategy in November in our Capital Markets Day. As a reminder, so our target is to outgrow the market. The market grows 3%. We aim to have 10% market and providing higher value-added data-generating X-ray detectors through outstanding interface to our customers, outstanding usability and services to our customers. Markets are driven by aging population, security concerns, quality and efficiency, eco and circular economies, shortage of raw materials and then overall, machine learning, AI and digitalization is driving the use of detectors. You can learn much more what's going on through clever use of AI. Out of the markets, clearly, biggest by application is health care, 70% and then security and industrial a bit over 10% of the markets. By technology, DT is strongest in line scan and CT, which is the fast and very precise scanning. We are market leaders there. And then the TFT panels and that digital X-ray market, the more static part is representing 40%, which is the biggest, almost EUR 1.5 billion out of the EUR 3 billion estimated market for 2030. So, we have now, I think, a very good position. Our business for the future will be more balanced because we have good products for all of these various technologies and applications. Strategy in a nutshell, we are building on top of the high-performing people through excellent customer interface and the 4 cornerstones are the improvements in the basic, I mean, in operations, R&D being faster, being more productive, increased productivity, going out and marketing, selling, building TFT panels, not only in China, what our -- so far, our growth clearly is out, but then also globally, adding value to our products, being active with customers, finding ways how we can also build up software capabilities with them and all is typically built on top of our hardware. And then we are looking for the new technology like photon counting for the 2030 and beyond. As an example, we are looking back last year, what did we achieve the big things. I think in the middle there, you see the heart, that's the India. So, we've actually had the inauguration of the India factory in December, and now we are ready to provide locally made products for Indian markets. We were awarded a very important recognition. GE Healthcare is the #1 in the health care industry, highly reputable, and we were selected out of more than 20,000 suppliers as the Supplier of the Year. GE, by the way, is spending about EUR 10 billion into their sourcing. So, this is a sizable recognition. And then we've yielded out a new CT detector, photon-counting CT detector data management and then created and developed a new low-cost product AVA for line scan applications, and then for sustainability, we were awarded EcoVadis Bronze with a score of 63. And by the way, only less -- about 2% of the companies applying and being awarded this Bronze or better. So, this is a very good position to start. Sales expectations now for the first quarter and first half. I think it's -- we are full of now energy and positively looking we have a quite nice outlook for the first quarter. We see that all our applications are growing, Industrial, Medical, Security, by the way, all our regions. And then we are guiding officially a double-digit growth, not only for the first quarter, but also for the first half of this year. Regarding the dividends, the Board is proposing EUR 0.30 dividend, which represents 68% of the net proceedings. And the financial targets remain the same, at least 10% growth and at least 15% or better EBITDA and the dividend percentage is between 30% to 60% of net proceedings as a guidance. Thank you. I'm very happy to -- I'm pleased to be answering to any questions you might have.

This is Nikko Ruokangas from SEB. I have a couple of questions and starting with the technical one after the technical problem. You are guiding double-digit sales growth now in Q1 and the FX seems to be quite negative still in Q1, if we look at the current rates. So, what kind of FX impact are you baking into your guidance there?

We have taken -- so the FX is -- based on today's FX. Yes, that's true. If we look at the comparable last year quarter, I think the -- for us, probably we would have minus 5% just with the same amount of sale. So that has been taken in account. So, the numbers we are reporting, we are saying that we are 10%, at least 10% higher first quarter. Comparable, it would be 15% above if the effect would be 5%.

Good. And then on the business areas or applications in Medical business. So, your sales grew quite nicely in Medical business in Q4. But was that driven by kind of bigger deals, clients refilling their inventories, or kind of end markets improving? And I guess that similar kind of a question, what are you expecting in your guidance for Q1/H1? And then maybe to give a bit more color on that as the big Western OEMs working in China still seem to be quite cautious on China sales in '26. So, could you give kind of a color on maybe your different view?

Yes. I mean that we don't -- we have not seen any sort of, let's say, change that some customers would be buying to inventory or so on. So, I mean, the behavior has been they are selling about the same amount through. For Medical, actually, China is the most important market because it's the hub in the world. Typically, companies export about 50% of their volume that they make in China. So, 50% stays in the country, 50% goes out in average. So, there's a lot of export out of the markets. And I think now after the China health care system has been in -- the new processes have been in place for some time. So, there are some more activities going on there. And then we see growth in that market, too, but also globally.

Okay. But you said earlier that now after the reform in China, so basically, the business there will be a bit more lumpy or the sales may come in bigger chunks. So, is this a case of that kind of thing? Or do you kind of see just the business going on?

I think it was -- that's a very good question. Thanks. I think at the beginning after the markets start to open up after the reform, it probably was a bit more lumpier due to the fact that also companies and customers were more careful and so on now and it's been going some time. So, it is a little bit sort of balancing and also the customers can count that they get business.

All right. Then one last from me and related to the Industrial business, where you showed nice growth in TFT business, but that also indicates that the legacy business was quite much down. So, can you comment on that? And what kind of expectations do you have for Q1/H1 for the legacy business in Industrial?

I think well, we don't separate that Industrial. It's Industrial, but I mean, it's the -- out of the -- like fourth quarter sales, yes, TFT was positive. Industrial battery was driving clearly that growth. I think food scanning also was growing. The basic industrial line scan was not growing, especially in China. The outlook for first quarter, I think, overall, in Industrial is very positive, even should be the legacy, let's see how it moves. But most important is that the growth -- we will have growth for the industrial part.

So, there isn't any bigger structural problem in Industrial legacy business?

No, it's just -- I mean, like I think Industrial business in China is just super competitive. So, it's cutthroat competition, and it's very -- everybody is fighting for very even small deals.

Joonas Ilvonen from Evli. If I can come back to this 15% underlying growth you said you see in H1. Can you elaborate on the like components in terms of volume and pricing, how it looks from those perspectives? And also, if possible to elaborate also from the perspective of the product application areas. So how are volumes developing on the one hand? And how is the pricing still I guess, within Medical, for example, there's still probably some pricing headwinds.

You mean pricing from us to our customers or pricing for our materials?

Well, maybe both, basically pricing.

And just to be a bit more specific, so I think we must remember that the big currency exchange happened in March after Trump was -- added his tariff things and so on. So actually, the currency, let's say, headwind or about 5% effect is only for first quarter. So, second quarter, then -- I mean, at least from today's point of view, the currencies are very much in line as they have been before to comparable quarter. Then relating to -- I think we have -- almost all our pricing is sort of fixed for this year. So, in a way, we know that. Yes, there has been some challenging negotiations and so on, and those are in -- we are counting those in our plans. Relating to materials and the cost, I don't think we -- there has not been any big, sizable inflation type of effects and so on, but also we must remember that we have been able to reduce cost by bringing certain value added to our own factory like in Wuxi, and that has helped us to reduce the costs.

So, to summarize, basically pricing relatively flat. So, it's mostly volume growth that you're expecting in Q1?

Yes, very much is volume growth. Yes, there are also, I mean, some price reductions and so because of the competition and what's going on. But I mean, volume is the key player there.

And can you -- because, I mean, how do you think about the Security performance in Q4? Because to me, it seems at least that maybe sales declined still perhaps faster than you might have expected. So, are you now seeing very much more -- or can you say something more specifically about security in Q1? What kind of recovery in revenue are you seeing?

Security in Q1 is very much driven by CT. So that's good. It was not driven by CT last year. So, it's, I think, from that on -- that way, we are in clear waters. The numbers look strange. I understand, but there are some one-time effects and so on. And we have not lost any sort of customer or these kind of things. So, it's just sort of the -- let's say some delays and so on, some stocks that are affecting until it starts to pull and it sells through.

All right. And maybe still on Q4 earnings. Arguably, you might say that it was even like relatively strong result considering the rather unfavorable product mix. So are you happy with the -- I mean, your gross margin still declined by some 350-basis points year-on-year because of this unfavorable product mix. But are you now happy with those margins and costs you saw in Q4?

I cannot be happy because we didn't deliver our numbers. So, I mean, clearly, we were behind in sales and profits. And of course, there's reasons and explanations there and so on. But what I'm happy of last year '25, I think we were quite successful in building a good foundation on how to step up. I mean, we launched 60 new products in TFTs, new products also in our sort of legacy business and so on. And we achieved certain things like the GE sort of award for Supplier of the Year and these kinds of things. So those clearly show that we are -- as a team, we perform, we can deliver and customers trust us, and we can move forward and build the growth.

It's Patrick Campbell from Nordea. Just going back to the inventories. You mentioned that you've increased inventories. Could you please explain the reasoning behind this?

Practically 2 reasons. One is that we are having some change in some suppliers. That means that we have to sort of -- for the transition period, we must be sure that we have the materials until we have approvals and everything sort of clear. And then the other side is that we are preparing also for the coming growth. We clearly see that, for example, the data centers, driven by AI. The data centers have really changed the, let's say, supply-demand picture in the world. And there are certain like active components that -- and semiconductors that were quite easy to be getting. Those are now really, really hard. Luckily, we don't have memory chips in our products, which is probably one of the area that is really, really -- there are shortages. So, we are preparing for -- so that even if there's some headwind and some challenges on availability that we still can support our customers and can have the materials and components to grow.

Just a follow-up on that topic. How well would you describe you're covered for the full year? And then what kind of costs are you expecting from these supplier changes?

I mean the costs are in our plans. What we need to do is make sure that we can deliver on our target, which is minimum 10% growth, and that's something that we are preparing ourselves.

We have Juha Kinnunen from Inderes online, so we could be taking a few of his questions next. So Juha is commenting that you had a solid growth in DFV sales. So, could you comment on the growth outlook a bit further in different areas such as battery, medical and defense?

Yes. I mean, TFT growth, we were able to win 2 super important and big customers who are driving this growth, which also is then a clear sign that we are -- we are competitive in -- as a supplier meeting hard quality and also cost targets. And then this will be helping us to grow also in other areas for other customers. And if you can do it in China, then also the markets in Europe and U.S. are not that competitive.

Okay. Thank you. What kind of sales growth do you expect from the defense sector? And is it coming from Europe?

Defense sector, it's -- typically, our products in defense sector are used in what we call industrial NDT, industrial nondestructive testing. There are customers out there making big systems who are then scanning and checking through engine blocks, cylinder blocks or aerospace, I mean, engines or -- and then also military, I mean, defense and so on. And there are possibilities to grow not only in Europe, but also in as an example, in U.S.

Thank you. Still one question from Juha Kinnunen. So how do you expect your gross margins to develop in '26?

Probably gross margins, I mean, if we are talking of sort of sales materials and what's left, probably we will be seeing about similar performance than we had in '25. That's highly then dependent how will the product mixes turn out.

Thank you. No further questions.

This is Nikko Ruokangas from SEB. I could have one additional question. You highlighted in your report that changes in your client portfolio affected your business in '25. So, are those impacts now over going into '26?

I think we -- a little bit, we were affected '25 profitability like we had the end of life on the analog portfolio, and that's then behind. We don't, let's say, from today's point of view, see any significant changes in that area other than that.

All right. Thank you.

Thank you. Are we done with the questions? Okay. Thank you. Thank you, everybody, and look forward to be delivering then on the first quarter and first half with our team. Thank you. Goodbye.