Scanfil Oyj (SCANFL) Earnings Call Transcript & Summary

Good morning. My name is Pasi Hiedanpaa. I am the Director of IR and External Communications at Scanfil. Welcome to Scanfil Earnings Call for 2021. Our CEO, Petteri Jokitalo, will present our results for 2021. Questions can be asked via chat. All questions will be answered at the end of the presentation. Please Petteri, floor is yours.

Thank you, Pasi. Good morning, everyone. My name is Petteri Jokitalo, CEO of Scanfil. Let's walk through our Q4 and 2021 key happenings and results, of course. The year ended with record sales of EUR 192 million, 24% growth year-on-year, driven by strong customer demand, basically from all customer segments and I have to say, also driven partly by material prices as well. Components availability remained an issue during the whole quarter, especially availability of semiconductors was a real challenge; that was leading us to make some spot market purchases to secure our customer deliveries. Q4 adjusted operating profit, EUR 10.2 million or 5.3% of our sales, adjusted earnings per share, EUR 0.14, reported earnings per share EUR 0.13. And if digging a bit deeper to our customer demand and through different customer segments, you can clearly see that customer demand was like enjoying double-digit growth in each segment; Advanced Consumer Applications Q4 year-on-year growth 28%; Automation & Safety, 21%; Connectivity, even 61% year-on-year; Energy & Cleantech, 43%; Medtech, 15%, so in total 24.5% year-on-year growth. Just to mention few product groups really backing our growth elevator products and handover automation, energy and recycling solutions really driving the growth during Q4. New customers world-widely behind our nice growth in connectivity, which is still a bit lower what comes to total sales, but with high growth rate, IoT, wireless communication kind of products and applications there. To secure our customer deliveries, we needed to use quite wide many times spot market, to our spot purchases during Q4, where total is like EUR 14.4 million and also the segment split is visible there. The highest amount of spot purchases were under -- for Advanced Consumer Applications customers and Energy & Cleantech customers. But anyway, the growth even excluding those spot purchases were really robust that we can see that we were enjoying basically double-digit growth, also basically in all segments without Medtech & Life Science. And so the growth rate without spot market purchases were like 50% year-on-year. Key takeaway, the whole year, record sales of EUR 696 million or 17% year-on-year growth, mainly driven by Energy & Cleantech and Advanced Consumer Applications segments. Components availability impacted negatively our operations. Especially during the second half of the year, it was impacting different ways, impacting the top line. We had even higher demand than what we were able to realize. On the other hand, component availability was impacting our profit in very many ways, impacting productivity. And also it was impacting our inventories growth, what going to discuss that a bit late. The whole year adjusted operating profit EUR 40.3 million or 5.8% of sales. Reported operating profit, EUR 39.6 million. Adjusted EPS, EUR 0.50 and reported EPS EUR 0.46. Other highlights of the year were that Hamburg products [indiscernible] finalized by end of Q3. And basically all activities in Hamburg were stopped during Q4 and Hamburg factory is closed. And we also put [ forward ] dividend proposal, that's EUR 0.19 for year 2021. And if and when accepted by [indiscernible] will pay [indiscernible] our dividend. Here, more key numbers in one table already. And if focusing on whole year numbers, almost EUR 100 million sales growth. Adjusted operating profit, slight improvement, but pretty flat. The same adjusted EPS, EUR 0.50 same like year before. Then if moving to those other KPIs also linked more to our balance sheet return on equity, equity raising, net gearing. We see that still on robust on healthy level, but basically some weakening from the year before and that was mainly driven by inventory growth and you can clearly see that also that net cash flow from operations were negative basically, our net cash flow from operations last year-end inventories. Then if going more to balance sheet, first of all, in total, EUR 474 million. And coming to inventories, our inventories were growing last year by EUR 90 million to EUR 193 million. And several reasons, of course, a strong customer demand is automatically driving our inventories as well, more materials are bought. But definitely these material availability challenges are really impacting inventory as well. Even if 80% of material is supplied by supplier on time, and 20% is missing, it is definitely slowing down the inventory rotation and growing the inventories and as well we're buying more expensive materials, some part of that is bought from spot market. And this is also impacting material inventory values. And as we can see also our interest bearing bank loans were growing by EUR 30 million and end of the day, the gas was like quite healthy EUR 25 million level and we could see that our financial position is healthy and still stable, but it's very clear that we need to be able to level off that inventory growth during Q1 and Q2 this year. This picture is illustrating quite well how strong the year, while sales wise that the gearing, as you can see that all the quarters from Q1 were stronger than comparable quarter year before. And also it's quite well illustrating how at least -- during the past 2 years our quarters are like, developing sales wise that normally the first quarter of year, it's a bit slower and it's impacted by Chinese New Year typically. Also some customers after Christmas and New Year day start a bit slower. The first quarter is normally followed by very strong Q2, Q3 again bit lower impacted by summer holidays and so on and normally year-end with a high level and that was exactly what happened last year. And if reducing those spot purchases and low margin trading away, we still see that we had very good quarter sales wise last year, that even taking away those spot lots, we were able to grow each quarter year-on-year basis. Then if going to and when going to operating profit, the picture is a bit different, that can see that the operating profit has been quite stable level, quarter level like EUR 10 million per quarter, but we see that only operating margin has been clearly lower level now during Q3 and Q4 last year, like 5.7%, 5.3%, and this is of course clearly lower level than what we are targeting to be, we would like to somehow go towards 7% EBIT level and believe that this is a realistic level and possible to go. And this is of course one focus area this year, we need to able to improve our operating margins basically to drive us there, materials availability and spot market processes and then this Hamburg TOT which impacted our profit last year and this is now basically fixed. And if putting our sales to bigger picture, this is still compound annual growth rate like 16.1%. We have been able to see some absolute growth every year in 10 years' time. And you can well see direct impact of PartnerTech acquisition in 2015, making the jump that time and then just 2021, jumped what was 100% organic and really based on great customer demand. Operating profit also 10 years perspective, good compound annual growth rate. But as we see the past 3 years, quite flat and of course, same with earnings per share. And then when going to dividend and payout ratio, now EUR 0.19 proposal from last year. And what is good to notice that there is still a very healthy and sustainable payout ratio during the -- 41% from last year, and somewhere around 1/3 as our target is over the past 10 years. Then moving to our focus on outlook in 2021. First of all, we are enjoying very strong customer demand and customer demand outlook for 2021. And the first priority of course is to utilize that potential and ensure the organic growth also this year. And there we need to be able to basically fulfill customer demand, and then, number one thing is that secure materials. And there are different ways to do that. We are continuously trying to further enhance our supplier management. We have firm longer term fixed orders and customers in place and we are making longer fixed term orders to our suppliers. But still I think that, unfortunately we still need to make some spot material purchases, unfortunately still at least during Q1, maybe also Q3 -- Q2, but looking forward to see a bit lower extent of spot material purchases in Q2 at least and especially the second half of the year. But number one focus to utilize the sales potential, what our customers are offering for us by securing materials. Then secondly, we also need to be able to improve our operating margins and profitability. Getting closer and back to -- towards that 7% target. And as I said, the Hamburg production -- the location was already completed last year, will impact positively. Already this year spot material availability remain a challenge during the first half of the year at least Q1, Q2, but we need to mitigate that challenge as far we can and I'm slightly optimistic that during H2, we are able to improve that part as well. That's very clear that spot normal price inflation and cost inflation, we need to get to customer prices and I'm confident that we have been able to adapt that. Some customers, we have moved to quarterly based pricing, so that we are able to react quicker and tackle cost inflation on that. And then last but not least, definitely the level of the net working capital and inventory growth. And hard work there as well, further enhanced inventory management, but there are also other ways to tackle that, like we have activated with some customers, customer on consignment stocks, also some other measures so that customers are like participating and taking their part in this very difficult situation. So all-in-all, we estimate that 2022 our sales will be between EUR 710 million and EUR 760 million and adjusted operating profit between EUR 43 million and EUR 48 million. And of course, there are risks this year. Two main risks are material availability, especially semiconductors, and secondly, this COVID-19 is not over as we have seen, it's not over in Europe, it's not over in China, and the impacts can be versatile. And moving to long-term targets. We have adjusted our targets. Our former targets were set to year 2023 and we aimed like EUR 700 million sales. Actually, it was about down already last year, very close to EUR 700 million, and we adjusted our long-term targets. Now we are aiming to grow organically 5% to 7% a year and to pay growing dividends and approximately about one-third of the annual earnings per share. We have already published this year some actions to ensure our organic growth. We've acquired more production space in Atlanta and Wutha. And last year, we already told that we have started plan, an expansion options at our Suzhou factory. Central Europe definitely is still seeing a very attractive growth driver for Scanfil, but at least this year, we are really focusing to grow organically there. We have more production space in Wutha, and we want to utilize that fully before taking any acquisitions there. In the long run, we definitely see North America and Asia is -- talking about offset of time markets, very interesting expansion areas and different reasons. First of all, our global customers, of course, are really aiming, they are already there and these are the key markets, and we need to make sure that we are able to serve our key customers fully into all key markets. Secondly, it's about polarization of what ongoing products are more or less manufactured in the main markets. If someone is aiming United States, North America as a key market, and the expectation is that supply chain is located there pretty much as well as if customer give market sign and then of course, the supply chain must be there, Europe pretty much the same. Can be also so that outside of China will also somehow follow the trend. And of course, if our expansion and most likely, our expansion to North America, Asia outside China will happen through acquisitions, it's also an excellent way to widen our customer base. Yes, it's time for questions. Please.

Yes, please. See if you have any questions, so just write your question on chat box, and we will ask them there. First question comes from Joonas Ilvonen. This is regarding most likely about the Finnish F35 Jet, what the country has decided to acquire. Could you remind us the nature of your US, Europe Airbus account and depending on the answer, could you seek Scanfil product participating in some role in the Finnish commissioning of the F-35 fighter jets?

It was a question about Airbus?

Yes.

Airbus customers for us is pretty much legacy customer, pretty much linked to Professional Networks business we used to have with Nokia at the time when that Professional Networks business was spin-off and sold to Airbus. But I'd say, sales-wise, the business is not very high and not really growing that point of view. I'd like to call Airbus legacy customer, we serve well and are pretty much dealing with products going to professional telecom networks.

Thank you. One question regarding the crisis between Ukraine and Russia. Do you have customers selling their end products to Ukraine or to Russia in a meaningful extent?

No. So far, I know it's not priced up in that context.

Okay, thank you. Have you seen any weakness in Chinese construction markets, especially in new equipment installations. So I think that this is regarding elevators.

We have not, of course that, the fact is that we are not directly selling anything to buildings and so. And we have some products that our customers who then may sell directly or indirectly some products which are used in the buildings. Other hand, the cycles are quite long that most likely, this turmoil started last year, does not -- is not so much visible in what comes to new installations yet.

Thank you. A question regarding market opportunities in Asian countries. Are there any other Asian country besides China where you might consider setting up a production plant? If so, would these be more advanced countries like Japan or -- and South Korea or developing ones like Indonesia?

Yes. I think that -- definitely thinking about that and it was linked to what I said as part of our long-term targets that definitely this is out of China is somehow attractive part to be present. And the existing understanding is that we could be more interested in to have operations in more like developing in countries quickly, developing countries, maybe India, Vietnam, Malaysia, would be excluding -- basically nothing, but giving you a picture, what kind of countries and markets we could be interested in.

Thank you. A question regarding -- quite many questions actually coming from on. Have you decided to invest in facilities in several -- you have decided to invest in factories, facilities in several factories. What kind of investment plans do you have to fill the floor space with production lines?

What kind of investments plans?

Yes.

No. We have like to kind of first in thinking, bringing more or getting more floor space that possibility to rent the space. This is exactly what we have done in Wutha and Atlanta, and Suzhou we're continuing to build a new -- in the same physical basically land we had there. That's where our existing building is located as well. And that's of course a different investment if we are building or renting. But then what comes to further investments is depending what kind of processes we are planning to have there. Typically, for the electronics process is then, of course, this is like the SMT lines related equipment testing, equipment, automated inventories normally needed. And if more integration business, then, of course, the investment grade to production lines a bit lower, at least what come to production itself, inventories, investments are pretty much the same. That to give you some ideas about the investment values, different locations, then it's about the production lines. Typically one, SMT line cost is like EUR 2 million, EUR 2.5 million, and then it's depending how many lines we are investing. Of course, those investments are done gradually in line with customer demand and the sales prospects.

Thank you, Petteri. That was actually a good kind of an introduction for the additional question what Antti had regarding the CapEx for 2022?

CapEx 2022 without that possible Suzhou expansion, it's pretty much in line what we had done, maybe a bit higher. Normally, we are investing like about 2% of our sales. And 2% of our -- we are talking about EUR 15 million, EUR 16 million investments. If we decide to invest new construction in Suzhou that of course, will be on top of that.

Okay. Continuing in with Antti, have you seen increasing labor productivity in January and February after some inefficiencies at the end of 2021?

Unfortunately this productivity is, as said, is pretty much hit by material availability and even we are taking a lot of efforts to improve, but until the material availability is getting better and our supplier OTDs is getting higher, unfortunately, we are not able to solve. So those productivity is total, that I still believe that we are suffering from productivity at least for Q1, maybe for part of Q2 as well.

Good. Regarding the inventories, [indiscernible] had a question. When do you expect inventories again to be on a lower historical level? Is there any risk that part of the inventory becomes obsolete, thus leading into write-downs? Good question.

Very good question. Yes, normal level, definitely, it's ready to sales, and we were able to grow a lot last year and still looking for growth this year as well. And also after that, 5% to 7% annual growth and of course, impacting the inventories that absolute level will be higher for serve if we are successful with our sales targets. But yes, to a more normal level, I think that as soon as this material availability start to improve, the latest and even before that, as I said, we're taking a lot of actions to stop and level=off the inventory growth. And looking for results Q1, I think latest Q2 and then we should see the lower inventory levels in relation to sales latest Q2. Yes, there are obsolete excess risk if you are not managing this well. And of course, we are paying a lot of attention for that. We have good ways to measure our slow-moving inventories. We have covering customer contracts. We have always defined customer liabilities and checkpoints. And yes, good management is needed. Otherwise, there are kind of excess obsolete risk and maybe getting more visible after 2 or 3 years or something like that. If you are not breaking no one alert, but I am confident that we have good processes to handle that.

Thank you, Petteri. Still going with the components, Pasi has a question regarding component prices and its effects on net sales. How much was the positive component price effect in 2021 net sales, in terms of the euros in year-on-year basis and what was the volume growth effect in net sales growth?

Yes. Basically, what we have basically counted and published is really PPV related sales and spot market related component purchases and related sales. And Q4, it was EUR 14.4 million, if I remember correctly, whole year was more like EUR 32 million. Then of course, there are also, we call it like -- should we call it like material inflation, somehow on bottom and that's followed as well. And then this is like I don't know if this is the right word, but lack of better word, let's use the name like a normal price inflation or actual price inflation. This is of course something we will try to cover by customer price increases and believe that we have good processes for that and we are able to cover that by customer price increases. How much it impacted our sales last year? We have not published that exact number. But I could say, it's not really high. Maybe we are talking about like very low single-digit percentage.

Okay, thank you. If there are no further questions, so we can actually wrap it up here, unless somebody pops in with a question. No questions at the time. So thank you from my behalf. Petteri, would you like to say a couple of words?

Thank you. Thank you, all from my behalf as well. Have a good day.

Thank you. Goodbye, and have a nice week.

Goodbye.