Scanfil Oyj (SCANFL) Earnings Call Transcript & Summary

Good morning, and welcome to Scanfil's First Half of the Year 2022 Results Webcast. My name is Pasi Hiedanpaa, and I'm the Director of Investor Relations and External Communications at Scanfil. Here together with me is our CEO, Petteri Jokitalo, who will be presenting our first half of the year results. If you have any questions, please use the chat function, and questions will be answered at the end of the presentation. Petteri, please go ahead.

Thank you, Pasi, and welcome to Scanfil Q2 result call also from my side. If starting with the highlights for Q2. Of course, sales, our turnover in the quarter was on the record level, EUR 213 million, 23% growth year-on-year. Our sales was driven, of course, with a high level of spot market purchases. But in addition, our record sales was also driven by very strong demand basically from all customer segments. Especially, I could mention products like analyzers, frequency converters, recycling equipment for bottles, indoor climate products, coolers, heaters, where we had very good demand. Generally, all those products are somehow related to life science, energy efficiency, cleantech type of businesses. Also, I'm very delighted the fact that our net cash flow from operations was positive after 12 months period where we didn't have positive cash flow because of increasing net working capital and special inventory levels. Now we were able to see changes there and, of course, plan to continue with that trend. Our operating profit was EUR 10.1 million of profit. Operating margin 4.8%. Net profit EUR 7.1 million and earnings per share EUR 0.11. The challenges in material availability were continued. We had a high level of spot market purchases during the period. We still saw some increase in inventory. Material availability was impacting negatively to our productivity. We needed to use a lot of time and resources to -- continue to issues with materials. We also faced some COVID measures in China, meaning basically lockdowns in China, especially April, early May, and that was impacting our operations and profitability, especially in China, 2 ways. We had more than normal issues with material availability time; and secondly, some of our customers, they also faced the impacts from lockdowns and even some customers they had some factory closures. So that was impacting our delivery volumes in China, especially in April, early May. Situation has normalized quickly in May and June was again a good month also in China. Exchange rates changes impacted our operating profit quite heavily So basically quite heavy or strong appreciation of USD during the quarter, especially in April, we saw big changes. Basically, USD was appreciating against all key currencies we have, meaning euro, Swedish krona, Polish zloty in Europe and even Chinese yuan in April. And that's impacting our operating profit like by EUR 1.8 million during the quarter. Well, the demand in different customer segments, EUR 230 million total sales increased 23%. And if we including those spot market purchases, we see double-digit, even above 20% year-on-year increases basically in all customer segments, even [indiscernible] pretty close to 20%. But as I said, we had a very high amount of spot market purchases during the period of almost EUR 30 million. To be exact, this EUR 30 million is like reflecting a so-called purchase price variance, what is basically calculated. This is actually the variance between spot market purchases and so-called normal cost purchases. So we could say that we have like almost EUR 30 million like additional cost. The money we spent to get the components in and customers were compensating that EUR 30 million, but without margin. And here, you can see the customer segment -- by customer segment is, especially, we had high spot market purchases in Advanced Consumer Applications segment, but you see that basically, we had some amount of spot market purchases everywhere. And -- but even if cleaning our sales numbers though that those purchase price variances or spot market purchase is not impacting. We were growing like 11.1% year-on-year. And this is, of course, a very strong organic growth. And especially, we see that -- or we could say that basically all customer segments except advanced consumer application, where a bit lower organic growth without PPV, only 1.1%. But all rest of the customer segments were growing really, really robustly. If walking through some H1 related numbers, sales during the first half of the year, EUR 410 million, growth 22%, operating profit EUR 20.5 million. Pretty much same level like 1 year ago. But then when going to EPS and net profit, we see that EPS was EUR 0.02 lower, at EUR 0.23 this year and last year EUR 0.25. And even our operating profit was pretty much same level this year, like last year, our net profit was this year EUR 1 million lower. And that was impacted by 2 things that our income tax this year was like EUR 500,000 higher above than our financial cost or net like EUR 500,000 higher. The key driver on the financial, of course, was that we have a bit higher amount of debt this year, but also exchange rates were impacting a bit more. Our finance unmet this year. And what comes to tax, we don't see even now our tax during the first half of the year was higher. We don't see any bigger changes up there. We think that our first half tax was basically impacted by kind of accruals of prioritization. And we believe that towards year-end, we will end up with quite similar tax rate like last year. Return on equity for 14.6%, equity rates of 40.5%, net gearing 45.4%. Net cash flow from operations during the first half, minus EUR 11.7 million. But as said, during Q2, our net cash flow from operations was 1 -- being exact EUR 1.2 million positive. So our Q1 net cash flow from operations was minus EUR 13.6 million. And now we have turned to be positive. And then employees in average 3,339 persons with 2.2% increase to last year. Going to balance sheet. The total value of EUR 535 million. We still see -- let's start with 1 year development and actually a big increase in inventory, EUR 90.3 million year-on-year increase in inventory. And that is partly, of course, also positive because it's related to strong customer demand and strong sales increase. But of course, that part is not so positive that our inventory rotation went down very heavily and key reason there is that the bad material availability that -- our suppliers [ OTD ], the delivery performance is about 80%. We are about able to get in or it's 80% of suppliers' products on time, but 20% not. And that's automatically lowering our inventory rotation and rising our inventory levels. And that's, of course, going to improve as soon as the material availability is improving. And of course, we are taking a lot of other measures. And basically, we were able to slow down already the inventory growth that even we had the record sales in Q2, our inventories were growing in Q2, either EUR 20 million. And you can see that this already lower level than we were before. But of course, we are not happy with that and looking forward to stop the whole inventory grow and start to reduce our inventories and get cash out of that. Still, our financial position very stable. We are definitely able to make all investments what we need to ensure our good customer demand realization and organic growth. Net debt situation, end of Q2, interest-bearing bank loans like EUR 90 million and lease commitments like EUR 23 million. So together, EUR 112 million interest-bearing liabilities, including lease liabilities. So we have seen -- faced great sales growth since beginning of '21. We see a gradual and steady growth since Q1 and '21. And drivers as say, great customer demand, first of all, during that period. But secondly, also quite high spot-market purchases. And even though spot market purchase is, of course, not a good solution for -- in long term, but -- and that has eaten a lot of our cash and capital and cost some eases. But of course, the key reason why those spot purchases are used is basically the purpose is good that is like ensured that our customers, end customers are getting their products on buying and by making those spot-market purchases. We have helped a lot the situation improved a lot our delivery performance. And that's the reason that customers also motivated to pay extra price. And of course, that has meant that as careful as well as our customers that have used a lot of the resources, they balance it, take cash for that and time and resources to buy these materials. But Scanfil was in position to do it that way. With our strong balance sheet, we have able to do that and will also have won on some markets here. And at that point of view, we are looking forward, that's like seen positively also by our customers and will help us to maintain and keep our position with our customers in the long term. Separating those sport market purchase is a way, first of all, you can easily see how quickly we really the spot market purchase started like Q2 last year, and we can see steady and even big sum now in Q2 this year, almost EUR 30 million. But now we see clear signs that what we believe. We believe that now the peak has been seen. And our spot-market purchases is already in Q3 this year, a lower level, getting to lower level. And we should see further lower in Q4. And the key reason is that we have seen some signs that material availability will improve, and in some extent already started. As I said, first signs, we still have issues with some components, some semiconductors. We have issues, some most likely issues continue Q3, maybe even Q4. But we see more and more also positive signs. And at that point of view, that will help our inventory situation during the second half of the year. Anyway, even without PPV, our year-over-year growth of about 11%, 11.1%. And then, of course, the question is that how much of that 11% has been impacted by cost inflation and our price increases to our customers. And -- our understanding is that we are talking about maybe about 3% year-on-year. And even if taking that consideration, we are talking about 8% organic growth. With this robust is [indiscernible]. Yes. We just said that sales has been developed nicely since beginning of last year. But now when moving to operating profit, we see that our operating profit has been rather stable since basically 2019, about EUR 10 million per quarter. And this is, of course, not what we aim and it's not what we believe that we are like somehow forced to be. And our target is really -- and we believe that this is a realistic target is -- our target is to be long term like a 7% EBIT level. And the 7% EBIT level, for instance, if taking our Q2 this year, sales cleaned from our spot-market purchases, meaning with sales was EUR 183 million, 7% out of that was our EBIT, basically should be like EUR 12.8 million. And then a big analyzing where we were. We reported EUR 10.1 million EBIT. And on top of that, we faced like EUR 1.8 million exchange rate issues. What we have done with the exchange rate? We have really like implemented and improved our hedging during Q2 and beginning of Q3. For instance, added China as part of our hedging. And we have also improved quite remarkable our hedging in Europe. And for instance, we clearly saw very positive impacts from that improved hedging, already May and especially June. We are not saying that we are able to hedge all changes, but we see that we are able to -- be able to hedge and protect our EBIT from exchange related changes, much better from now on than what we saw in especially what we saw in Q2, especially in April. EUR 1.8 million exchange rate changes. And then on top of that, we had the China lockdown impacted our Chinese result quite heavily in April, early May. We have seen situations to change already improved, and we are back to track in China, being there basically in -- from beginning of May. And of course, we don't know if there will be additional lockdowns in China, of course, then we face tenancies again, but assuming that no, so heavy lockdowns, especially in Shanghai area what we faced in April. That's clearly positively improving our profit-making capability in the Suzhou. In addition, we, as said, we see materials availability gradually to improve. We also see, as we brought also in our report that we see our customer demand further improved during second half comparison to first half. So we are very confident to maintain our OP guidance as we maintain that our EBIT will land somewhere between EUR 43 million, EUR 48 million this year. That means that we are confident that our EBIT start to improve from now that we can -- we don't need to wait a long time. We already see a great improvement in Q3. That's our expectation. So we upgraded our turnover guidance for this year now in July. So -- and it was pretty much driven by further improving customer demand and also very high spot market purchases, especially in Q2. And the spot-market purchases, of course, continue still same level in Q3, maybe even Q4, but we believe that the level will be lower. Anyway, new sales guidance is that this year sales will be between EUR 800 million and EUR 880 million. And we maintained our operating profit guidance, EUR 43 million, EUR 48 million. Of course, uncertainties are the same like earlier. Material availability is not fixed yet. We will face some challenges the whole year, but we believe that gradually situation is now improving. There is still war in Ukraine. There will be likely some energy availability issues in coming winter. COVID-19 may cause some additional lockdowns and other issues, basically could say that there are no lack of risks at the market. Our focus is very clear, and I'm basically repeating everything what we said, say, 3 months ago. Our focus will be to realize our organic growth opportunity, having a great customer demand. We are pretty much focused securing materials. We definitely see good chance to improve our profitability. And also, we need to continue to improve and our net working capital and reduce our inventories. Long-term targets, annual organic growth, 5% to 7%. We are quite well there, even above operating profit level at 7%. We are not there yet, but we are going towards during the second half dividend approximately 1/3 of annual earnings per share. Also, wanted to update a bit about what we have done this year, when it comes to our production space to ensure growing customer demand. We already published beginning of this year that we have added the production space in Atlanta and Wutha. In Atlanta, we made like a 6,000 square meter addition and Wutha, 2,000 square meter. And now the latest extensions in Malmö, about 1,500 square meter and Suzhou 1,500 square meter. In total, we have added our production space this year by 11,000 square meter. And we believe that, that's enough for next 12 to 24 months customer needs. So far, we see customer demand below. In the long term, we see still North America and Asia besides China markets interesting expansion areas, most likely acquisitions. Acquisitions are an attractive option there. And as I said earlier, Central Europe definitely still a very attractive growth driver for Scanfil. Now I think that it's time for questions.

Thank you, Petteri. Pasi from Nordea has actually a question regarding our guidance, full year guidance midpoint indicates even 5.8% average EBIT margin for second half of 2022. Do you feel EBIT guidance could be challenging?

I think that I already explained why we believe that this EBIT guidance is doable. And there are a lot of positive drivers now. Of course, there are also risks in the world. And if those risks we will realize, then will be challenging to meet our EBIT guidance. We are confident that we are able to go there driven by those positive factors what I mentioned.

Okay. Pasi continues. Could it be possible for revenue to decline by 5% year-on-year in 2023, if the availability of the components improves and prices are at the normal level?

Of course, this PPV, of course, we do not have any guidance for next year, and I'm not planning to give it right now. But that's clear that this PPV, what is like a purchase price variance. This is like a somewhat additional sales that has to be taken in consideration when thinking scenarios for next year. And that the PPV will disappear as soon as material components availability has normalized. But of course, no one knows exactly has it totally normalized until the next year. But the expectation is that this has improved a lot so that the amount of PPV, hopefully unlikely will be much, much lower level next year. I think that -- we cannot -- we are not in the position yet to give any numbers would come to our next year.

Okay. Thank you, Petteri. Pasi continues about our customer segments and has a question regarding Advanced Consumer Applications and increase of EUR 15 million year-on-year revenue in that segment. Should we specify what product or products or customers are behind the increase?

Yes. I think that we have mentioned especially in Q1 those elevated products that we mentioned as well also those lockers, those parcel lockers. These are 2 kind of products we have mentioned after Q1.

Thank you. Jonas has a question regarding, are there any other factors besides the exclusion of the FX losses, stabilizing spot market component purchases and the fading of lockdowns in China, which will help your profitability improve somewhat in the second half of the year?

I think that these are quite important, okay. The sales rate lockdown is somehow maybe like a one-timer. But of course, this -- if this material situation start to improve as we believe, that will definitely improve generally our productivity and the use of resources, and that's pretty. But there are like no remarkable changes coming to our product portfolio, not that kind of changes are expected during the second half.

Okay. Antti has a question from Inderes regarding our estimates coming from customers. How have customers 6 to 12 months rolling estimates progress during the last few months? Are these still trending upwards? How much of the new floor space there? Okay. Well, let's take it separately. Is the customer demand is still trending upwards, is the question?

Yes. Let's focus on pretty much this year because next year, of course, is a bit more unclear still. But this year, we have seen a growing customer forecast. And as I said, and we do not see any -- so much changes in that trend also will come to next year.