Scanfil Oyj (SCANFL) Earnings Call Transcript & Summary

Good morning, and welcome to Scanfil's 2022 Results Webcast. My name is Pasi Hiedanpää, I am the Director of Investor Relations and Communications at Scanfil. Here with me is our CEO, Petteri Jokitalo, who will be presenting our results. Questions can be asked via chatbox. All the questions will be answered at the end of the presentation. Petteri, please go ahead.

Yes. Thank you, Pasi. Thank you, Pasi. Good morning, everyone. Also welcome from my side to Scanfil's 2022 and Q4 '22 results call. Let's go straight away to Q4. Year ended very positively. We had record sales driven by very strong customer demand and also improving components availability. We saw components market start to improve somewhere -- availability to improve somewhere early autumn and then development continued and even strengthened through the second half, but also meant that our spot market purchase is much lower level than first half of the year. And in numbers, EUR 222.3 million sales Q4, about 16% growth year-on-year. Operating profit, EUR 13.4 million operating margin, 6%. Operating profit improved by 40% year-on-year. Main drivers higher sales volumes and improved efficiency, what was impacted possibly, for instance, by better component situation, components availability. Net profit, EUR 10.5 million; earnings per share, EUR 0.16, 24% increase year-on-year. Customer segments -- all customer segments were growing year-on-year. Especially, we saw high or robust growth in Medtech, Energy & Cleantech and Automation and Safety segment, all these segments were growing double digit. If looking at the right-hand side of the table, you can see our spot market purchases. We had 14.6 million spot market purchases together in Q4. And if cleaning out those sport market purchases, automation safety, Energy and Cleantech and Medtech and Life Science segments, all of these were growing above 20% year-on-year. In total, without spot market purchases were growing 17.1%. And then going to whole year '22, record sales and operating profit again. And same drivers, the strong customer demand, we already had strong customer demand at the beginning of the year, but that was even strengthened during the year. And also, we were able to improve our efficiency, as said, and improved material situation impacted positively that. We had some issues, especially in China with COVID, especially in Q2 where those Chinese lockdowns were a bit giving some headwind to our business there. We were able to run our factories all the time. We need to -- we didn't face any shutdowns in our premises. But we had some issues with some suppliers. Also some of our customers were like facing situations that they were not able to run the factories without interruptions. In numbers, EUR 843.8 million, a 21% growth year-on-year, EUR 45.4 million operating profit, 5.4% operating margin, about 15% year-on-year growth. Net profit, EUR 35 million; and EPS then EUR 0.54. Also, I would like to highlight that our cash flow from operations during the second half of the year was EUR 21.9 million positive. As discussed very times earlier, we have -- we faced some issues with inventory growth during the past 2 years, we'd like to say so, and we were able to stop the inventory growth middle of the last year. And since that, we have made a very healthy positive cash flow from operations, driven by a bit higher profitability and stable inventory situation. We made major investments in production space and equipment in Atlanta, U.S.; Wutha, Germany; Malmö, Sweden and Suzhou, China. And then dividend proposal now is -- year '22 is EUR 0.21. That means that this 10 years in line, we are raising our dividend. So if you are cleaning out spot purchases our '22 annual sales, you can see that all our customer segments were growing double digit. And especially, we need very strong growth in Customer Segments, Automation Safety, Energy, Cleantech, Medtech and Life Science. And the investments, Atlanta, Wutha, Malmö, Suzhou new floor space, production floor space, almost 11,000 square meters, new electronics products online, Suzhou. And also, we decided to add and widen our service portfolio in Atlanta and investment in electronics manufacturing line will be up and run in Q3 this year. Most of these investments are mainly to improve our capacity. Atlanta investment also have a kind of strategic angle to widen our service portfolio in United States. Then a focusing here a bit more on our balance sheet. The balance sheet is healthy. We were slightly improving on keeping situation stable. Return on equity, 16.1% equity ratio, 45.3%. Net gearing, EUR 37.8 million. And as said, net cash flow for the whole year, EUR 10.2 million second half, almost EUR 22 million. Employees average 3,400, including all rented workforce, we are above 4,000 people. Turnover quarter-by-quarter past 2 years, see continuous improvement somewhere in Q4 '20. Spot market purchases in these numbers. And -- but here, you can see the spot market purchase is separated. We see a similar trend since Q4 '20, growing -- continuously growing sales without spot purchases. Here we can also clearly see that spot purchase is really peaked Q2 '22. And now we have continued lower and Q4 '22, pretty much same level than we were in Q4 '21. If cleaning spot market purchase is away, we were growing Q4 plus 17% year-on-year. And '22, we were growing 15% year-on-year to '21. Other message from this picture could be that you can see how our sales is normally allocated between different quarters that normally, Q2 and Q4 are the strongest quarter sales-wise and Q1 and Q3, a bit weaker. They are quite clear drivers like Chinese New Year in January, February time, and then summer holidays during Q3. And operating profit last 2 years, actually, I'm very happy to show this and then discuss -- there's been some frustration. At the same time, our sales has continuously improved somewhere mid of '20 early '21 already late '20. We have seen that our operating profit has been quite stable, about EUR 10 million. And there are certain reasons we have faced COVID during that time. We closed our Hamburg operations -- one Hamburg factory moved manufacturing to other factories and quite time consuming also cost-consuming exercise, we have faced components issues and so. But anyway, profit has been quite stable, like EUR 10 million even sales has improved, and we can see that in our lowering OP margin trend. But now we can see that finally we see a profit improvement what we have aimed and believed all the time that will come and now even operating margin without spot fees is 6% level. And if you are cleaning spot out, we are about 6.5% level, Q4. And development has been good also in long term that 10 years compounded average growth rate turnover 16.7% operating profit, 18.8% and earnings per share 18.4%. And finally, dividend increased dividend again and this time payout ratio about 39% and policies to distribute about 1/3 of net profit. Moving to long-term targets unchanged. Long term, we are aiming to have organic growth somewhere between 5% to 7%. Operating profit at 7% level. We are getting closer to that 7% level and believe that we are pretty much there in normal circumstances, no go with normal material availability factories operating normally. I'm very confident that we should see that kind of profit levels soon in the future. What comes to organic growth, we have seen much higher numbers. And still feeling that the market is good for our customers, and we have a good chance to keep that space even inflation-corrected. Long-term growth drivers still Central Europe, our market there is still relatively low, and there are a lot of kind of needs. Our factory network is very well positioned. Our service portfolio is very suitable. In the long term, it's quite clear that we need wider factory network in North America and Asia markets outside of China. And as I said, it's one very important long-term growth driver, of course, is our customer portfolio, very strong customer portfolio who has very attractive end market, especially right now, it's a great market for all kind of energy saving, green energy applications and solutions. And also, we see excellent demand from Cleantech customers, Automation, Safety, even Life Science looks like they have very good demand right now. And now guidance for 2022 -- 2023, and we estimate that our sales is between EUR 820 million, EUR 890 million and adjusted operating profit between EUR 49 million and EUR 55 million, and we are really focusing on securing organic growth potential, what we obviously have securing steel components and capacity. Even component situation has improved a lot. It's not totally soft yet, and we believe that there will be some issues until year-end. We will focus on profitability improvement towards our 7% level. And also, we need to continue to work with our inventories and improve our net working capital. Major production investment we have published Atlanta electronics manufacturing line. We already discussed it is on growing in production Q3 this year. This year, January, we published that we have made investment decision to add one more electronics manufacturing line in Sieradz, Poland will be in production Q3 '23. And also, we published in January that we started preparing a new manufacturing building in Sieradz. We are talking about 8,000 square meter building. It will be a major expansion to Sieradz and I see this investment be not only to increase capacity, but also they have strategic importance to widen our service portfolio in the United States and also if that 8,000 square meter investment is done in Sieradz, it definitely will be our main electronics manufacturing site in Europe after that. So let's move to questions.

Thank you, Petteri. Since that winter holidays in Finland and Sweden has an effect actually on the activity level. Currently, we have only one question actually coming from [indiscernible] Scrooge. Why don't you pay off debt? Gearing is higher compared to the last year and you need to pay more to cover the interest rates.

We believe that first of all, we have quite good financial agreements with the banks. And we are not feeling that the interest that we are paying are still quite well under control and moderate. Secondly, we would like to have some reserves, for instance, in order to be active in acquisition market if interesting opportunities will occur.

Okay. One from [indiscernible] Hill, operating profit guidance for 2023 is strong taking into account potential cooling of global economy. Is your confidence based on good demand for high-margin customers? Or is it more related to the client recent challenges, component shortages, COVID and so on, fading away. Expansion in Asia seems to mean growth and production locations outside of China. But does this aim include even acquisitions? Maybe first, starting from the profit guidance.

Our profit guidance is always based on our customer outlook and customer forecasts and our customer bases, they are indicating strong demand. And our guidance is in line with that. And the second question that if you want to expand our factory network in Asia and also same matter in North America. Most likely, that means or means that we need to study and look acquisition.

Thank you, Petteri. Joonas Ilvonen. Do you expect to see any meaningful changes in product mix this year? Should we expect somewhat similar top line development to continue this year for all segments like the ones seen in 2022.

We are not expecting any remarkable portfolio change in '23.

Antti Viljakainen from Inderes. Are component prices still trending up today? Or are there signs that we could see buyers' market in the component markets this year or next year?

Even availability is improving. It varies between different components, even electronics components and even different semiconductors. Then even semiconductor market is quite different depending what kind of ships you are buying. And as I said, there are still some availability issues with some ships and most likely will last until end of the year. So we will see some -- even some price increases this year. We are not expecting any double digit or something like that, but the low end single-digit price increases are possible.

Antti continues, regarding the salary expectations, what kind of salary inflation do you expect on the group level for the next few years? Is salary inflation more difficult to price in than the sales prices than component prices?

I did not say if starting with, I don't see any big difference if all inflation end of the day, we need to be able to push to customer prices. It doesn't matter if these components or salaries. Salary inflation varies a lot between countries in China, salary inflation are at a low right now. East Europe, rather high. Talking about even 15% level in East Europe, something like that this year. Difficult to say, most likely, it's not going to last very many years. In Finland, we see Sweden situation, Germany. We all know that we are talking about [indiscernible] about 4% lever per annum this year, maybe next year, a bit lower, something like that.

Thank you. If anybody has further questions, so please hit the chat window and post questions if you have any. Let's wait for a second or 2. It seems that there is no further questions coming in. So you can, Petteri, proceed from here.

We call the key takeaways then that record customer demand and also customer sales '22 and record profit and we also say that profit improved as expected. Now we are getting closer to the level what we are at and believe that we continue improving our profit. Material availability started to improve. And so spot market purchases were declining. And we believe that this year, our spot market purchases will be definitely much lower level than last year. Net cash flow from operations improved. We made EUR 22 million positive H2 '22, and we are looking forward to improve that by managing our inventories better this year. We have made quite strong investments, '22 and also '23 to support our sales growth and efficiency and also improve our strategic position. Strong customer outlook for '23 as discussed. And this is based on customer forecasts, what we are receiving from our customers. So I think that this -- we have a good reason to end this session positively. 2023 looks positive, and we have good sums to take this company even higher and improve our financials and customer satisfaction, employee satisfaction through the year. Thank you very much. Have a good day.