Scanfil Oyj (SCANFL) Earnings Call Transcript & Summary

Good morning. I think that it's the time to start. It's 10:00 a.m. Finnish time. And good morning, and welcome to Scanfil's Q2 and First Half Year Results Presentation. My name is Pasi, I am the Investor Relations and Communications Director at Scanfil. Results will be presented by Scanfil's CEO, Petteri Jokitalo. This will be also his last time for after stepping down after a 15-year career at Scanfil, of which 10 years or over 10 years as the CEO of Scanfil. About practicalities, please mute your microphone during the presentation. At the end of the presentation, there is a possibility to ask questions in a Q&A session. There are 3 options to address questions. [Operator Instructions] Also note that the meeting will be recorded, and it will be available on the company's website later today. And then, Petteri, please go ahead.

Thank you, Pasi, and good morning, everyone, and also welcome from your side to Scanfil Q2 '23 results call. As I understand, the presentation is now visible for you. Pasi, can you confirm?

Yes, yes, it is.

Very good. Let's go ahead. So Q2 this year, as we said, it was strong in all measures by all KPIs, record high sales, EUR 243 million, 14% growth year-on-year. Drivers, strong customer demand, also components availability was improving also from Q1 this year. And we also invested to our production capacity, so we could better meet high customer demand and improving components availability with a possibility to improve our volumes. Also all-time high operating profit, EUR 17.5 million or 7.2% operating margin, mainly driven by higher utilization of production capacity and increase of production efficiency, what was positively impacted by improved material availability. At bottom line, earnings per share was doubled to EUR 0.22 from last year Q2. Especially, we saw very strong customer demand in Energy & Cleantech customer segment year-on-year, 61% growth. There, we see that our customers, they have really great tailwind now of drivers related to green energy efficiency and so on. Also, Connectivity, we saw very great growth, 38% year-on-year. Advanced hearing protection customer was one of the strongest growing companies in that segment, and these products are also utilized partly by defense military forces. Medtech & Life Science, Automation & Safety, we saw a stable development single-digit growth. And Advanced Consumer application, we saw some negative growth, but if you are gleaning the growth numbers from spot market purchases, actually we also had like 7% growth year-on-year in that segment. Our purchases last year were really high Q2 last year, almost EUR 30 million and pretty much in Advanced Consumer Application segment. And this year, we saw as total number only EUR 5 million spot purchases during Q2. Other key numbers. Return on equity, a good level, 22.6%. Equity ratio improved to 45.8%. Net gearing improved as well to 36.5%. Especially, I'm very satisfied with positive development with our net cash flow from operations, EUR 25.2 million cash flow during Q2. Pretty much driven, of course, by healthy profitability, but also our Sciences to reduce our inventory level, we were able to reduce the inventories by EUR 7.5 million during Q2. What was really good result, taking consideration that we were growing at the same time quite strongly. And here if we're looking at 3 years' sales development and trends, we can see different trends. First of all, growing sales since early '21, lowering spot purchases. As said, the spot purchases repeating exactly 1 year ago, EUR 30 million, and gradually quarter-by-quarter, we have been able to reduce our spot market purchases, reduced because of improved materials availability. Maybe the third thing here to notice is that looking at least at 3 years' picture here, we can see that Q2 has been in very many years quite good year saleswise, and also Q4. Normally, Q1 is a bit lower because of a bit slower start for the year and Chinese New Year, that kind of factors. And also Q3 is impacted by summer holiday period. And a similar picture about the operating profit and operating margin, a healthy operating margin improvement since Q2 last year. And now we are at the level we have said that we are targeting, 7%. Where we used to be, by the way, before COVID. You can see that we were at about 7% level. There are different drivers, but one driver what impacted our bit lower operating margins in 2021 and also '22, for sure, we had material availability what was decreasing our operational efficiency. And other really Scanfil-specific reason was the closure of Hamburg factory and products and transfers to Poland and our other factory in Germany. And that was negatively impacting our -- these 2 things to our operating margins. And now it looks like material availability is normalizing. Even there are still some issues, but normalized a lot and Hamburg technology transfer has been successfully done and it's not impacting any more our profit. Our factories are now good. All the factory network, good shape and running with high efficiency. Major production investments or decisions, or investments what we have done this year. Atlanta, as told earlier, we have in -- already last year decision to reinvest in electronics manufacturing capacity and line in -- electronics manufacturing line in Atlanta before, now the line installations are being done. And actually, this week, we have started to manufacture first pilot PCBAs there. And definitely, we are in our schedule to really start commercial volume products during Q3 this year. This is an important step for us. As I said, we didn't have electronics manufacturing capability in the United States earlier, now we have. And as I said in the interim report, the demand and interest from customer side even exceeded our expectations, that really looking forward to start to produce volumes in Atlanta already this year and especially next year. Sieradz, Poland, our customer demand has been all the time very strong, and we have even suffered big capacity issues earlier this year when components availability was not so big bottleneck anymore. And we have invested heavily there as well. We have got new major electronics manufacturing, new line investments. They're installed and done and these are as well ready for production from now on. And we do not see any capacity limitations in Sieradz anymore, and we are able to even meet the higher demand from customer side what we see today. And then yesterday we announced with a stock market release the -- we made a decision yesterday to invest about EUR 20 million to new building. This is increasing our floor space in Sieradz by 14,000 square meter. It's like the 70% increase to existing. It's really a remarkable major investment in Poland. It really will ensure our European electronics manufacturing capacity from 2025. We are able to increase our electronics manufacturing in Europe by hundreds of millions when this building expansion is done. This EUR 20 million is including building only and related heating -- it is an ESG floor kind of investments. And then production lines themselves can be tens of millions, of course, but it will be then invest gradually, in line with a big customer demand from 2025. Really important decision for Scanfil to make sure that we are -- we stay competitive. We are able to grow, not only with our existing customers but also new customer hunting in Europe in the next 5-plus years. Outlook. Supported by strong first half of the year and a strong customer outlook for rest of the year, we revised our outlook on July 10th. And now the new guidance is so that we see that our expected sales turnover this year will be somewhere between EUR 900 million, EUR 950 million and our adjusted operating profit EUR 61 million to EUR 68 million. And the focus areas remain pretty much the same than earlier, driving organic growth. And now, as I said, we believe that we have a decent capacity for this year. But now, of course, we need to make sure that we are ensuring manufacturing capacity for next year. And securing components still -- even material availability has improved a lot, but there are still issues and there is still extra potential to manufacture even more, even this year, if you are able to find missing components. But for some special components, lead times are still very long, and availability is weak so securing components is not forgotten. It's still an issue. Even we are now 7% level above. We are, of course, not fully satisfied with that. We still need to see some possibilities to improve, increase our efficiency and work will continue to maintain and even further improve our profitability. And for sure, given our Q2 results were good and reducing our net working capital and inventories, that work will continue. We have quite ambitious targets for the rest of the year. So time for your questions, please.

Thank you, Petteri. Now we can kick off the Q&A session. There is already actually raised hand by Pasi Väisänen, Nordea.

This is Pasi from Nordea. I have a couple of questions. And to start with the component availability. So when you do now have components available and order backlogs are going to delivery, so is this a very good run we have seen in the second quarter. Could it be like a ketchup bottle effect and fading away later on? So how do you see it? What is the underlying sustainable growth and profitability if this would be a bit more ordinary year by excluding this ketchup bottle effect? And also one question related to investments. So quite many [ En S ] companies are adding capacity just when the markets are very worried about the kind of order intakes in several sectors and also worried about the consumer spending on this year, and especially regarding the next year due to inflation. So what is the customer segment or the product category this new investment to CRS is actually focused on? And are you kind of sure that there will be demand for your new capacity and devices into Poland?

Thank you, Pasi. Very good questions. First, how confident we are that the demand continuing short term was the Q2 kind of big? I say it many times earlier, our customers are providing us with, say, from typically forecast covering next 18 months or something like that, 12 to 24 months, and quite typically 18 months. And we have not seen that affecting customer forecasts. Vice versa. We have seen that it looks like the demand is sustainable and we didn't face any kind of special peak in Q2. But the customer forecast is the best what we have in hand and also our guidance is, as I said, pretty much based on customer forecast that has been historically the best way to evaluate the future business development. Then secondly, that how sure we can be that we have enough demand in Sieradz when that investment is ready in 2025? Of course, there are no guarantees. But on the other hand, you also asked that how is our customer base there? We are feeling that we have very healthy customer portfolio in Sieradz. Very good customer distribution. We are not depending on any individual customer. We have very many customers exactly coming from energy sector. And if personally I should bet, I would bet on the companies who are getting tailwind from energy efficiency and green energy level also in Europe. I do not see that demand to disappear. Of course, there could be weaker periods, longer periods, but I see that, that's a mega trend what will remain. So I and we are very confident that definitely, this investment is needed and that we have very good opportunity to fill the factory.

May I have one follow-up regarding the kind of demand? When looking at the kind of very strong performance into Energy & Cleantech's segment or customer sector, did I hear right that you said that it was partly related to defense and military related to IC. So is that right?

That was Connectivity.

Okay. I would say that this kind of a follow-up to Pasi's question regarding the Energy & Cleantech segment, which performed very nicely, actually, during the first half of the year. So Joonas from Evli. Could you elaborate a bit on Energy & Cleantech customers and demand. [ Emerson ] is one of the new customers there. But obviously, not the large at this point. So are there any significant new customers? Or are the high volumes stemming from the well-established names?

The high volumes are always coming and coming from well-established names that -- if we have new customer, basically it doesn't matter if this is a large or midsize customer. It starts with lower volumes and then gradually we are ramping up. And so the major volumes, big [ pipe ] volumes, they are coming from well-established OEMs, also in Energy & Cleantech segment. But we have quite promising new customers in the sales pipeline. But as said, volumes are not super high yet.

Continuing the customer segments. And Ramil Koria is asking a question regarding our concentration to specific customers in Connectivity. So going back to our roots as a supplier to Nokia, and how we should think about the business in the coming quarters for the Connectivity sector?

Customers are quite different in Connectivity. As you see, it has a few brands, what we were solving. They are not competitors at all. They are in different businesses, and they have different outlook. And so we have customers where the outlook is very good, and it's also talk by the customers. [ And Visi ] has mentioned one customer, who had publicly thought that they have very good outlook.

[Operator Instructions] And [ Yurki ],there is a question now from Yurki. Will the focus of investments in the future be on the expansion of existing factories as it is now? Or are acquisitions also likely?

I have a feeling that growing organically, it's very efficient and a good way to grow, if there's that kind of demand situation what we have seen and what is still -- believe still will continue. And of course, again, it's a very cost-efficient way if you have to expand our existing factories. And if location is right, we should do that. As in Sieradz case, we believe that it is good location in all terms. And it's almost like a no-brainer to grow by expanding the existing factory. We believe that all fundaments are there and customer demand in Europe continue. But then we have geographical areas we are not -- our factory network, it's not so strong, that I said it several times for us, it's North America. We have -- it's important we have a site in Atlanta. We also will have electronics manufacturing capability in Atlanta, and that's really improving our service capability there, but most likely mid or longer term, that's not enough. It's big continent and it's quite easy to think that we need a bit wider factory network, and we are not able to solve that by expanding Atlanta. And that could be one good example that definitely could make sense to consider acquisition, maybe including Mexico side in Mexico. A big site in Asia, that we have very well, high efficient, high-scale factory in China for Chinese market, but we do not have any factory network in Asia out of China. So greenfield is not attractive option, but again we could consider acquisition.

Thank you, Petteri. Antti Viljakainen at Inderes, he has 3 questions. First, I'll start from there. Several EMS companies have reported that the order delivery lead times have decreased to pre-COVID levels as component availability has improved this year. Do you see the same? And how far can you see at the moment?

Yes, the order delivery lead times are maybe not so relevant from our point of view. We have forecasts from our customers, and then call-offs; basically that we are buying materials based on customer forecast, and customers are taking material liability based on that. It's not so much linked to when customers are really calling off the products or placing the final purchase orders. We don't see any impact to that process. But of course, the lead times from our suppliers, these are normalizing. But as I said, there are still some components we have, [ pieces ]. We have still components with rawmat 2 years' lead times that it's not 100% sold yet. And as I said, we have still tens of millions potential to sell more if we are able to -- in relatively short term, if we are able to solve components issues. Just to give you a picture that it's not 100% sold yet, but there are still components with availability issues.

Thank you, Petteri. The second question from Antti. Have you taken typical summer holiday breaks in factories in Q3, as demand and probably also backlog are strong?

Yes, we have had typical holiday breaks, as we had last year as well. Now July, August.

Okay. And the third one from Antti. How did your customer satisfactory level develop in the midyear survey?

Yes, very good point. I could highlight that as well. We saw now improvement in customer satisfaction after last couple of years, where material availability has been quite stressful and a negative thing impacting everybody. And now we believe that there have been several factors why we saw general improvement in customer -- remarkable improvement in customer satisfaction after our June survey. And one of our surveys says, there's material improved availability, but not only we have availability, also because of capacity investments what we have done. And we have also paid a lot of attention to improve our communication and cooperation with the customers. But yes, happy to tell that improvement seen.

Okay. Thank you, Petteri. If there are no further questions, we can go to the final.

Before we close, key takeaways. Strong Q2, strong first half. Operating margin now 7.2%, the whole half year 7%. Net working capital, inventory management, clear success. And looking forward, we have ambitious targets to second half. New electronics capacity, taking the products in Atlanta, Sieradz factory expansion really remarkable, ensuring our future in Europe to be part of that, and strong customer outlook remains for '23. And maybe still a couple of words before we close. As Pasi said, this will be my last Q1 report and call. I think that I had 41 quarter reports, a bit more than 10 years or 40, 41 reports at Scanfil, totaling 15 years. Scanfil over 10 years as CEO position, been really great time. I'm feeling so in every aspect. And now when my time is ending at Scanfil, I would like to thank all the Scanfil stakeholders, but also I would like to thank you, shareholders, investors, analysts, the whole investor society. Thank you for your trust and constructive cooperation. Thanks a lot. Have a good day. Bye.

Thank you. Bye-bye.