Scanfil Oyj (SCANFL) Earnings Call Transcript & Summary

Good morning, everyone. My name is Pasi Hiedanpaa. I'm the Director of Investor Relations and Communications at Scanfil. Welcome to our Q4 and full-year results webcast. In 2023, we posted all-time high operating profit and cash flow. And here with me is our CFO, Kai Valo and our CEO, Christophe Sut. Christophe, please, handing over to you.

Thank you, Pasi, and thanks for all of you to joining us this morning to have a look at our Q4 and full year '23. I would like to start with a few highlights. And as you could see, I mean, our Q4 '23 was strong in revenue, EUR 217.7 million. When we look at the numbers, excluding spot market, which gave us a growth of 4.9% year-on-year. Facing already a Q4 '22 that was quite strong already with growth, so quite a high number. And that, as you will see later was driven by our Energy & Cleantech segment that overall showed a positive development during that quarter. Again, when we look at our profitability, when we adjust the profit from some onetime cost related to restructuring and some material invoicing and also some customer settlement, we had 6.7%, which was a strong number and strong development, which shows also the activity we had in the quarter, both on efficiency short term in the quarter, but also on preparing the future. I mean, when you look at the total operating margin, we were at 6.1% against 6% last year. And the gap between the 2 is actually, as I said, some onetime off that will also generate positive effect in the future, since we implemented a program that will create EUR 1.7 million annual savings out of it. So all in all, I mean, a very positive quarter with strong top line, good development in operating margin and action for the future that will bring us forward, as you will see a little bit later. A few key events we had in the quarter. We continue to take steps towards sustainable manufacturing and increasing our capabilities. I mean, we have now started the implementation of the expansion of our Sieradz site. We are right now installing the geothermal heating system that is going to serve that new factory. We also had major customer events in Atlanta, where as you remember, previous quarter, we finalized the implementation of our first assembly line in North America. And during the quarter, we have been hosting customers there and have been starting ramp-up of production. So our manufacturing capability continue to both improve in how much we can produce, but also how clean we are in the way we produce. We also continue to develop customers, and it's both our top clients. But also, we welcome as part of our portfolio company that have been with us for a long time, but that now are taking new steps. And we have established this partnership with Braincool that built this Medtech device, and that is now very promising and ramping up in a very good way in our factory in Sweden. So that was a very pleasant development, and it shows the dynamic we have in our customer portfolio. And every quarter, we get the chance to start new projects that move us forward into the future. Then, to continue on the positive note, we had our annual survey both on customer satisfaction and employee satisfaction. And both were showing very good development and very satisfying development. So all in all, a lot of events that in the quarter, on top of our financials came to show the development of Scanfil and the improvement we are driving across the organization. Looking at our revenue and how we developed in the quarter. We had total revenue of EUR 217.7 million, as I mentioned, EUR 3.1 million on spot market purchase. And as you can see, I mean, that number has been, during 2023, step by step decreasing compared to what we faced the year before, returning to a more normal level, even if from time to time we still have some components that might be a little bit critical and where we have to watch carefully. But all in all, a situation that is getting more normal. Then in terms of revenue, Q4 was a very strong Q4. If you compare to historical numbers, we are now navigating in a totally different level for the company. So that was very positive. And that translated in a profit of EUR 13.4 million and 6.1%, which was driven by both strong level of sales, but that also includes some one-time operations that are driving improvement and efficiency for our future, which is important. I mean, we need to make sure that as we grow, we remain efficient. It's our competitiveness of the future. So all in all, very pleasing numbers. Looking at our customer segments, you can see that Energy & Cleantech is becoming really sizable as part of Scanfil portfolio. It's now 34% of our total revenue. And then, we have a balancing situation between Automation & Safety, advanced consumer application and then Medtech that are all traveling in the range of 20%. But it's nice to see Scanfil profiling more and more as a company positioned for the economy of today and tomorrow with Energy, Cleantech and sustainability on top of the agenda for many of us. So that's a very pleasing development and very, I would say, inspirational situation for all of us in the company. It also translates into our numbers, where not only Energy, Cleantech was the biggest, it has a very significant growth. When we look at the development of this market and looking at figures that are excluding our stock market purchase, we are in the quarter growth of the Energy & Cleantech segment of 27%, which is very, very significant. And on a year-on-year basis, 44%, which shows the level of activity across the board in that portfolio. It shows also the strength of Scanfil in that field that is not dependent on a single customer, but that a spread of customers acting in that field, that is quite broad. So it doesn't mean that all customers grow at this level, but it means that the total grow at this level. So very pleasing numbers. Looking at the second segment that is important to us, Medtech was slightly below in the quarter, negative 6%, but still very positive year-on-year with 8.4%. We had a destocking effect on that segment on the quarter on a few customers, but we remain very positive for the future with quite a significant number of new projects that are in preparation on that segment. Then commenting on other segments. Connectivity segment grew significantly in the quarter, 10% versus last year 26%, but it's the smallest segment we have currently within Scanfil, but that contains a few niche companies that are very well positioned and that are growing and developing well. And then Advanced Consumer Application was flattish slightly negative in the quarter, as the way it has been during the year and Automation & Safety was negative 8% in the quarter, driven by the destocking effect from our customer in that segment, but also year-to-year remained positive in the range of 6%. So all in all, I think that it's a very interesting picture where you can see a lot of historical Scanfil clients in advanced consumer application or Automation & Safety, where the market has been a bit softer. But in the same time, the transformation towards Energy & Cleantech and the growth of that economy is fully benefitting to Scanfil and overall continue to grow significantly in the quarter. In terms of customer portfolio, we have on the year rebalancing of our customers. Our biggest customer is 13% of our revenue, and our top 10 -- excluding the biggest customer is 42%. So we remain -- as I expressed before, we remain spread. We have quite a few customers that are significant to us, that are sizable leaders in their field, and that's very nice to see, that we support and continue to grow. And in the same time, we continue to welcome other players and other companies that make their journey with Scanfil and that grow and develop. So I would say we have a really healthy portfolio of customers with a quite good level of balance. All in all, it allows us to suggest a dividend of EUR 0.23 for 2023, which one more year shows an increase. It's more than 11 years now, 12 years that we have had an increase of our dividend on a regular basis and that's very pleasing. And obviously, this year is not an exception. On the opposite, it is confirming this trend that we have had. So that's pleasing. In the same time, as I have mentioned before, we are very engaged in developing our company and making our company, the company of the future. So we have ESG targets that are strong and that we want to continue to work on and to improve. We have worked during the year and it shows during the quarters, at the end improvement on our CO2 emission that we have reduced drastically. We are also and have been working on our share of fossil-free energy that we are also, in that case increasing, which is good to increase that element in a quite speedy manner, and also been increasing our employee satisfaction. So you can see that we are getting closer to our 2030 target. And for some of them, we are already getting there in 2023, which is positive development. It doesn't mean we're going to stop there, but it means that we are committed and that we are taking actions in the area we are committing and delivering. So all in all, a very pleasing feature. On that, I will hand over to Kai for our financials. Kai, please.

Thank you, and good morning also from my side, and thanks for joining. So here, once again, is the summary of the last year and the last quarter reported and official figures. So left side is the Q4 and on the right side is then the full year. Talking of quarter, we can see -- like you can see, that then the turnover is comparing to very strong quarter last 2022, is on the same level and running rate pretty much on the full year level. Operating profit reported more or less equal, including some like onetime cost in the quarter. Net profit slightly better, even due to the financials and then cash flow in the last quarter very, very strong, EUR 35 million positive in the quarter. When looking at the full year, turnover exceeded EUR 900 million and 7% growth, including this spot buys, which then make the picture a bit -- looking a bit wrong, I come back to that later. Operating profit over EUR 61 million, 35% growth and also net profit, strong growth. And full year cash flow cannot too much be highlighted, almost EUR 70 million of positive cash. Then we can go to next page. And here a bit explaining Q4 further. And here, when excluding in the comparison take out this any kind of material sales and spot buys, which is also kind of material sales or material price invoicing and also some one-off expenses for restructuring and customer settlement. In fact, our operating profit in the quarter is 6.7% for the regular normal operation. So it was very good and well in line with the full year result in the Q4. We had very strong actions driving the high efficiency. On the left side is the cooperation year 2022, and that has also been kind of normalized, excluding the spot buys. And on that year, we start from 6.5% of profitability and we increased EBITDA sales. But what is interesting that we decreased, in fact, the cost year-on-year in this quarter. So it was very good result in terms of efficiency, 6.7% operating margin. Go to next page. And here is the same -- similar type of comparison for the full year, taking out this spot buys with some bit missing the figures. So last year, a year before 2022, it was EUR 80 million of no or low margin spot buys revenue, while it was less than EUR 20 million in the last year. And if you take those out, the comparable operational revenue is 15.6% increase, EUR 120 million growth in the revenue, which is huge. And I have to say that we have done good work making it efficiently. The cost increased EUR 100 million, but that's, of course, its majority of that is material cost, which we needed need for the output. So there is some -- of course, some increase with other costs as well, which is not small, but anyway, in between, we made EUR 16 million of more operating profit, 35% growth. Go to next page. Balance sheet. This can be -- here is again like a year-on-year comparison. Left side is last year and the year before is the right part. And inventories were dropping EUR 20 million in a year. Good achievement. At the same time, then equity on the right side, we can see is growing EUR 40 million equity ratio following that. And what we did with them, like excess cash we paid off the loans, more than EUR 30 million in the year. Go to next page. Here's the net debt development. And like many industries also asked in the past, we were suffering for the component availabilities in the past. And for that reason, to be able to like fulfilled customer demand and make our best. And we needed to grow the inventories in the past and the peak was somewhere in '22. Now we are back on track, so to say, and then the net debt is declining strongly. And we are halfway back to where we started from very good development in the net debt in the last year. And the next page. And this is showing the same view from a bit different angle. So the net cash from operating activities quarter-by-quarter, repeating the message that the Q4 very strong Q2 as well. And the whole year '23 from the cash perspective. And the next page. Here is a bit more breakdown for the cash flow. So the EBITDA, when counting together, the net profit and the adjustment big part is the depreciation. So EBITDA is EUR 80 million is the starting point. And then then paying out the normal expenses from that interest and taxes. And the working capital was more or less flat. And we paid in -- had investments also over EUR 20 million. And after that, paid dividends EUR 13 million. So the remaining cash over EUR 30 million was used then for loan payments, EUR 34 million. And the next page. And still highlighting the key figures, equity ratio almost 54% now in comparison to a year before 45%. Accordingly, the gearing going down, which is good, of course, and now less than 20%. And then earnings per share EUR 0.74 in comparison EUR 0.54 the year before. And based on the proposal of the Board of Directors, then the dividend would be EUR 0.23. And it's equal to EUR 15 million of dividends pay out. But it leaves also to company EUR 33 million funds to be well used for the company future. And you can see then then above the EPS, the return on equity. So this is a good target for us. We have been making almost 20% of return on equity in the last year. And then then we need to well spend the remaining profits for the future. I think that was all from my side and hand over back to Christophe.

Thanks, Pasi. So going back to some key takeaway for the year that ended a few weeks ago. The first thing is we can see that we have had a very positive development. It was a record year ending with a growth of 15% when we neutralized from spot market sales. So from that perspective, very positive. That led to a record profit EUR 61.3 million, reaching 6.8% of operating margin and the cash flow of EUR 68 million. So very positive financial that in many ways are record financials for Scanfil. We have also during the year continued the transformation of our customer portfolio towards sustainability and Energy & Cleantech type of customers, which is a market that has a very, very high level of dynamic and strong level of growth. And that shows a positive perspective for the future. And all of this has led to a proposal of a dividend of EUR 0.23, which has basically been a number that has been growing over the last 11 years, since 2012. In the same time, this year has been transformational and we have been preparing for growth. I mean, just reminding, I mean, we -- as I mentioned before earlier, we increase our capacity in Poland during the year, but also decided to take another step, launching a new site that is right now under construction. In the same time, we had our first assembly line built in the U.S. for electronic. That is, as we speak, ramping up and getting the first customer order to be produced. We continue to build strong position in Energy & Cleantech segment. We have welcomed new customers and also welcome new projects from the customers we have had before. And it's a positive momentum here. I will say driving not only our competence, but also driving the profile of our company and the discussion we have around environmental and sustainability manufacturing with those customers that profile us in a very positive way for the future. We also do that through modernization of our site. You remember in the Q2, we mentioned -- in the Q3, we mentioned the inauguration of our future site with our clients, where we have the full blend of what we call the new factory with digitization and automation of operations. That is a very impressive site and we are rolling that out across the organization with very good success. And customers are really impressed by that. So that's a very positive development. And all in all, last but not least, we leave the '23 in a very strong financial position, a very strong balance sheet that will and that gives us opportunity for continuing to grow the company in the future and having room for that. So a very positive '23 that both in financial level, but also in terms of activity, prepares Scanfil for the future. When it comes to our outlook for 2024, we have a view of a revenue turnover level between EUR 820 and EUR 900 million with a turnover that will be, from now on, more normal. And what I mean by that is we expect to see much less spot market purchase that we have seen during the past 2 years. So that's the level of revenue we foresee. And this level of revenue should bring a level of margin between EUR 57 million and EUR 65 -- operating profit between EUR 57 million and EUR 65 million. So we continue to see a very positive development in the added value that Scanfil is creating through the project we deliver to our customers. The focus area, we are aiming at continuing the development of our Energy, Cleantech and also Medtech and Life Science segment that have shown to be very, very dynamic during '23 and where we are working actively to continue this growth through the implementation of new projects that are currently worked in our factories. We also want to remain a player long term and the way to remain a player long term is to be a competitive player. So building growth and profitable growth will always be in the agenda and building efficiency through automation, through digitization is going to remain in our agenda because this is what guarantees the position of Scanfil in the future and will remain a key milestone in the quarter. So we are gearing up the company for a continued growth journey. We believe that the second part of '24 is going to show a very strong development of growth with a slightly different dynamic compared to what we saw last year. We will have very high comparable for the first part of the year, slightly more reasonable on the second part and in the same time there's quite a lot of customer projects to be implemented and to be applied. So all in all, we have a positive outlook for '24. With that, I will end the presentation and hand it over to you, Pasi, for the Q&A.

Okay. Thank you very much. Let's start from outlook. In order to reach high end of your sales forecast, what needs to be happening in your market and customers? In other words, what are your assumptions in this positive scenario? So if we are going to reach nearly EUR 900 million, what has to be happening?

Yes. I mean, at this point, if I will go back to the way the '23 has developed, we remember that we had a last quarter where some of our customer segments have been facing a destocking situation. At this point in time, I mean, the high end of the scenario could be reached when the outlook there becomes more positive. And it's a little bit early to be affirmative on it, but that's basically what could make it happen. So in reality, we have the customer portfolio that will allow us to reach that level. It is just a slightly more positive outlook from some of them that will bring us there.

Okay. Follow-up question regarding the guidance. The guidance is wide. What are your hypotheses baked in for sales reaching the low end of range? Comment on potential price decline, impact on turnover?

Yes. I think the guidance is a little bit large because we are starting the year. We are quite confident in the development of the year. But then you can always have some project that can be a little bit delayed that could bring to a slightly lower turnover. But all in all, even if it's quite wide guidance, I think that we are confident in traveling within those numbers. And we believe that it's already a quite positive visibility for '24.

Okay. Follow-up question actually regarding our investments. There are actually 2 similar questions. You have invested in the new capacity recently, but the guidance suggests the amount is now flattish or slightly decreasing for the year end. Are you going to keep your capacity expansion program unchanged?

Yes. I think there are 2 things. When you look at our number, you should obviously be very careful about our revenue because part of our revenue the last 2 years have been out of spot buy market. And when we buy components, we don't need any capacity to do that. But on the other hand, we don't get any margin. So you should always look at our number with this very critical eyes, which is, okay, what is revenue from added value? What is revenue from component sales? And then when you look at it that way, you will realize that it's actually quite positive, quite good development. Then the second thing is that, as I said before, I mean, we are working with long-term customers, that we have a real partnership situation. We have a long-term outlook that is positive with those customers. We are working on projects that are going to bring any additional volume in our factories. So we need the capacity we are building, and we will need the capacity we are building in the future. So there is no reason to stop that. On the opposite, we should continue it and are continuing it.

You are conducting a restructuring program, or can we even call it that? But should we see the positive impact already in 2024? That's the question.

Yes. We are adjusting costs. I think it's important that as we continue to evolve, we make our factories more efficient on a constant basis. So we will obviously, step by step during '24, get the benefit of those activities that have been initiated in '23, and that have been realized in '23. So it will ramp up during the first 6 months of 2024 to be full speed by then, absolutely.

Also, a question regarding our investments on automation and efficiencies. But this might actually rather go to our Capital Markets Day, which will be arranged on the 5 of March. So maybe we do not actually talk about that no further here. How much or little Scanfil customers rely on improving operating environment in second half of 2024 in their demand estimates? So is it demand improving at the end of the year or in the beginning of the year, in the first or second half?

Yes. I mean, what we can see is obviously we have long-term outlooks with our customers. I mean, we prepare for a level of manufacturing. And we can see that there is a dynamic of ramp-up coming from the end of first half of the year to second half of the year. And that is starting to build up as we are going. So I will say that there is already a clear momentum that is designing towards the end of the first half of the year and the second half of the year.

Next one, I would hand the question to -- direct the question to Kai. Inventory-to-sales ratio seems to be highish despite the release of net working capital. How has the Scanfil's inventory program performed, and is there still room to release capital from the inventory?

Yes. Like I said, we reduced the inventories about EUR 20 million against the growing volume. So I think that was a good result as such. But for sure, there is room for improvement in the inventory turnover still going forward. So that then goes back to the level of working capital turnover in the past. And is it exactly the same level or no? That will be seen. But yes, there is still positive opportunities. Even we have used part of that already, quite big part.

Continuing maybe on the destocking questions, do you see destocking in other industries besides Medtech? So do we see that widespread or?

Yes. I mean, it has been -- when we look at our Q4, it has been a very dynamic quarter, to put it that way. I mean, it is industry that have been destocking, not only Medtech. Then we have these other 2 major segments that are waiting 20% each that actually are covering many different industries. And there, it is really a case-by-case. Some customers are on business that are growing. Some others have been flattening out because of this destocking. So it's really a case-by-case. But obviously, it is not only Medtech. It has affected other industries. But there, you need to get more granular to be able to see how it develops. I think that we even have some customers in the Energy & Cleantech that have been on a bit of a destocking verge. But here, we are so big, and the overall market is growing so fast that it compensates for that. We still overall grow very significantly.

Actually, a question regarding specifically on Energy & Cleantech and demand in there. Will the good revenue growth seen in 2023 slowdown in Energy & Cleantech segment in this year? So do we see a decline there or at least a slowdown?

I believe that obviously when you grow and come to the size we are, the growth in percentage might not remain at this very high level. However, we have a positive outlook in terms of growing that segment. That segment is going to continue to grow. Then maybe not in the 40% range in percent, but it continues to grow in a dynamic way. And we will elaborate it a bit more in Capital Markets Day, but we can see that the long-term perspective of that industry is very positive and will be positive and will be better than the average growth of the EMS industry. And that we believe will be also the case the coming year.

In geographical terms, where do we see the growth? What is the current situation in China in terms of growth expectations for this year?

Yes. In China, we remain positive on the development of our Chinese operation. And we -- I would say the added value of that operation will continue to grow. We believe that the Chinese market remains active and we have a good perspective for '24 there.

Okay. [Operator Instructions] Maybe this is the ideal ending for the presentation if there are no further questions, because there is a question regarding the ESG. So our targets when it comes to the fossil-free energy. You have reduced the share of fossil-free energy to less than 50% of your consumption and your target is 60% share. From the [ Finnish ] perspective, the target sounds very modest. Do you have plans to increase your own solar power production in countries where the renewable energy is more expensive?

I think that we are obviously reviewing -- I mean, there is 2 answers to that. The first one is we are very happy with the effort we have done on both CO2 emission and use of renewable energy. But I think that we should also look at that on a more long-term perspective, which we are actually doing now. And we will be in a position to talk about it during our Capital Markets Day in a few weeks from now. So I would like to more give a glimpse of an answer and save a little bit and invite you to listen to our Capital Markets Day where we will be touching upon that part, obviously.

Let's see if there are no further questions. So I think that we are done with the Q&A. So handing over to you, Christophe.

Thank you, Pasi. Then I would like to thank you all for having listened today to that presentation. It has been a very dynamic '23, as I said, positive development. And we believe that both from the activities we have had, from the customers that we are working with and from the investment we have made and the financials we have delivered, we put Scanfil on a very good trajectory for long-term growth and long-term development. With that, I will maybe hand it over to you, Pasi, for the last slide and reminding our audience about the coming events. But thank you very much for today.

Thank you, Christophe. So we will have our actually second ever Capital Markets Day. It will be held this time in Stockholm on the 5 of March. So there's a possibility to watch it online, follow it online or on site. So you are also welcome to be on site if you're available. But if you are not, so you can also actually be part of the -- and ask questions also via web. So we will be disclosing more information, actually what we discussed in here, that we will shed some light on our strategy, financial targets, growth prospects, efficiency improvement through automation and process planning. So some of the questions what we were having today will be answered in full in our Capital Markets Day. So welcome there. Okay.

Thank you very much.

Thank you.