Scanfil Oyj (SCANFL) Earnings Call Transcript & Summary

Good morning. My name is Pasi Hiedanpää. I'm the Director of Investor Relations and Communications at Scanfil PLC. Welcome to our Q2 2024 results webcast. Together here with me are our CEO, Christophe Sut; and our CFO, Mr. Kai Valo. [Operator Instructions] But hey, welcome Christophe and the floor is yours. Thank you.

Thank you, Pasi. Welcome to all of you, and let's start. So going into an overview of what was Q2. As we had communicated before, Q2 was facing very high comparables. So we landed in revenue at EUR 195.5 million, which was a negative 19.7%, pretty much in line with what we were expecting from the quarter. Therefore, I will say the main focus of the quarter was to defend profitability in a market that was more volatile and more challenging. And there, I think that we did a good job, maintaining EUR 13.9 million of operating profit, which was 7.1%, in line actually with our long-term target corridor that we communicated earlier in our Capital Markets Day earlier in the year. So it was quite pleasing to come to that level of profit in such market condition. As I mentioned, I mean, turnover was declining, which was expected. We however, during the quarter, started to see sign of recovery in one of the market segments we have, which is Medtech and Life Science. I will explain a little bit more about it later. We got actually the outcome of the efficiency program we have put in place and we worked on already last quarter last year, and it came in full action during that quarter, allowing us to actually balance the revenue by lower cost. And we also continue the work we had on improving our working capital, reducing inventory, which had a positive effect on our cash position. In the same time, even if we were in a defensive mode regarding cost and delivering profitability, we continued to work on strategic initiatives we have launched earlier. Both Dream Factory implementation is moving forward as well as the commercial plan we have with implementation of our 3 segments that are now fully in place and working towards our customers and also acquiring a new contract. So a lot of activities. If I look at a few key events that I think were significant in the quarter. I mean, we won a project for EUR 40 million. And I will go a bit more in detail later, but we have now decided that we will, on a regular basis, give you on a quarterly basis the number of the project won we get in the company. The EUR 40 million was a solid number and a few contracts came on. The one we have here on the screen is the contract we signed with Framery, where we are actually doing system integration and building those small offices that you can see on the picture. So an exciting -- a very exciting business, very proud to become a supplier of that customers and to bring new solution live to the market for them. Other development, we are evolving our management team and we were happy to announce during the quarter the recruitment of Anette Mullis that will join us as Chief People Officer. I think in the phase we are where we really aim at slowing the company and building competence is a key element. So Anette has definitely, we believe, the right profile and experience to help us forward. We also continue to focus on quality delivery. On-time delivery was again above 98% in the quarter, which was very pleasing. And we were very happy to be recognized, I mean, our Suzhou factory was prized by Danfoss Sensing Solution for the quality of their performance, and that was something very pleasing and something that, in a way, is nice to share because it materialized what we have been talking about, about the performance of our delivery and how people appreciate the outcome of our programs. And then we -- as last element, we are now gaining speed in the manufacturing of electronic component in Atlanta, where we have now several customers coming in and getting manufacturing on our Atlanta facilities. So step by step its now moving forward and gaining momentum, which was, if you remember, one of the key investments we made last year. So a few events that were there during that quarter that we are quite pleasing to see even in market condition. Revenue development, I mentioned it before, EUR 195.5 million was the revenue level we reached. And you can see that from a supply perspective, now we have very few, what we call PPV coming in our revenue. Now our revenue is more coming from product delivery and added value, so that part has normalized over the time. And then in terms of operating profit, as I said before, I think it was pleasing to see we reached EUR 13.9 million of operating profit, which was actually one of the #4 biggest quarter ever for Scanfil profitability -- in value which in the market situation we were in is, I think, very pleasing to see. And 7.1% margin was also in the marketing corridor. So the big thanks to all our teams that have been really working at efficiency, making sure we keep control of the cost, which is always pleasing to see that we are resilient whatever business cycle we are in. In the same time, we continue our diversification of portfolio of customers. Today, the biggest customer is 12% and the top 10, when we take away the biggest one is 42%. So we have a very well-balanced portfolio, which is, I think, a good element because it brings us 2 things, it brings us some stability for the long term, but it also gives us the opportunity to go into the future. I mean many of those customers, they are not -- we are not owning 100% of their manufacturing, and they are going in with that. So that bring us opportunity [as we come]. Looking at the defense segment now. On the revenue side, Industrial declined 19.6% during the quarter, which was, as I said before a bit in line. We had comparables that were very high, and we believe in a few -- in [very] few of those segments that last year was a little bit of a bubble quarter with a shortage of components and people being in panic of getting their supply. So it declined 19.6%. When we look at the first half of the year, we have acquired revenue for about EUR 35 million in that segment, which we believe is good to [growing] us forward in those. There is a few sizable contract we have acquired 2 being in the defense segment with about EUR 13 million if you pull them together. That will actually be materializing in the 6 to 18 months depending on which contract we are talking about. So those were the development we had in the quarter. Moving now to Energy & Cleantech. Energy & Cleantech declined 26.1% in the quarter. And they are more than anywhere else. I mean, we were really facing a bubble quarter last year. And therefore, I think that we should look at those numbers with a critical stomach [indiscernible] this is what it was. What is interesting to see, however, is 2 things is the dynamic we continue to see on new projects. In that quarter, we acquired EUR 22 million of new contracts in that segment. And since the beginning of the year we have acquired EUR 38 million of new contracts. And I think it shows 2 things. It shows the long-term dynamics of that sector that is clearly going to continue to grow and to develop long term and it also shows that we are seen as a very reliable potential supplier in that sector with the value we acquired in the quarter. So it's a positive development. We -- I would say we only gained customers in that segment. There is no loss of customers, and they move to us more and more -- move more and more product to us for the existing customers and new customers also come on board. So that was the outcome of those new wins we had. And then -- and finally, Medtech and Life Science was declining 4.9% in the quarter, which was, I will say, getting very close to stabilization in numbers. And in reality, when you look at the dynamic of the quarter, I mean, we had a slight rebound coming towards the end of the quarter. And the same goes also with acquiring a new project where months after months, we are gaining momentum. We have acquired EUR 12 million, a bit more than EUR 12 million of new projects since the beginning of the year. There are project that will bring growth on the long term. And we have a lot of traction right now in discussion, both with existing customers that are reducing their supplier base and move more project to us, but also with new customers that recognize our capabilities. I will say here, we have 2 factories that are in the forefront is Suzhou and Sieradz where we have quite a lot of interest for that Medtech and Life Science segments. So pleasing to see that the focus we have started to put on it is already paying off and creating traction. With those words, I will hand over to Kai for the financials.

Thank you, and good morning also from my side. Here first picture is showing like waterfall from the operating profit of last year to operating profit of this year second quarter. And what it is showing is that the strong agility, what we have with the expense so that while the revenue was dropping EUR 47.8 million, we are almost -- we have almost able to do the same with the expenses and which means that nearly all expenses have been kind of variable expenses as it should be in the EMS business. And therefore, we have been able to well defend the operating margin ending up to 7.1% in comparison to last year, 7.2% with a strong comparison volumes. What is remarkable here, this is showing the balance sheet comparison to the end of last year. Two things, inventories have been lowering by EUR 24.1 million, which, of course, is good, very strong improvement there and at the same time, then it has been turned to cash. So we have almost EUR 20 million more cash in hand. And here is the cash flow, net cash from operating activities in the quarter, very, very strong EUR 37.2 million of positive cash flow. And in the quarter -- in the first half, EUR 47 million positive cash. And that was driven by about EUR 25 million of positive inventory meaning reduction of inventories development. And if looking at the last 4 quarter 1 year in total, EUR 92 million positive cash and half of that, about half is coming from the inventory improvement and the other half, of course, from the good profitability. And the net debt following the good positive cash flow. Net debt is on the level of EUR 29.2 million, and it has been lower from the last year by EUR 60 million, almost when it was EUR 87 million a year ago. And we have very strong liquidity. We have nearly EUR 90 million of unused credit facilities, and then besides that EUR 40 million cash in hand. So almost EUR 130 million of total liquidity at the end of first half. And net debt at the same time is 0.4, when a year ago it was 1.15 . Key figures, equitization strengthen more equity and then also then the total of the assets or the balance sheet value being a bit lower with the reduced inventories. Net earning naturally coming down with the lower interest in liabilities and then increase in the cash. Return on equity. We have higher equity the comparison figure is higher, but of course, the euro operating profit and net profit following that is a bit lower, which is then impacting the percentage, but on the other hand, then still on a fairly good level. And earnings per share, EUR 0.17 in comparison to 0.22 a year ago. And back to you, Christophe. Thank you.

Thank you, Kai. So in a few word, I mean, we continue to focus on the recovery of the market, and we'll start to follow up very closely customer that are rebounding. We have a few focus areas we have said before, Energy, Cleantech, and Medtech & Life Science or the area we have started to create focus and we have started to see momentum. So we'll continue on that one. We want to secure profitability. So attention on efficiency is going to remain. I think that if we look at the last 3 quarters, it's probably something we have gained building accountability across the organization, making sure that people and teams make progress every time being more efficient, and that's something that we can keep with us no matter the business cycles. And then we are continuing to gear [ ourselves for growth ], as Kai presented, we have a financial situation that is healthy and that allows us now to build pipeline for acquisition and potential M&A, and that's what we have started to work on and we are working on. We adjusted our guidance a few weeks ago and have now a target of EUR 780 million to EUR 840 million in revenue and profit level, EUR 54 to EUR 61 million as a corridor for this year. With those word, I will open up the floor to questions.

Thank you Christophe. What do you see in your American operations during the quarter and how do you view the demand situation going forward?

So 2 questions. I mean for the American situation, I mean, we -- what has happened is we have started to fill the factory with, I will say, existing customers that needed manufacturing in the U.S. So this is ramping up. I mean, every month, we have more units built out of that unit. So that's a positive development. In the same time, we are starting to gain local contracts that are new to us that will also ramp up in the second part. So I will say that we are very positive to that investment. And obviously, it takes time to get the payment of it, but let's say it follows the milestone we were aiming for, meaning we ramp up volume, and we start to gain new customers to those facilities. So that's positive. When it comes to the demand and outlook, I mean, as I mentioned, first, I think the -- if we look a bit backward, Q2 was a very volatile quarter. And by volatile, and that's probably also why I'm so proud about the profit level we delivered with the team. By volatile, I mean that it's not like -- it's landing where we thought it will land, but within the mix of customers, it was a lot of plus and minus, which means that in reality, we have to adjust all the time. I mean it was plus, minus, plus, minus. So it was volatile, sometimes rebounding better than we thought, sometimes people are not coming back to the level we were hoping for. So that's just a bit for the history. Then looking forward, I mean, we see some segments coming back. Obviously, Medtech is one that is clearly showing signs of recovery. Then on the others, I mean, we have seen signs of return to a better forecast. But I think it's still a bit early to be super enthusiastic. But I think that we can see that step-by-step, some customers are getting out of the phase of destocking, and that, we believe, is going to materialize in the next 6 months actually.

Thank you, Christophe, for your response. A question regarding then project wins. Scanfilwon new project with an annualized value of EUR 40 million in Q2 and EUR 84 million in H1. At the same time, some existing project sale -- some product scaled down or up. So the existing before, so kind of they're elaborating a bit whether it's actually adding value or how did it go?

But thanks for that question. I think it's a question everyone would -- wanted to ask. So the one that’s asked it really is helping all of us. Thanks for asking. There are 2 things I would like to explain. I mean, we would have loved to give you comparable numbers, but we realized that -- I mean, we made an effort last year to start to be more accurate on tracking of new projects and their impact, and now if -- and now we are 2 quarters where we have been robust in those so now we start sharing, which means unfortunately, we could not share history in that one. Which means that I will say, as we will go and you will get those numbers every quarter, you will get a much better feeling on okay, what is -- what Scanfil needs to win to deliver the goals they plan to deliver. What I can however say to help you a little bit is what we estimate based on what we have today is probably we need 10% of our revenue every year in acquired new contract in order to maintain our position, and then what comes on top of it is growth. So those are the elements you can take when you want to materialize a little bit, okay, what has come. And if you take that, then you realize like, okay, EUR 84 million in half year is [ very good start of ] the year. If we will continue at this speed for the second part, then we will land with a very nice year. So that's what I can say on that.

Besides volumes returning as the market recovers, what do you see as the most important lever to improve -- to keep improving the margin?

I think that -- I mean there is 2 things. I mean we have set the margin corridor between 7% and 8%. And I think that we will stick to that because we also want to win market share. So that's an element. Then when it comes to improving the margin, we continue to see improvement coming from the modernization we have from our factory. I will say today, Suzhou factory is the best in our portfolio, but we have still investment coming in to improve the other factories. So that we will continue. We believe that digitization or automation brings long-term improvement in efficiency and therefore, help us to increase our profitability and our competitiveness.

A question about the price and mix effect. What was the price [mix] effect in revenue growth in Q2? Or is the decline in the net sales mainly volume driven?

I think the -- as I mentioned before, I think the main challenge we had in Q2 is if you look at Q2 against Q2 last year, last year, it was 2 elements. It was a boom on some of the industry we serve, where people we are thinking about those level that were in the high double-digit range. I mean, for example, I think about Energy & Cleantech, I mean it was going about 30%, 40%. When we know that long term, it's a double-digit growth we expect from that segment, but starting with the one not with the 3. And that obviously makes the comparable very different, and challenge the recovery. Then when we look at the decrease in revenue, it is coming from lower product delivery, which means 2 things. It means that we have still room in our factory to increase and to create growth, but also, it means that we have managed to -- despite this decrease in added value services to be very efficient in what we have delivered.

About the market, how do you see your European market share developing in the quarter? So has there been any changes in the market share?

Yes. I think that when we look at the European market, I think that you can see that -- I will say we have -- it's a complex question, so I will try not to just lost in too many details. But I will say that we can see that we have been maintaining our position quite nicely, and then in a few subsegment, we are actually gaining momentum. I think for us, it's very clear that Energyand Cleantech as usual, we gain more and more new contracts, And also Medtech, we create real momentum. So I think that on the European base, I'm not sure I can talk only about Europe. It's probably on a global basis. We believe we are gaining momentum and position on the 2 segment I mentioned.

About the outlook and market demand is the outlook for end demand now weaker than it was on June 10 when the new guidance was given? So has there been any changes in the market?

I think, as I said, it's very volatile. You should also appreciate we are in the middle of the summer So there are many customer that have not even come back. So I think it's very difficult to comment the difference between June and beginning of August, I mean many people are away. But as I said, we have seen sign of recovery from some customers, but it's very early to say. I mean many people are still in vacation.

Two questions regarding the inventories. Is it fair to assume that [ the real sum ] 10 million to release in inventories going forward for this year? Very specific question.

I think it's a very specific question. I think it's fair to assume that we will continue to improve our inventory position, and we are working towards that definitely.

And then I had a question regarding the same. But do you expect that the desired inventory level will be reached before the end of the year?

Can you take it once more, Pasi, please?

Do you expect the desired inventory level to be reached before the end of the year? So drop that into the model, how much more actually the cash would be coming in from the inventories?

I think we will not give a specific number at this stage. But as I said before, we believe that, yes, it will continue to improve towards the end of the year.

You expect Medtech and the Life Science to recover first. Do you expect the Industrial or [ Energy Cleantech ] to recover second? Or how do you see in Europe 6, 9 months, customer forecast in these 2 segments now?

Yes. I think that Energy and Cleantech we have an extremely dynamic portfolio, and we have quite a few significant new projects started. So in the coming 12 months, they will all pay off. So we are very positive to that segment. Then Industrial is a mix of very many different subsegments, but we believe that some of reach bottom and will step by step come back. But I will say in terms of recovery, probably Energy Cleantech is the one that has the highest potential.

And then there was a question regarding actually the projects for one as a comparison year, but we had disclosed and do not disclose those comparison figures. So just pointing that out again.

And I commented we don't.

Yes. What have you seen from your clients with employment solutions such as heat pumps during Q2? So getting a bit [ of creep ] on energy saving solution and the demand in that segment.

As you saw the segment that was in Energy and Cleantech was slow for us in the quarter and it was driven, as I mentioned before by 2 elements. One was the comparables of last year that were incredibly high, but also a destocking effect. Then depending on customers, we start to see -- first of all, we continue to see interest for new projects so this business continues to flourish. There is still activities to be prepared for the future and therefore, there is a belief that customer demand will come back. And then some customers have started to move forward a little bit, but it is still early and the second quarter was challenging from that perspective.

If there are no further questions, so I hand it over to you, Christophe, for the summary. So please go ahead.

Thank you, Pasi. So when -- as a summary, as I said in -- during the Q&A, I think we see signs of gradual recovery, and it's led by Medtech and Life Science, where we have here very clear momentum being built. We are also quite pleased with the new deals we have won during the first life -- half of the year that was significant and that was also good in the quarter. EUR 40 million in the quarter, we believe, is positive and means that we are there with our customer and making sure we -- we follow them, we help them and they appreciate that. I mean, it's the deal they give us, it's the price they give us. It feels good. It feels really good. And then also very proud of the operating margin, we reached 7.1% in the current market situation, not only with the lower volume, but also if you heard what I said with the volatility we had to experience during the quarter. I think it's extremely hard work from if they want to reach that, and I would really like to thank everyone for that effort. And then net cash flow from operation was positive, which all in all means that we have a positive financial situation very healthy, a debt level that is, again, very low that allow us to be prepared to finance growth and we have started activity in that field. So as I said before, I mean, we are now bringing up new customers as part of our segment strategy that we have implemented. We are gaining new projects as we speak and we have a healthy pipeline of new customer and new customer projects so that's very pleasing to see. In the same time, we have started to work hard on the growth on the organic, obviously, as I have mentioned before, but also on the inorganic, and we hope to start to make progress in the future. So with that, I think it was a challenging quarter, challenging market situation, but a very good effort from all teams. I want to thank you for listening for today, and please reach out to Pasi if any more questions.