Scanfil Oyj (SCANFL) Earnings Call Transcript & Summary

Good morning. Welcome to Scanfil's financial statements report webcast presentation. My name is Pasi Hiedanpää, I'm responsible for Investor Relations and Communications at Scanfil. [Operator Instructions] Together here with me is our CEO, Mr. Christophe Sut; and CFO, Kai Valo. Now handing over to Christophe Sut, please.

Thank you, Pasi. And wishing you welcome for this Q4 report. Let's start. First of all, I wanted to go on a few key events that we had during the quarter. It was a very eventful quarter. And on the customer front, we started to see a very difficult market on the Medtech & Life Science, which translated both in increase of customers during 2024, but also a return to growth if we compare this quarter to the same quarter of last year. So from that perspective, a very positive quarter for Medtech & Life Science. On the internal side of the company, we announced just before -- just at the end of Q3, an evolution of our organization and the creation of 4 region. That has been implemented during the quarter and that's been running full speed from the beginning of this year. So here, as well, things have been delivered on time and delivered as planned. The last quarter was also very active on the sustainability front. We continue to implement our plan and have also been working on our CSR reporting that you will discover in a few weeks from now. So there, as well, good development. Looking at the last point, which is acquisition and investment, we announced at the beginning of first quarter the acquisition of SRXGlobal, that gives Scanfil now presence in Malaysia and Australia and also a new portfolio of customers. That's an acquisition that was very welcomed by our customers. And we have, following the first months, taken the decision to increase the capability in our Malaysian site, where we have secured additional manufacturing space. And we have also announced the investment of a new SMT and THT line that should be up and running during this year. And this investment is now already starting to be under implementation. So as you can see, just taking a few element of it, a few transformational activities have been going through during this quarter for Scanfil. If I go back to the change in organization, it means that we have now 3 new members in the management team, and at least 4 persons that have new position. Anette Mullis joined us during Q4 as Chief People Officer, and she has a long-standing experience in human resources and will help us in our goal's journey to make sure that we able to grow talent and attract talent. So very happy to get Anette as part of the team during that quarter. On the other side, you can see that we have now 3 new regional president. All of them actually come from the company. Starting with the first one on the list, Steve Creutz, that is now VP of Northern Europe. He has a long-standing experience, has been running our Åtvidaberg site in a very successful way. Has a strong commercial background, which we believe is what is needed for our Northern Europe region. So very happy to have Steve part of the team and that he accepted the challenge. On the APAC region, since now we have Suzhou, also SRXGlobal, being part of it. Christian Kesten that has been, for quite a few years now, running our Suzhou facilities has accepted the challenge to run the APAC region. And he's now full speed continuing the development of Suzhou that is clearly a top-notch facility for Scanfil, but also bringing the SRXGlobal team alive and as a new member of the Scanfil community. So very pleased to have Christian on board. And then last but not least, Markku Kosunen, that has a long-standing experience already in our management team, has been running operation in the past, has been running also supply chain, has accepted the challenge to run our Central European region, which is a key region. We have a country like Poland, where we have 2 very significant facilities, but also Germany. And his broad experience and understanding of the company will help us to continue the development in that region that is strategic for us and our customers. So things went well and things went as planned. On the -- now going to the number and to some more fact-based element or tangible elements. Fourth quarter was EUR 212 million, negative 4% compared to last year, and organically, negative 8.8%. It was a solid quarter, we believe, in execution. Profit margin was EUR 14 million, which was the highest level of profit margin -- the highest level of margin this year, and at 6.6%. The quarter was impacted by some material sales that, in a way, diluted percentage of margin. So if you will shave that out, you will realize that the underlying profitability based on our operation was in the range of 7.3%, which is in the corridor we aim at. So it was a positive development there. On the business side, it was a very active quarter. We won deals, and I will get back to it a bit later, for EUR 61 million, which makes it a very dynamic and very active quarter, bringing new customers and also new projects from existing customers, which is a good mix. And then as we have done for the rest of the year, we focused on efficiency and making sure that we were adjusting our size to the size of the business we were facing. As you can see, the quarter in revenue was rebounding against previous quarter, so ended up a little bit stronger than the quarter of this year, which was a positive development. And obviously, had a positive impact on our margin as well, where, as I mentioned before, we have actually, in value, the highest quarter with EUR 14 million, which was also a positive development for the company. When we look at the customer base, we have a stable customer base, even if there are movement in it in terms of growth or a slight decline from some customer related to the development of their business. But we keep having very good spread in our customer. I mean the biggest customer is now landing around 13%. And after that, we have our top 10 customers that are in the range of 50% of the total revenue. So quite spread. And within those customers, it is usually big names. So which means that it's usually several companies that are building that portfolio. So I think there, I will say, no big surprise. The continuous improvement and continuous development has been mainly the [ word ] with the customers. Looking now at the development of our different segments. The segment -- the Industrial segment declined 5% year-on-year, but had a very positive development in terms of won deals in the quarter. I mean as you can see, EUR 31.6 million was definitely the highest quarter in the year in terms of winning deal for that segment. We had the pleasure to win a couple of deals for the mining industry, which will come in manufacturing in the coming year, which actually made the difference for the quarter. So pleased to see that the long-term effort we have seen building relationship with customers are paying off and translating into a deal that we can win. Energy & Cleantech rebounded from previous quarter to about EUR 20 million. And there, it was mainly a spread of a new contract that we are acquiring with existing customers in terms of won deals. In terms of revenue, we were negative, about 8% versus last year. It's a segment that has been, as you have seen, suffering the most this year from the correction. But we still see very dynamic development in terms of number of projects and opportunities. And our portfolio of clients there is getting stronger and stronger quarter after quarter. And then finally, as I mentioned, 1 quarter that we were very satisfied -- one segment we were very satisfied with is actually Medtech & Life Science. That grew over last year by about 8% in terms of revenue, and that's obviously something that is pleasing. It shows the long-term commitment we have with our customer and the good quality of service we can provide them. But also grew in terms of deals we won. Since this quarter, we were very close to EUR 10 million of new deals, which was record a quarter for this year in terms of new deals both in the company. So that's a segment that we are happy to see that the efforts we have put during the year, both in getting new certification, making sure that we beef up the teams in terms of sales and get close to our customers, those efforts pay off again during this quarter. On the ESG development, we have a reduction of our CO2 emissions since we started the journey by 52%, which was positive. We are also reducing the share of -- increasing, sorry, the share of fossil-free energy. I mean we did last year a significant investment to our Suzhou facilities where we have installed solar panels. That is slowly starting to help the development since it came late in the year. And then on employee satisfaction, we remain at a high level. We are a little bit down previous year. I will say mainly the main challenge was actually our Polish operation, where we have had actually quite a lot of resizing because of size of the business, which will obviously affect a little bit the employee satisfaction in here. But something we are working on. And obviously, new projects coming in will create a different dynamic there and are creating a different dynamic. Finally, I would like to give you the picture of 2024. 2024 was a challenging year when you look at the market, and you all know that. But in many ways, I'm very satisfied and very pleased to see the work that we have done. We reached EUR 779 million, which was an organic growth negative of about 15%. But despite those circumstances, we managed to deliver operating margin level that was in line with previous year, and in value, EUR 53.1 million, which was a challenging year to go through. But in many ways, good, because we could also work on our productivity and how we improve our company in those difficult times. So very pleased to see. Then in the same time, we kept moving forward with our strategic initiative. And it translated in new deals that we won, EUR 187 million, we believe, is a significant number. Even if it will take time to implement, but it's a good number. And we also acquired SRXGlobal, which was something we mentioned at the beginning of the year was important for us to be active again on the M&A front. So that was also a positive element. And all of this brought us to -- and the Board to suggest a dividend of EUR 0.24 per share, which then allow us to continue our journey to move upward in terms of the dividend level we can offer to our shareholders. So I will say, in many ways, a year that was positive and that was building the company in a good direction. With those words, I will now hand over to Kai, our CFO.

Thank you. Yes, I will deep dive a bit further in the P&L and the balance sheet, cash flow and the key figures. And starting from the Q4 operational expenses and operating profit. On the left side, you can see the operating profit the last quarter of 2023, and then on the right side, you can see the operating profit of last quarter of last year. And the improvement, like mentioned, EUR 0.6 million improvement in the operating profit. How we end up from one figure to another? Turnover, like mentioned, was still declining, 4% and almost EUR 9 million. But then what we did good is that we were able to improve our operational cost and operational efficiency, and almost cover that with the lower expenses, almost the same amount lower expenses than we declined with the turnover. There was also a change of inventories, nearly 2 million finished goods inventories at year end, which then related to the year-end deliveries, whether they are recognized as revenue or inventory. And inventory were growing, not recognized in the revenue. So it means that the production volume at the end of the day was EUR 2 million higher or less lower than what the turnover would look like. And resulting from that, then the operating margin increased from 6.1% to 6.6% year-on-year in the last quarter. Looking at the full year in the same manner. Left side, we have full year of 2023, and then on the right side bar is the full year of 2024. And from EUR 61.3 million operating profit, we declined to EUR 53.1 million, about EUR 8 million lower. But how we end up there is -- looking to turnover. Turnover dropped by more than EUR 120 million and about 13% decline in the revenue. And again, we were able to mostly cover that with our operational cost improvement. Of course, that in a full year level, it's not -- things are happening gradually and you are not able to do the improvements in day 1. And for that reason, it's not like totally same effect as in Q4, but very good result. And operating margin was actually then ending up to be exactly the same 6.8%, with significantly lower volumes. So from the operational efficiency point of view, very good result. A few highlights about the balance sheet. First of all, inventories, EUR 170 million, roughly. EUR 40 million less inventories than a year ago. And that is including some increase, EUR 6 million increase at year-end for SRX and some foreign exchange rate differences. And from the cash flow point of view then, the inventory reduction was more than EUR 50 million, which is probably more correct figure in my mind. Very good improvement, and that was like strengthening the balance sheet. We can see -- part of the effect we can see in the cash, which we had EUR 50 million at year-end -- and actually EUR 50 million is higher than our financial debt loans, because EUR 70 million of interest-bearing debt is including about EUR 27 million of leasing liability. So we have more cash than we have like financing debt. Fixed asset, slightly growing. Part of that, maybe half coming from SRX and then half is in investments in operational efficiency and customer needs and requirements. Equity, nearly EUR 300 million out of EUR 540 million of the total balance sheet. And if looking at the equity per share, we have now EUR 4.5 million (sic) [ EUR 4.5 ]. If hypothetically we would like sell all the assets and then pay all the debt, you would have EUR 300 million left and then EUR 4.5 million (sic) [ EUR 4.5 ] per share, which is quite good. Then net cash and more looking on the full year level. So the last year, we generated cash flow. I have been asked that what are the possibilities to generate cash in our business, but obviously, we have been doing quite fine, EUR 92 million last year. Like I said, about half of that is coming from the -- or more than half, EUR 50 million, is coming from the inventories and then the rest from the profitability. And then the year before, we have a high growth year, but still EUR 70 million of increase and -- or cash. Then the year before, which was '22, and a very, very challenging year from the component market point of view, still was EUR 10 million positive in cash. So there is no, in the near past, any negative years with the cash flow. And vice versa, a very good year last year. Net debt, we ended up to EUR 21.2 billion. And like mentioned, that excluding the leasing liabilities, then we would be basically no net debt at the moment. It increased a bit from the previous quarter due to the SRX acquisition. Acquisition was more than EUR 20 million -- or EUR 30 million as a total. But then the net debt is due to the good last quarter, it increased by EUR 10 million from the previous. And we have liquidity level of EUR 140 million. And then why is that important is that we need to have a certain level of liquidity to be prepared for working capital needs or be prepared for investments and also some level of acquisitions with this. Of course, we need also some like fuel in the engine all the time, so that then all EUR 140 million is not available for investments or other purposes, but a big part of that could can be used. And then EUR 90 million is unused credit facilities and EUR 50 million is in cash. And key figures. Equity ratio, strengthening by increased equity. And then balance sheet, actually total balance sheet, increasing a bit less than equity because of the reduced inventory significantly. Net gearing is a bit like opposite of equity ratio, debt lowering and then total equity growing. So the ratio is very low. Return on equity, lower from the last year. Quite naturally because of lowering euro value of operating profit and the net profit, and also that increasing equity value. But still, not too bad level for the -- maybe for the challenging year. And then earnings per share, EUR 0.6, and previous year, EUR 0.74. Out of which, EUR 0.6 million, we have decided to -- or we are proposing to pay the dividends of EUR 0.24. That's all from my side, and I hand over back to Christophe.

Thank you, Kai. Going to outlook. We see '25 as a growth year, back to positive journey. We have given guidance, EUR 780 million to EUR 920 million in terms of revenue. I will say there is 2 things to consider in it. One risk is obviously the geopolitical and overall world situation that can obviously constitute risk for any company today. On the positive side, however, what we can see is we have quite a few customers that are in project business and that are still having quite significant opportunity that could transform during the year. So that also explained a bit the big windows we have in the sense that, still, quite a few things can happen this year that could be very positive to us. And it obviously impact our profit level, where we have also a positive development moving from EUR 53 million to EUR 66 million in the window. And there, as well, reflecting the belief that we have now a good understanding on our cost base. We have a good understanding on the market situation, our opportunities and good control of how to steer the company and build profit. And we are confident that this year brings us back to the corridor we have wanted to go, and the growth will help us to in that journey. We see the year moving from the first quarter that is going to be a focus on ramp-up activities to build the growth that will be delivered later in the year. So the first quarter is important on the operational side, just to make sure that things get in place to deliver a strong remaining part of the year. We will remain, in '25, with our focus area, which is to build pipeline and continue to acquire either new customer but also share within the customer we have today. And that's obviously a strong drive for Medtech & Life Science, but also for Cleantech. We will continue our strong activities in terms of cost control and inventory improvement. I mean we believe that we still have room to do better. I think we have obviously captured a big chunk of that opportunity when it comes to inventory. But we still believe that probably 1/3 of what we did last year is still feasible for 2025. And then we are also, on the cost control side, working very thoroughly in the company to make sure that roles and responsibility are clear, and that accountability is built across the organization and as close to the customer as possible. And at the same time, we continue to have an appetite for M&A, and we continue to build pipeline and analyze, monitor and review potential cases. So we believe that '25 should also bring M&A and potential acquisition to the overall picture. With that, I will hand it over to you, Pasi, for questions.

Thank you. I think that you closed your part to the kind of the part where it also continues in the question side. So it's about the defense and M&A. Europe needs to increase production of defense products, are there product categories which would offer a significant growth opportunity for Scanfil? That's the first one, if you want to take the first one.

Can you just read it again?

Are there product categories which could offer a significant growth opportunity for Scanfil in certain areas?

Yes. I think there is a few things. There is a defense aspect that you mentioned. There is also Medtech & Life Science. I mean we have had a positive momentum there, and we have strong position with our customers. So we believe that, short term and for 2025, is something that will pay off and that will bring growth for Scanfil. Then when it comes to defense, we have a small exposure to that market today, but a few very successful company that we believe will continue to build momentum and that we are working very close with them. That's one element. The second element is we do not exclude the possibility to penetrate that market through M&A if the opportunity comes.

Okay. You took actually the second part of the question already. So can Scanfil take advantage of acquisitions in different areas to accelerate growth? Yes, so it can.

Yes, we believe it can.

How do you view your current momentum in new sales going into 2025?

Yes, as I mentioned in my closing comments, I believe that Q1 is a critical quarter for Scanfil because we have quite a big amount of new project implementation that are in the pipeline. If you look at what we captured during '24, as of today, it's only about 20% that is in manufacturing. So quite slow, and that needs to ramp up. So I would say that's the plan. Q1 is really a quarter where we need to invest to make sure that we gain the momentum that will translate steadily Q2, Q3, Q4.

Yes. Thank you. And sales wise, was there extraordinary cases in Q4?

That's probably the good news that it was no -- nothing extraordinary in Q4, but more normalizing sector. So if you look at Q4 sales wise, you will see from all our customer base and Industrial and Energy & Cleantech, it was a stabilization quarter. And then for Energy & Cleantech, it was even a rebound compared to the number we have had.

Thank you. About the customer satisfaction, how did Scanfil customer satisfaction develop in second half of 2024? I do not remember myself, at least the number.

We can come on that. I think that we had, on the second half of '24, a customer survey and I think that it has developed very positively. We reached, I would say, the best rating from our customers during that part of the year. Which is pleasing, because the least we could do is volume reduction was to become better in our on-time delivery. And there, we have been quite high during the whole year. So it has been a very positive development. And when you see the number of deals we have won, I mean you can see that a big chunk of it comes from customers that had the relation with us. And obviously, if they are happy, they are more willing to give you more business.

Digging deeper into the NPS and the part of that, which are the main areas in which Scanfil must do better to improve NPS in the next years? So the development areas in customer satisfaction.

In customer satisfaction? Well, I think that we have -- I believe we have a good path in being close to our customers and being proactive in our communication on opportunities and the risks we see on the market. And therefore, I think it's not a magic bullet there. I think it's -- we should continue that, continue to create a very close relationship and, I will say, tackle the challenges that can come together. I mean a good example is what's going on now with the situation when it comes to potential tax duties. We try to be upfront and very close to our customers to tackle that. And I think that element, that you built up within the company at all level of the company, that will help us to build a long-term, sustainable good results for the survey.

So proactiveness and open communications.

Yes.

From there, actually, to the geographical regions, how do you see demand outlook geographically in Europe, China and the rest of the world?

Yes. I will say that, obviously, for -- I think we have 4 region, and what will happen is you will get the numbers of those regions to get familiar with it. What we see in China, I mean, China is, for us, as I said, a very good operation. And we have long-term relationship with customers that wants to utilize that facility even more. So we see the outlook positive on China. We have no worry there. I think that it's good. When look at Europe, what is key for us and strategic is our Central European operations, where we will have a significant work ongoing at the beginning of this to ramp up projects for some key and strategic customer. So I think that, long term, we have positive outlook on Europe as well, but mainly driven by the good development we have had with customers. Then it might take a little bit more time for our existing contract to regain volume.

Yes. About the pricing environment for 2025, what kind of pricing environment do you expect for this year in the guidance?

Yes. What we believe is that the price -- the market situation will probably remain quite similar to what we have had last year, which means that probably the supply side will remain not too tense during this year. So we don't expect major changes in the year.

Okay. Thank you. How do you see the ramp-up schedule for contracts won in 2024 entering production in 2025? I think that was maybe partially already closed in the presentation. But please, can you emphasize again?

Yes. As I said, I think that -- I believe that, Q1, we will make a lot of effort, but a little outcome of those contracts. And then it will gradually gain speed Q2, Q3 and Q4. But I will say, already Q2 and Q3 will start to have a significant impact on those new contracts coming in, actually.

Okay. Thank you. Can you expand anything around the 2 large climate change orders won in the quarter in Q4?

Yes. Obviously, all we cannot disclose the detail of it. But what I have said before, we have a good footprint when it comes to this type of activities. And we have good footprint with leading company and leaders that are, today, moving towards Scanfil as a strategic supplier. So I will say those contracts are logical steps in the partnership we have created, and they are building up for the future and they are putting Scanfil in the heart of those customer system as a key supplier. So that was very pleasing. And from that perspective, we are also very confident on the development of volume that, that will bring.

Yes. Maybe to elaborate a bit, that the climate change mitigation contract was a new customer and the other one was actually existing customer.

Yes.

Thank you. [Operator Instructions]. Let's wait for a short while. If there are no further questions, so handing over again to Christophe, please?

Thanks, Pasi. Now let's see. Okay. So I wanted to finally close '24 and I have a few takeaways for this year. Obviously, if we look at the financial side, we had a positive development in the sense of our margin remained at 6.8%, which shows our commitment to defend our margin level no matter market condition. And that I think I'm very proud about Q4, but I'm very proud about what we achieved there during the year. In the same time, I have said it before, we managed keep going with our strategic initiative, both in winning deals in segments we believe we can bring added value, and Medtech & Life Science being strong on that side. But also following our M&A journey with SRX acquisition. So that was also a positive thing. I think also we managed to balance very well our investment and our cash situation. And as Kai presented, obviously, we had a strong cash flow during the year. We have the improvement in many areas in our operation, reduction of inventory being one of them. But we also managed to keep our debt level low despite the investment we made. So all in all, Q4 was delivering on many aspects, both financial, strategic and preparing for the growth and for the future of the company. So with that, I want to thank you for listening to that webcast and for following us.

Okay. Thank you.