Scanfil Oyj (SCANFL) Earnings Call Transcript & Summary

Welcome to Scanfil's Investor and Media Conference. My name is Pasi Hiedanpää. I am the Investor Relations and Communication Director at Scanfil. Yesterday, we announced the acquisition of ADCO Circuits. Our CEO, Christophe Sut, will present the acquisition in brief. We have Q&A at the end of the presentation and all the questions will be addressed there. Now handing over to Christophe. Please, Christophe.

Thank you, Pasi. And thanks to all of you for joining with such a short notice. We really appreciate the [ effort you make ] listening to us and trying to understand what happened last night. If we move to the next slide, Pasi. Just to remind everyone, I mean, we announced a bit more than a year ago that as part of our strategy and in order to fuel growth, we will return to an M&A agenda. And we did during the fall last year, acquiring SRXGlobal that gave us footprint and expanded footprint in Asia. And as you know, we are working as we speak, to increase our capability in Malaysia to grow that business. In the same time, we had also announced and been clear on the fact that we were looking for an expansion in America, where we have our smallest region today. And that's what we will actually cover today since the acquisition we made yesterday is actually in the U.S. If we move to the next slide, Pasi, here, you can see the footprint of Scanfil today, where we have 3 factories that are located in Asia, 4 in Northern Europe and then 3 in Central Europe. And once the acquisition of ADCO will have been closed, we will have in North America, 2 operations, 1 in Atlanta and a second operation in the north of the U.S., close to Detroit. If we go to the next slide and look at the company in brief, I mean ADCO is a company that was established in 1981. She has been grown and developed and been owned by the Damman family. Mark Damman, one of the brother has been and is currently CEO of ADCO. He will actually continue as part of Scanfil and keep the minority shareholding of 20% in the company for the time being. The company is in the range of EUR 30 million revenue with an EBITDA margin of 11.4% and has a strong customer portfolio in aerospace and defense, serving American manufacturers that are either sales on the U.S. or also export and outside the U.S. We have -- they have a focus on electronic and a strong knowledge on electronic manufacturing, 3 assembly line located on their site in Detroit and a strong team that is extremely experienced when it comes to electronic manufacturing to mastering standards in the MedTech sectors, in the defense sectors and as well as automotive, which shows the quality of their quality system. They focus on electronic manufacturing and have a complementary business on box build for Industrial customers. When it comes to the acquisition in brief, the enterprise value was established at EUR 21.7 million. We will have a purchase price based on 80% of the share, which is estimated to be EUR 13.6 million and to be paid in cash. The closing of the deal is subject to some regulatory approval, and we expect that to be granted during the third quarter and from there, have start of having ADCO as part of Scanfil. As you will have noticed, actually, this acquisition is something that was absolutely in the range of what Scanfil can do and will actually keep our net debt ratio far below our target of 1.5 that we communicated last year, which means that we will still have the firing power after that acquisition has been completed. Going maybe a bit more to the next slide, Pasi, to some more details. All operation and staff are today based in Rochester Hills. It's 45 minutes more or less north of Detroit in Michigan. They have facilities of 5,000 square meters, where we have currently 120 employees, 3 SMT lines that are running in that operation. And actually, that factory is running in 1 shift at this time, which means that it has room for growth even within the current space and with the current equipment. As I mentioned before, it is a very strong competence in that factory. I mean the people running those operations have long-term experience in the EMS and electronic manufacturing industry and therefore, have developed a very, very, very strong capabilities in that operation. Moving to the next slide. So if we look at a summary of that acquisition from a customer perspective, it increased actually our penetration on what we call aerospace and defense since 37% of the revenue of the company is in that field. It will actually double our revenue in that area once the acquisition is completed. It has also a growth opportunity in Energy, Cleantech, MedTech and Life Science. We have even a few customers that are joint customers. And I would say on those customer segments, I mean, the couple of customers we have spoken since we signed the acquisition have been very positive to the news and very supportive to the news, which is very, very positive for the future. In terms of geographical expansion, as we had mentioned before, I mean, we have a willingness to grow in U.S. And obviously, it will more or less double our size in North America, still a lot of room to grow in North America, but it is a big step. And I believe that having that facility in the north part of the country and another one in the south part is giving us a lot of strength with our existing customer as well because it gives us the chance to have redundancy. It also gives us the opportunity to have an expanded offering since ADCO has a Proto PCBA service manufacturing and good NPI capabilities, which will also support our Atlanta site that is developing in the field of electronic manufacturing. When it comes to the value creation piece, we get increased presence in North America and very strong PCBA experience. So that's also positive for our customers that are currently looking at localization, and that is a positive element. As we said, they have a very good quality of operation and a certain number of certificate that are both in the field of MedTech, automotive and defense that we will be able to leverage on. And then finally, but not least, they have -- we get the opportunity with new employees, new colleagues, competence and the chance to grow the business more. One thing I didn't mention, which is still important is, of course, joining Scanfil, they will benefit of the bargaining power of Scanfil in terms of purchasing of components, which we can see also in the case of previous acquisition we have made is a very good attribute for people, for company joining us. Moving to the next slide. In terms of positioning, I mean, this is a perfect match with Scanfil. They do high mix, low volume. They do industrial customers, MedTech, Life Science and also Energy and Cleantech and they have PCBA and box build manufacturing. So totally in line with our strategy. Next, in terms of customer portfolio, their top 5 customer weighs around 50% of the revenue of the company. And as you can see, MedTech and Life Science is in the range of 10%. Then comes Aerospace and Defense with 37%. And then finally, Industrial, the way we split our business, representing half of the revenue. And then a certain number of certificates to serve those type of customers. Moving to the next slide. Turnover for '24 was in the range of EUR 30.6 million with an EBITA percentage of 11.4%, EUR 3.5 million, which showed the good performance of this operation that has had a long history of very strong cash conversion. So that is very positive. The production facility will not be part of the transaction and rent expenses will actually affect EBITA by EUR 0.3 million to EUR 0.5 million per year. Summarizing what you have seen before we can open up for Q&A. The acquisition of ADCO is a step for us to speed up the execution strategy when it comes to what we presented a year ago, both increasing our presence in the U.S. and getting a platform to grow there, but also transforming our willingness to do acquisition that fit our strategic match. And I think from that perspective, as you have seen before, ADCO is matching perfectly what Scanfil is looking for. I think the second element is that we get here the chance to have a very complementary offering against Atlanta, both having the capability to have different location in the country to have redundancy, to have different competence as well. They have, as I mentioned before, prototyping facilities. That's something we were missing in Atlanta that was a bit of a challenge lately. So that will be very, very positive. And also will enable us to start to have a stronger sales penetration on the market because of the size we are starting to build in North America. So in summary, I will say we are very pleased to have signed an agreement with the owner of ADCO. And because I think this agreement is really an industrial logic between the 2 companies, Scanfil wanting to grow and develop in the region and ADCO and the family owning the company wanting to find an owner that gives a perspective to the company. So very pleased with the development.

Now we're getting to the Q&A. There are quite many questions if I start shooting those from here. Just a sec. First question, how has ADCO's profitability evolved over time? And what are the key drivers behind its strong margins?

I think that -- I will say the ADCO profitability has slightly improved and has been for quite a long time at a quite high level. I think there is one main driver here is I think they have first developed a very strong competence in linking high mix, low volume with prototyping, which allow them to offer a very good quality of service to their customer. I mean it was -- I was mentioning a few calls that happened last night with some of their key customers, and that's something also they confirm once more. So I think that's a very good quality of service. And then they serve quite complex manufacturing and requesting quite a few approval and quality standards to serve those markets. So they have a good -- they are playing in a good market and bring added value to manage that complexity and such request of high quality. I would say the Aerospace and Defense part of the business [indiscernible] is obviously one of the driver of that profitability with all the characteristics it has.

Question actually continues. Is the current level sustainable? How do I see it?

I think that we believe that the current level has been sustained for a very long time and should be sustained in the way it is. I mean there is added value and there is a recognized good level of performance from the company. So I think that when you are on those niche market, I think you can definitely continue it. And when we talk about niche market, it's still a market that are very sizable.

Okay. Question regarding defense customers. Does this acquisition help you to increase business with old or new defense customers in Europe due to, for example, more credibility or new capabilities to serve this special segment?

Yes. I think there is 2 answers to that. I mean one of the answer is obviously, even the American customer they are delivering to have export business. So they benefit from the global trends of increase of spend of defense. Then obviously, as we are growing and you know we have already a few companies that we are serving in that field, it's good now that we have a new site that have strong competence, certification and experience. And I believe that it will help us both to build credibility with customers, but also to build the knowledge within the company.

Okay. About the lease deal what we have with the factory, will the factory itself be subject to an ordinary lease?

Yes, we will not own the -- as it was mentioned, we are not owning the property, but we have a long-term lease that has been agreed as part of the acquisition.

Additional question actually regarding the facility -- sorry, a lot of questions popping in at the same time, to keep a track on that. What is your view on the lease terms? Can you expand further in the existing property?

Yes. I think my view is very positive because I think, obviously, the family will keep owning those facilities. They have -- and Mark has definitely an interest to facilitate the expansion of the company because of his remaining ownership in it. On top of that, there is both capability to increase our revenue with the current machines because you know that there is only one shift running right now. But also there is within those facilities, a possibility of -- within that land, possibility of expansion, meaning the whole land is not used as of today for manufacturing. So there is both possibility to grow in the current factory space and possibility to expand that factory space. And that has been, I will say, taken into consideration as part of the negotiation.

Okay. About the remaining 20%, which Mark will hold, is there any earn-out related to remaining 20% of the company?

I think, obviously, the fact that we will have a 20% ownership in the company gives him the opportunity to increase the value of the company. And that's the whole construction behind it that it will remain for a period of time, and they are giving the opportunity to sell it to Scanfil at a later stage on an agreed terms.

Regarding our M&A strategy, do you prefer acquiring companies of this size, roughly 3% to 5% of your revenue? Or are you aiming for larger acquisitions?

I think that what we have said is that we aim at 10% growth on a cycle basis and half being acquisitive and half being organic, meaning that basically, we need to buy for 5% per year, if I make it very simple. That company gives us that number. Then does it say that it's the only size we want to buy? No, we will consider a bigger company, and we are considering a bigger company. But in a way, this size is very satisfactory when we get the right price, the right profile of company and in a way, it helps us to achieve our long-term targets. So it's not a limitation, but it's a sweet spot when you find the right target.

A question regarding ADCO Proto. What is ADCO Proto? And does it directly generate revenue?

Yes, absolutely. ADCO Proto actually is a service that they offer to their customer to build prototype in pre-industrialization phase, and it's actually a service that generates revenue.

Still about the 20% seems that this is a subject for many people. Do you have an option to buy the minority stake out in the future?

Yes.

Given only one shift and procurement synergies, would it be logical to assume increased margins if you succeed getting new business there?

I think it's a question where you can answer yes, no, maybe. It will obviously depend on the type of profile we -- and type of customer we bring in. But I think at least we can hope to maintain and sustain the level of profitability. And obviously, if we would have to increase significantly, we will also have to make investments. So I think that counting on keeping the level of profitability and increasing the revenue is already a very positive story.

Okay. A question on procurement. You said this acquisition will benefit ADCO in purchasing components. How will procurement purchasing change at ADCO post acquisition?

I mean that's something that we have started to roll very well with the SRX acquisition, where we basically review all the components that get consumed by our companies and make them benefit from our global contract. And with all the semiconductor player, we have global contracts, special payment terms and prices that are negotiated. And you will easily recognize that when you are a EUR 900 million company or a EUR 30 million company, I mean, you obviously get different conditions. And that's usually the way we benefit from those type of acquisitions for the acquired companies.

Seems that currently -- to the summary. If there are no further questions, so let's wait for a bit more. Okay. No further questions. And if you come up with any questions, so you can directly always contact me or Christophe or Kai as well. Now handing back to you again, Christophe, for the summary.

Thank you, Pasi. So as I said, I am very pleased of closing that acquisition. I think there is -- maybe one reason I have not fully highlighted is or highlighted in north is I believe not only a company that fit us strategically, we have met people that fit us culturally. It has been a very constructive process, very constructive discussion, very easy to align on our joint goals and ambitions. So for me, it's probably the most important things when you do an acquisition of that type that you feel that not only we are in the same business, but we see the future the same way. So it's a big step for us. We will double our size in North America. As you have seen also, Christina Wiklund, that is our current Chief Commercial Officer, will take the lead for that region, which will allow more focus and more customer focus in the region. So really looking forward to that development. Thank you very much for joining us today. Very appreciative that you took the time with such short notice.