Detection Technology Oyj (DETEC) Earnings Call Transcript

Good afternoon. Welcome to follow Detection Technology's Second Quarter results announcement. My name is Hannu Martola. I'm the President and CEO of Detection Technology, and I'm pleased to present. Second quarter, we reached sales of EUR 25.6 million, which is a 5.1% growth year-on-year, reached EBITDA of EUR 1.8 million, which is slightly better than last quarter, EUR 1.7 million year-on-year. And then EBITDA percentage yielding out to 7.1%, again, slightly better than a year before year-on-year. Where did it come from? So the growth continued. It was very much driven both by medical applications and TFT. Good news is that the TFT growth now started also in the Western markets. But then in total, China weighed on both our security and industrial sales. Total industrial sales was negative 6%. Sales of line scans in APAC, China declined, but then TFT sales grew in APAC, but also in all geographical markets for industrial. Medical sales, strong growth of 21%, driven by global CT demand. But the TFT delivers for medical, I mean, we started to deliver those. Security sales minus 8%, and this is a bit controversial because we had good growth both in Europe and Americas in Western markets, good growth also APAC outside China, but the China security sales declined. The total outcome is minus 8%. Despite this, globally, our market share unchanged. We are a little bit stronger in the Western markets and then in China markets, a little bit -- I mean, some of our customers also are making products for themselves so that they are using two sources, us and then in-house. Net sales by quarter. We see here the past 3 year or 4 year, including '26 impact. First and second quarters this year is up about 9% together. Also EBITDA, slightly better than last time on the reference, which was 7%. Then going into the regional business units. Americas, representing 7% of our sales grew nice 15%. That was quite much driven by security. And this is, I think, also now good news that Americas, we've had some decline in history there and some structural changes. Now it's starting to grow. APAC representing 72% of our sales grew 2%. China declined, but then overall outside China growth. EMEIA representing 21%, a nice growth of 15% and EMEIA also was very much driven by security. And I must note here also that actually we have some shift here on security sales from Europe into outside China in Asia. So that is also affecting these numbers. Then by applications, Industrial, minus 6% altogether; medical, 21%, EUR 13 million; and Security then which is representing 20% of our sales is minus 8%, all counted together. Looking first 6-month numbers, I think nice 9.1% growth. EBITDA, 8.2% and EUR 4.2 million. And first 6 months regional business unit split, Americas, 21% growth; APAC, 6% growth; and Europe, Middle East, India and Africa, 18% growth. And the same 6 months by application, Industrial growth of 6%, Medical growth of 19% and Security, flattish, minus 1.5%. Then looking at the key results and numbers, a couple of things that I would like to highlight. I think the profitability here, 7.1% is very much explained to the product mix. That's something that must be noted. It was quite heavy on medical, and that is affecting the numbers. We also have highest fixed cost due to the fact of building the India factory, old factory and so on enablers for future growth. On investment side, that sticks out investments, EUR 3.3 million. We made long-term investments into R&D capabilities, competencies. And then cash flow negative minus EUR 600,000, two reasons. One is the investments, long-term investments, then the other thing is increasing of stock. Return on assets. Net assets is still quite nice, 19.9% and I expect that for the future, we can improve that. Then what I want to a little bit go through is what have we done in our strategy execution. We have four cornerstones. That's the base on -- regarding our legacy technologies and doing everything better, what we are doing, new growth areas for TFTs, added value, subsystems and then investing into new long-term new technology on foundation of better performing organization and team and more pleased successful customers through ease-to-use products and services from DT. I think this is quite interesting. This is the EUR 65 million target, additional sales of EUR 65 million to be reached by 2030. We have divided this, and this is something we also published at our Capital Markets Day a bit over a year ago. We have divided this into the areas for TFT into the medical industrial CT line scan into security CT line scan and then into security cargo. TFT, by the way, represents 1/3 of this growth, very important for us. So we have now -- we have launched more than 60 TFT products. We have launched world's largest fast panel 43108, and its little brother 4386, which is even faster, but slightly shorter. We've introduced new IGZO-TFT products for both EV battery and energy storage and dental applications. We've launched AIDA for more value-added subsystem hardware, software detector system, X-ACE for high-speed medical CT. We launched AVA for low-cost security, a little bit industrial. And then we have in our pipeline new both low-cost and high-performing CT products, both for medical and security. We launched X-Cargo, which is a very fast detector, especially for trains, cargo detection. And all these together are helping us now to get to our target of EUR 65 million additional revenue. We are working on developing new photon-counting technology, which boosts the growth even higher later on. And then to have the enablers for doing this, we've opened new sales and production site in India. And by the way, it has just been granted a medical device manufacturing license in India. We -- it's very fresh news. We started a new site in Shanghai, not only for better environment for our R&D employees and sales and administration there, but especially for new facilities for testing of products and so on and much, much bigger capacity. And then expanding the European origin capability manufacturing in Oulu, which is helping us further into especially defense area in the Western world. On TFT sales, nice growth of 20% for first half. I think it was 25% for second quarter. But the notable thing here is that actually now TFT starts to be 10%, 1/10 of our revenues. And out of this roughly 10%, 20% already is coming outside of China. So we are very well now moving ahead with our strategy execution and in plans. We've had growth for industrial applications, all regions for TFTs. TFT deliveries for medical has started. And if we look at the order backlog, so the future orders, we have growth in all regions. Looks quite nice. And most important foundation here is that now we have the world's best set of fast and large single-glass flat panel detectors. This is extremely important, especially for defense weapons industry. And to back that up, here are the two new flat panel products. We have 43108 and 4386. As one of our customers stating, a representative from Fraunhofer Institute, which is the largest research institute in Europe. I think Fraunhofer has some 35,000 research people. He said that this is a real game changer for industrial CT. And we are now stepping into the era of quantity. Everybody knows the word of drone. So from stepping from the missile into multiple high-volume drone manufacturing, it's quantity, you need throughput, but also you need the quality. And that's where this X-ray technology steps in. So defense drives now demand for fast and large-scale scanning for high throughput and quality. And this is now positioning after these launches and verified. So we have -- several of our customers have been verifying. Now we need to sell. We are #1 in high-value industrial and defense inspection, large panels, dynamic large panels. Okay. Stepping from products into the reporting. This is something that we are now planning. We are now planning to move into IFRS reporting, first time from the fourth quarter this year, and this would then put us into the same framework with all our peer group. The transition date is 1st of January '25, and we are doing then the reporting fourth quarter '26 as informed. And this is then helping especially the analysts and financial community to really come up with comparable finance numbers. I would bet that it is more probable that our results will be a little bit improve than vice versa, but let's see when we finalize the planning work. Then what do we see for future? Very short term, we see growth. We see growth for third quarter and fourth quarter. Probably the growth for second half is similar than the second quarter from the applications, industrial, expect growing, medical growing, but security declining a little bit. So the official guidance for third and fourth quarter is growth. The financial targets midterm remains the same, 10% growth, 15% EBITDA and then 30% to 60% dividend yield. So this is, in a nutshell, our performance for the second quarter. I would be very happy to answer to any questions if they may arise. Thank you.

This is Nikko Ruokangas from SEB. I have a couple of questions, and I'll go one by one. And starting with security sales, both outlook and sales in Q2. So you highlighted that you are not expecting sales to grow due to Chinese weakness and also some fluctuation in EMEIA market. So can you open the reasoning behind especially the EMEIA market a bit more?

I think if I look first, I mean, the Western market and so on, I mean, they are now we know that we -- our customers have new orders. We know that we have in our order pipeline, for example, products that will end up into the U.S. airports as an example and so on. So overall, we see growth. Of course, there can be some quarterly adjustments and so on. But I mean that market is growing, and we expect to be growing. Then on APAC, also outside of China, we see growth. But then China security market, I mean, high probability, it is declining still. Let's say, the share of our revenues, I mean, from, if I call companies who have headquarters in China. We also have the Western companies in China. I'm not talking of those sort of companies whose headquarters are in China. And many of them, by the way, are government-related companies. The share of our total sales has been constantly, I mean, declining, but also that means that the impact of it will be getting less. Long term, we see also growth in this China-related headquarters. It's just that, for example, there's not very much investments in China in security. And also after the price erosion, let's say, the market size has been changing.

Okay. So that's basically the reason you are not expecting growth in Q3 is due to the China.

Very much so.

Yes. And then you mentioned also the in-housing trend from a couple of your clients. Can you...

It's -- I mean, I think if we look in history, we have had very strong position in those days also, China was by far the biggest market, security market in the world, probably bigger than all the other countries counted together. That passed. We don't think that, that will return in a way. So the picture has changed. Also, we were almost having a monopoly. We were winning almost every single piece. And obviously, we are the first one and we were ready and so on. And now it's becoming more sort of a, let's say, normal type that customers might use 2 suppliers for risk mitigation, et cetera, these kind of things. And this has been the sort of the journey there.

And that considers China.

Yes.

Okay. Then on medical side, you showed strong growth there. So can you elaborate a bit? Was it between China and kind of markets outside China? And how sustainable is the growth rate you are currently having there?

Right now, it looks quite, let's say, sustainable. Nothing, of course, I mean, is ever lasting. But I mean, the thing is we also know that both GE HealthCare and Siemens have come out with second quarter results, and they've had quite nice results on the imaging sector, which is CT is the most important biggest and the highest profit maker there. So this is global. It's a little bit different if we think the China is the global hub for medical. Let's see. I mean, will that change because of India and so on. But right now is most of the equipment and so on are made in China because of the super competitive supply chain and so on. Part of the equipment will stay there. And answering your questions on growth, I mean, we see growth in basically all markets for computed tomography.

Okay. Good. And then the last one from me. Your business model tends to be scalable, while you are now guiding for or expecting medical sales to grow and security sales to decline. So probably the mix will be a bit weaker also in H2. So should we expect relative profitability to improve in H2?

I mean our profitability improves when we -- revenues increase, of course, mix is something that also has an effect. I think from the profitability point of view, medical is high volume. The margins are there smaller, security is -- the volumes are smaller, but then the margins are a little bit better there. And then also, if we look at the TFT business overall, it's -- the margins are quite okay globally. Of course, there's a big variation on the sort of different segments and also the markets.

It's Patrick Campbell from Nordea. You completed some investments in Q2 related to the production process. Could you perhaps kind of explain the rationale behind these investments?

Well, I think the Q2 investments, it's in a way, threefold. We have production investments a little bit for improving capacity and also the, let's say, quality and automation. And then we have investments for long-term R&D.

All right. And just looking ahead, will further similar investments going to be needed in H2? And if so, what is kind of the size of these investments?

Probably the long-term R&D investments are not something that are with us every quarter. So we will see that coming down. The production capacity needs to be seen. We have -- I mean, compared to our revenues and so on the investments, the production are fairly small.

All right. And then maybe on component availability, which you've mentioned earlier, and now you continue to grow inventories. So what kind of cost increases have you seen on the component side? And what is kind of being done to mitigate the impact?

I think we -- if we look at our P&L, you don't see very much the impact in the cost increases there. So a little bit cost increase there, but we have been able to mitigate those with taking more value added in scintillator pixelation. And that's relating to the investments also to Wuxi sort of production and factory.