Detection Technology Oyj (DETEC) Earnings Call Transcript

Good afternoon, and welcome to follow DT's Fourth Quarter Results Webcast. My name is Hannu Martola, I'm the President and CEO. I'm pleased to report to you fourth quarter results. So fourth quarter, we reached EUR 28 million sales and 14% growth. EBIT of EUR 2.8 million, which is about 10% of our sales. Then looking inside. So we had really nice and high growth in both Industrial and Security. Industrial grew 35%; Security, 41%. Medical actually had a decline, went back on 7%. Looking more closely what happened actually in Industrial area, actually, demand was quite strong in all areas albeit within Industrial, we had also much better delivery capability than before. We got some components in December, and we're able then to meet customer requirements. In Security sales, growth was 40%. Actually, if we look inside, very much the Security grew because of new customers. So quite a lot of the, let's say, legacy aviation-related, even CT, we did not see that high growth there. But thanks to new customers, we also were able to deliver nice growth. On the Medical side, the growth came down and especially what we also anticipated before, there were supply chain topics, customers were quite critical on their net working capital and so on. So there were these kind of like stock corrections. Also Medical was still impacted because of the component shortages. Overall, I think we had a very tight situation in December in terms of China and Corona restrictions. I mean early December was quite exciting especially on our Beijing factory and despite all the challenges and thanks to our great team, actually, we were able to proceed through these challenges without any effect into production capability. So we were able to deliver everything that we had on materials for. Also, on Medical business, it was impacted a bit because of the customer payments. We have actually now getting back to the normal phase, we are a bit fat in our net working capital, and we will put a special emphasis on that. And as part of these actions and managing it, we also have made more strict sort of policies on payments and so on. And if I connect these policies, if we don't reach certain payments in time, then we also hold the shipments. So these kind of activities are more stringent in the company. So profitability, it improved quarter-on-quarter. But if we look at the previous year quarter, we had a little bit decline there and because of the spot purchases and some extra costs. Roughly, I think we had some EUR 1 million level of extra cost in the fourth quarter that affected the profitability. And as here, we see this coming year or the year we are living now that '23, we foresee that due to some sales also from last year and even despite the growth we foresee as double-digit growth for this year, we still see it quite probable that the profitability can be slightly below the target level 15, where we're getting closer there, but still it would be sort of quite probable that we would not reach 15 this year. On net sales, fourth quarter was highest so far. If we have to go back to the 2019 and second quarter, which we see there as a second sort of a line there. So we had 27.5 and now we reached 28.2. So it's a good start for the year, having a strong fourth quarter. And we expect the first quarter also to be better than last year first quarter. So reaching 14% growth. On operating profit, 10% for fourth quarter is not at the target yet due to these onetime effects and so on, but I think the trend is very good. Quite interesting here is then if we look at the sales split by business units, then that we are getting, both IBU and SBU, which, by the way, historically have been about 60% of our sales. and Medical about 40%. So that now has started to change. And SBU and IBU are now starting to pull the growth for the company. MBU was the growth engine for the company then through the pandemics. Also then the same kind of a phenomenon we can see here that through the pandemics, actually, the Americas and European, Middle East, Africa sales have been fairly sort of small. So now even 80% growth in Americas, that's percentage-wise is very big, but okay, the sales is small. But then Americas already were 12% of the sales. Also, Europe, Middle East, EMEA, Middle East Africa was 22% and the Asia Pacific, which also through the past couple of years has been very, very dominant, now is at 67%, and we see that this also sort of scenario is quite good, having more balanced global business portfolio, even though, of course, Asia Pacific is 3/4 of the global population. So that's very important for the growth. On total year, we reached 98.6. We are a little bit shy from 100. I mean we would very much have liked to be there. But I mean due to this being more stringent with the payments and so on, that cut off a bit of our sales, and we landed at 98.6, which still is roughly double digit for the full year growth, which we see, to the circumstances, is quite okay performance. Then if we look at the full year profitability, that is not okay. It's far from okay. We have too many onetime issues on '22 that affected our profitability and the result was single-digit EBIT. One full year then, business unit-wise, I think actually, the fourth quarter probably gives a better picture on what's going on for the years to come, but MBU full year was like 50% and IBU, SBU less, and then full year, both SBU and IBU delivered nice growth and MBU was staying flat. And then the split by region, Americas roughly 10%; Europe, Middle East, roughly 20%; and then Asia Pacific, about 71%. And as we remember a couple of slides before, the EMEA and Americas were sort of even higher than here. On then financial side, I think something to note here, if we pick up the single most positive item here is the cash flow. I mean, despite the fact that the cash flow was slightly negative for the full year due to especially the high growth in the net working capital, then we still were able to deliver fourth quarter a nice cash flow of EUR 3.7 million, and that also is a good start for the '23. Then R&D, full year R&D was quite much higher than last year in monetary terms, also slightly higher in the percentages. We spent 12.7% to R&D in '22. And then during the fourth quarter, it was 11%. That is a bit higher. This 12.7% is a bit higher what we actually see as coming for the '23 and beyond. Investments were quite small. Full year investments about 1.6 due to the fact that we did fairly little investments and didn't have a need to do investments to production equipment and capacity increase. It was mostly maintenance topics there. On strategy highlights. Good thing is that roughly, we got actually 20 new customers. So we have been very active, if you remember also during the '20 and '21, we were able to win new customers, and that's very good promising growth for the company growth for the future. We also announced late last year that we will do some capacity and production investments to Oulu, enabling us for the customers who wish to have more like European origin or Western origin products, we also then have possibility to do the final assembly, and it will enable roughly 10% to 15% of our sales to be manufactured in the rest of the world outside China. Some product releases, most important was the X-ACE computed tomography product. And then we did a lot of product modifications. So that 8, 1/3 of our R&D capacity, we had to create more than 100 new products, replacing the FPGAs that we have had shortages before. On components frontier, we see some small challenges still with the components. We also foresee to spend a little bit money into the spot purchases on first and second quarter, much, much less than last year. So roughly, we spent EUR 3 million money into the spots on during last year to be able to survive and support our customers. And the good news is that it's mostly over, but thanks to the redesigns and overall situation also, which has improved, we don't see a heavy impact to '23 any longer on that. Other events, we had some smaller items here. I think the big topic here is that despite all these challenges, we kept the company going, and that's the most important, thanks to the fantastic team, we had actually 8 days our production team, 100 employees were locked into the factory. They were working 12 hours and sleeping and rest 12 hours for 8 days in a row. And thanks to them, we are here celebrating that we had 14% growth for the fourth quarter, and they did it voluntarily. So that's fantastic. We also included new design for environment tools into our R&D processes, enabling us to have higher sustainable products. We did some internal surveys started this kind of heartbeat pulse surveys. Values Champion is something that we have started to celebrate for the company, I mean, following company values and awarding that. And then a very, I think, also fun event was that we celebrated the Quality Month as well as the United Nations Children's Rights Week so that we had invited our employees' children to our workplace and it was exciting to see them thrilled, seeing what their parents are actually doing. Then what are we expecting for first quarter and first half actually? We expect that all these business units should be able to grow double digit. And the reason really is that the growth barriers also have eased up. We are quite sort of excited to see, for example, how China economy will really open up after China just bent their big annual holiday and event, the Chinese New Year last week. So I mean now they are coming back, some are still on holiday, but coming back. And I think for the global business, it's exciting to see how will China market open up and after the restrictions in China on China New Year. And therefore, we are actually guiding that DT as a Group should grow double digit, probably something between 10% to 20% for the first quarter and for the first half. On market growth, I must repeat what I have said before. It's still a bit early to say where really these markets stay as growth I think the Medical market, all the, let's say, signals from the market is that it should be some mid-single like 5-ish percent, then also Security, probably 5, even though Security has not jumped back to the level it was in 2019. So that's a bit question mark, it can grow faster. And then Industrial has been for some time between 5% to 6%, about 6%. Then on this earnings per share and payout. So what the Board of Directors of DT is proposing to the AGM, to the Annual Shareholders Meeting, is a dividend of EUR 0.20, which represents 57% of the net proceeds. So that's roughly on the higher end of the range. We have 30% to 60% as target. And then regarding the financial targets for midterm, those remain the same. So the annual sales growth above 10%, operating margin at 15% or above, and then 30% to 60% dividend policy. So thank you for viewing and listening and I would be very pleased to answer to any questions that they might arise.

Nikko Ruokangas, SEB. Relating to your comments on profitability, so I know that your business model is scalable. And so the profitabilities will grow with sales growth. Now you are expecting somewhat below 15% margin in 2023. So if you take into consideration the expected cost level in 2023, so how much should you sell to be able to reach this 15% target?

Well, higher than we planned for 2023. I think if we take more on the cost side, there are still some, let's say, activities in the R&D relating to the redesigns. A little bit also spot stuff is there. I mean, probably somewhere 400,000, 500,000 altogether. So this kind of will still be affecting; also we've had some, let's say, higher cost increases in fixed costs that they will be on longer term. So this will mild it down compared to the sales. So those will be affecting, most of this like extra logistics costs and so on, I think they already have come down to the more normal level, but there is still some overall hassle that is affecting a little bit. Also, I think the overtimes we had to do for fourth quarter to keep things running and so on, also those have come down very much. So those should not be affecting that much.

All right. So at what ballpark are we at in the inflation rates in your expenses if you leave these spot [ purchases ] aside?

I think if we look -- really, if we look at the bill of material, I think we were very successful to fight against the material cost for the products. And also, we have done a little bit price increases, not very much and also there is a little bit cost increases. So if we look really on the, as we call it, the throughput margin, which is the after material cost or the sales margin, which is after the direct cost, including the labor, that level of profitability is about the same. So we have not been sort of, let's say, losing on that margin. But then it's below sort of on the fixed cost side that there are some challenges and increases.

All right. I understand. Then one question on your Medical demand. So you already mentioned that there were some inventory reductions and everything happening in Q4 that affected our sales. So there are some large X-ray players still that have commented that they will reduce their [indiscernible] sales during this year. So do you expect this phenomenon still affecting you? And for how long and how long do you think that these events in China that affected your sales in Q4 will still affect Medical sales?

Well, we expect the DT Medical business still, I mean, will be growing for '23. And I mean in CT, I think the, let's say, the higher the premium segment probably is doing a little better than the, let's say, the lower segment. But also it is a bit company-specific, so it depends who you have as a customer and so on. But in big scale, if we take out this kind of like inventory correction and so on, everybody is fighting to get thinner after the fat years of pandemic, if we take this impact out, the end sales still is overall should be growing in the world.

Felix Henriksson, Nordea. Just a clarifying question in the beginning related to the spot purchases and extra cost. Was it so that 2022, you had EUR 3 million of extra cost Q4, EUR 1 million, and now you were speaking about roughly EUR 400,000 to EUR 500,000 for 2023.

Yes, thanks for asking, actually, this EUR 1 million is altogether sort of the extra cost that we had. Spot probably was about 600 out of that and so on. We did some reservation and some there still was some extra hassle, so a good approximation is that altogether, this impact was about EUR 1 million.

Right. And then could you give us any further color on the magnitude of the postponed sales in Medical due to these payment issues in China in Q4?

And it was payment issues overall, not just, I mean, but just for medical, it is not, let's say, huge, but I mean, if I say that, we probably would have been a bit over 100 if there wouldn't have been any issues. I think it's sort of something that is in a way I hate to say normal in our business because of course, it's a nice phenomena, but customers are playing with this sort of payments. And if you don't really force them, I mean nobody is paying to voluntarily things. So it's always you have to be a little bit negotiating on shipments and so on that you make sure that you get your money to the cash box. And now, I mean, we have a project then relating to improving our net working capital. And part of that also is that we are more careful and more strict on payments.

And then finally, based on your current visibility, what are you sort of expecting in your budgeting from some Security sales? Do you think it's realistic for it to return to the pre-pandemic run rate levels during 2023? And are there any sort of updates in terms of aviation investments that you can share with us?

Well, I think, as we see, overall, I think it's expected that global traveling in monetary terms would this year be the same than 2019 was. But of course, I mean, there has been some inflation. So probably from traveling point of view, there's a little bit less travel. But I mean monetary terms globally, it should be about the same than 2019. And I mean, at the end of the day, the airports get money from the, I mean, flying passengers. I mean, sometimes indirectly and so, but at the end of the day. So of course, this kind of traveling is sort of driving these investments to the airports. And then on top of that, there's needs to increase the throughput, speed up the throughput and so on, and then we are talking of computed tomography technology and that kind of sort of solutions, which have now started, but has been proceeded slower what we have anticipated. Then interesting is also that it will not be business traveling very much still this year because all of us, we've been learning to meet people through remote, I mean Teams and so on, but it's private people will be traveling more. Then also relating to traveling, as I just read beginning this week, there already was some news on China traveling and China New Year is a big event. It's the biggest event in the world in traveling perspective, and it still was only 50% what it was in 2019, Chinese New Year. China traveling, I think, went up 70%, 72% and from last year, but still was about one-half. And the reason is that people have been very careful of not to go back home or to their closest and risking the parents still and some elderly people to be sort of catching any disease. And that is now getting back. What I know from our own personnel in China, they're very happy. I mean they feel like free birds, I mean, being able to move around and so on and the travel in China also will pick up quite fast. And we hope also that that would also drive the China starting to invest in the CT technology and the aviation as well as some other programs they have planned like green channel and so on, which would be very favorable for our Security business. So in a way, we have quite positive expectations of Security business, but then it's a question mark that how fast will certain things open up. It's quite probable that they open up and so on. But I mean, how quickly is something that we need to wait and see.

Matti Riikonen, Carnegie. A couple of technical questions. You said that the payment issues in China had an impact of roughly EUR 1.5 million, right. So EUR 100 million would have been met without those transferred deliveries.

Yes. I emphasize, I think overall, we have now more strict policies on sort of payments. So that's what it means. So it's a change of DT behavior, right.

And do you expect that you will deliver these goods in Q1 this year?

It's in our Q1 plans, yes.

Right. So basically, when you talk about the overall demand, which is strong in your vocabulary in SBU and IBU and only good in Medical, is this the difference that for the first quarter, you are guiding for double-digit growth in Medical, but it's because of those transferred...

It's in that, yes.

Okay.

But then I mean, the performance for SBU and IBU also has been much stronger in all the quarters actually last year. So...

Yes. So do you think that the MBU business can grow by the double-digit regardless of the China kind of situation at the moment. So that is embedded in your estimates, and you are certain that you can meet that.

Well, I would not like to go to very complex mathematics. I mean, simply, is we look at the fourth quarter sales and then what we look for the first quarter sales compared to the year before and what we are predicting is growth in MBU.

Right. So should we kind of take into our estimates that Q1 in Medical is still going to be fairly good, I mean, double digit. But then do you expect some softening during '23 as you said that the outlook was a bit more soft in that segment.

I think we have told we still expect the Medical overall global and the computed tomography to grow in the world. Then visibility for the second half still is not very good. So it's too early to say. But what we are thinking here that the market should be growing 5%. And then if the market grows at that rate, I mean, we need to grow faster.

All right. I think you last said that the component situation would be at least close to normal in Q2 this year. Do you still think that that's the case. So that's...

Yes, there's still some, let's say, restrictions. Luckily, it's less and less. And what you also can see that in the spot markets, the availability, meaning the prices have come down a bit. I mean they are not hilarious as before, but there's still work to be done. I mean part of these [ FPGAs ] are used in military and due to the very unfortunate and terrible war in Ukraine, nobody could have foreseen that the demand for overall military is so high in the world. And in the world's priority when governments need components, they get them. So that is a bit affecting the situation. But still, like you said, we expect that, I mean, first quarter is much better than fourth and then it's sort of [indiscernible] down from that. And thanks to the redesigns too.

So basically, you are not expecting any more redesign costs in Q2 this year...

Not to significant level. Some still first quarter, but they are [indiscernible] down.

Okay. Then regarding the R&D cost, which is a bit elevated, at least when it comes to as a share of top line. But do you think that you will keep the absolute level of R&D costs going forward at the same level as it was in Q4? Or do you think that also the absolute level of R&D cost could come down this year?

I don't know. I don't think the absolute level, I mean, we intend to grow, and that means that we have to put money into new technology and new product creation and so on. But it should not grow at the same rate than the company growth. But hopefully, we are able to grow, and that means that we are also able to then fund our future for faster growth also a little bit more than before.

Okay. So there's no basically kind of extra element in the R&D costs that you could just take away. So it's there. It's going to be there, and that's part of the fixed cost increase that you...

Yes. And R&D, I mean you have to fairly long-term plan it, so you can't just cut it short term. It's mostly salaries, by the way, and meaning that, then, of course, the percentage is dependent on what is the top line.