Scanfil Oyj (SCANFL) Earnings Call Transcript

Good morning, everybody. Welcome to Scanfil's Q3 2023 Results Call. My name is Pasi Hiedanpää, I'm the Director of Investor Relations and Communications at Cornfield. Today, here with me, is the new CEO, Christophe Sut, for the first time; and our CFO, Kai Valo. A couple of practicalities. [Operator Instructions] Questions will be addressed at the end of the presentation in the Q&A session. So thank you. Christophe Sut, please go ahead.

Thank you, Pasi. And thanks to all of you for joining us today and listening in. I am extremely proud and extremely pleased to represent Scanfil today and to introduce you our third quarter. So I will suggest we get started. And starting, I wanted to share with you a few key events in Scanfil life during Q3. We have had quite a few openings, but 3, I would like to highlight, we were all the management team during August in Suzhou in China with our top clients, presenting them our new implementation and development in the factory where we have been driving automation and digitization. And we were very proud about it because it really makes this factory one of the top factory that you can see. And we have got extremely positive feedback from our clients. So that was a very important moment. In the same time, we have carried on with the investment we announced earlier. And in Atlanta, we have now our first manufacturing facility and manufacturing capabilities for electronics. And that was also implemented during that quarter. So in different class of the place of the world, a lot of things happening in Scanfil. Finally, there is one element I wanted to highlight. We also got an award from one of our [indiscernible] for our sustainability program. And that's also something that was very pleasing because we have had and I have had during my 2 visiting clients during those first months, a lot of positive feedback on our sustainability program. And that's something that is important to us. So all in all, quite a few openings within the Scanfil world and a few very positive openings. So very good. If we move forward and look now a little bit on our numbers, we had positive development when we look at our revenue, excluding spot market buy where we landed at EUR 209 million with a growth of 9%, which is the real development and growth of the business. Then when we integrate much the purchase of spot market then we are at 212, which gives an overall growth at 0.4%. All in all, it allowed us to land with a very positive development of our profit since we landed at EUR 18.2 million, which was growth of 32% versus last year and then an operating margin at 7%. And finally, EPS of 0.17. So what you can say on that slide is both a solid market performance and also a solid delivery performance with a good level of profitability in line with what we are promising the market. So all in all, a solid quarter in terms of delivery. If we move to the next slide. And here, you can get a bit of a flavor on how Scanfil looks like at the end of this quarter. We are on a 12-month basis, trending towards EUR 903 million revenue. We have 3,700 employees and the presence in 3 continents, in Asia, Americas and obviously, Europe where we are very strong. So in terms of footprint, no major change, and we are obviously during this year, continuing our growth journey. In terms of revenue, as I mentioned earlier, we had a total revenue of EUR 212 million, which was a strong delivery with a lower impact of purchase price of spot market price, if you compare to the third quarter last year, which was heavily impacted by spot market price. So it gives us a growth of the business of 9% when you look at the core of our activities and of our deliveries. And if you look at the impact on profitability, it resulted in profitability of 7.2%, which is driven by a few factors. So obviously, the more we deliver from our core business and not just be transactional and buying components, it has a positive impact on our profit development. In the same time, you will see later, we have a rebalancing of our mix in terms of clients that is in a way helping us. And also, we have been working with a gain of productivity, where we have a very strong program when it comes to digitization and automation. So all those elements allowed us for another quarter land above 7%, which was positive. Going to the next slide. On that slide, you can see the development of the different segments we have. And looking at the one that is now the most significant for us, Energy & Cleantech grew significantly during the quarter, almost 40%. And that's driven by a very strong demand, and I will explain a little bit more later what this segment is built from, but we saw a very positive development. We also had the positive development on connectivity, where we have a couple of clients that are actually seeing a very strong development. But obviously, that segment is a little bit smaller. Then automation and safety as well as Medtech were flattish during the quarter, but we still have a positive outlook on those 2 and mainly on Medtech, where we have quite a few significant business opportunities that we have been working on during the quarter. So still confident on that one. And then finally, advanced consumer application was negative during the quarter. This is a mix of many different type of clients. So here, you really get a mixed bag of some growing, some flags declining. But what you can clearly see on the picture is, I would say, 2 market segments where we have a growth path and long-term good potential. Obviously, Energy & Cleantech being the driver there being the one that has the strongest momentum and becoming very sizable. Moving to the next slide. On that slide, you can see the same picture but on a year-to-date basis. And as I was mentioning before, I mean, Energy & Cleantech is now 33% of our total revenue. It has had a growth versus last year of 40%. So we see a very strong momentum, and we see a long-term positive development driven by long-term trends on that one. Another segment that is positive and developing in a good way is Medtech and life science that on a year-to-date basis, is still positive 6.5% and now waiting 17% of our revenue. And it's a segment where we have a mix of global leaders and very sizable companies and start-ups that are now taking off and building opportunities for the future. Then if we look now a little bit more in detail on the Energy & Cleantech segment that I mentioned before, I think what is very interesting to see when you look at Scanfil is how broad is our portfolio on that segment. I mean what we can see clearly is that there is an interest in the world for renewable energy, there is an interest in the world for recycling. And to make that happen, it's many things that needs to happen from producing the energy, transferring the energy, building tools and components that are allowing lower energy consumption. And I think what is really good with the Scanfil portfolio is how we have built relationship with different players that allow us to have actually a quite spread portfolio towards that specific segment from recycling to energy storage, being also part of the renewable energy building, for example, drive for windmill et cetera. So we have a very broad portfolio, which help us to have this very significant growth because you know the way things go, everything when you have a transformation like the one we are living now, everything doesn't go in the same time. But overall, everything goes in a positive direction. And when you have such a strong portfolio and such a diversified portfolio, you obviously even out and you benefit from it. So I think that's a very impressive portfolio that resulted in a very significant growth for Scanfil in that quarter and on a year-to-date basis also. If we move to the next slide, Pasi, I think that another positive impact of that development is also a rebalancing on our client portfolio. I mean if we compare 2022 to 2023 Q3, you can see that now we have 13%, our biggest client moved from 19% to 13% of our total revenue. And then the 10 biggest clients after that are now waiting 44% of our revenue, which is a positive picture because we have a spread portfolio, but we have also a very solid player we work with and people that are committed to Scanfil on a long-term basis and where we have very long-term program with them and will become as important to them that they are important to us. So I think that picture and that rebalancing of the portfolio is something that is significant. And it's both a rebalancing in terms of the type of industry where we go further and further faster and faster towards fast-growing industries, but also the number of clients that makes the biggest chunk of our revenue and this pipe between them. Then going back to our investment, we have presented that picture earlier in the year. We continue with our investment in efficiency and capability. As I mentioned before, we are now up and running our new space for electronic manufacturing and system integration, which was positive. We have also started, as we announced during Q2, the extension of our facilities in Sieradz in Poland. So this project is now up and running and on the way. So that is positive. So we are just moving forward as we have communicated and as we are committed to also to support the growth of those new sectors and those new clients on the long term. Thanks, Pasi. I think that with that, I will hand over to Kai with the financials.

Thank you, and good morning also from my side. Here, you can see repeating a bit what Christophe was showing, the turnover development last 3 years. What I want to also highlight is that it's nice to see the development now that the spot by impact on the revenue is melting down and being very marginal in the Q3 of this year. So the last year year-to-date, it was over EUR 60 million, EUR 66 million in total, and now we are EUR 50 million down and revenue development overall has been good and big seasonality in Q3, I could say, but otherwise, it's a well developing. If you go to next page, here you can see the same operating profit development. And again, I want to maybe highlight on our long-term development that it's nice, nice now that the company, after challenging times of the past couple of years, and we were handling those, we like a quite steady 10 million quarterly operating profit and now we have been on the level of about EUR 16 million in average in this year, which is an operating margin was 7.2% and in average 7%. You can go to next page, please. And here is the Q3 view with the reporting of [indiscernible] comparison to previous year. And you can see on the right side, this is operating profit of this year, the quarter and 7.2% and EUR 15.2 million when in comparison to last year, it was EUR 11.5 million of operating profit and 5.4% of margin. Here is included the spot buys almost EUR 20 million of last year and then EUR 3 million this year. But if you go to next page, here, those have been excluded, and then the view is a bit like a more normal looking. Then you can see that when we start from the left 2022 operating profit, then what other steps to operating profit on the right at EUR 15.2 million. And first of all, turnover has increased almost 10%, 9%. And overall, the production volume is higher by 10%, including some products on the transit at the end of the quarter. So we have 10% of growth in the manufacturing volume. And at the same time, the cost has increased clearly less and keeping in mind that the big share of our cost is variable or even material cost. So we have been doing that very good, efficient way to growth and being able to improve our profitability in between. Growth in the OP was 30%. And here is the same view, including the spot by [indiscernible] remembering there's EUR 66 million last year, [indiscernible] 50 million less in this year. The profitability growing from EUR 32 million, EUR 15 million, EUR 16 million, up to EUR 48 million in this year and operating margin same time from 5% to 7%. If you go to the next page, and this is maybe better so in the year-to-date that then how significant organic growth we are talking about. It's about EUR 110 million organic growth in euro, which is 20%. So this is really a big challenge for any company. But we are very proud of the way we have been able to handle the growth and like manage it, and that's shown in the profitability, EUR 15 million, EUR 16 million also and 50% growth in the profitability if we compare them like euro figures. Next page, please. And here is the balance sheet, and one of our big strength is the balance sheet, and it's getting stronger cash being EUR 14 million and could be less even that is not a target to keep cash in hand. However, the equity ratio, we are approaching now 50% equity ratio. And at the same time, then the debt-ness or gearing figure is getting down. We are 33%, and it was 10% higher a year ago. Inventories are slightly declining, not dramatically, but a bit. And the reason, of course, is that we are growing at the same time, year-to-date, 20% growth. So the inventory turnover is significantly improving and then working capital is a bit growing like [indiscernible] can see from the cash flow as well, but that is coming from the accounts receivables where we, of course, with the growth also growing. So that is like a normal development. Interest-bearing loans are declining. We have a EUR 17 million less than we were a year ago. And could you remember that this is the total figure of interest-bearing debt we have when is impute EUR 20 million of leasing loans, which has kind of calculated from the factory rents basically, can step forward. And here is the cash flow strong positive cash flow. When you combine this net-net profit and adjustment, it's almost EBITDA a little bit other adjustment related to financial items, but very close to that. And then when we change from the EBITDA, we changed the working capital change, EUR 20 million, like I said, that is mainly related to receivables or all basically and then we pay off cost, some interest, very reasonable level. We have a very good like financing agreements and the cost is reasonable accordingly. Taxes paid like a good taxpayer and about 20% is our normal tax ratio. And then we have invested EUR 18 million our cash. So it leaves us still year-to-date, EUR 16 million free cash flow out of which we have paid the dividends, EUR 13.5 million. So basically, any cash going forward this year will fill the pockets and will be positive like, of course, there are still some investment payments as well, and maybe it's the time for the last page, I still want to remind about also the good net profit development, 50% up, which is then, of course, connecting to earnings per share in same relation and out of which we target and have been following the target pay dividends about 1/3 to shareholders. And last but not least, is the return on equity percent. And keeping in mind that the equity has et ratio has increased significantly since last year, approaching 50%, we are still generating 21% return on the higher equity, which is very, very good level. And I think that the money has been from that point of view, in good hands, making good return in Scanfil. Thank you, and I hand over back to Christophe.

Thank you, Kai. If we go to the key takeaways and outlook for the rest of the year, when we look at the quarter, we see that we have had a good profitability that has been driven by mainly our operational efficiency. Our operating margin for the first 9 months is 7% and has been for the second month in a row above that at 7.2%. So a positive solid delivery, I will say. We can see also that supply chain challenges have been fading away, which becomes positive for us and for the way we run our operation. So we are pleased with that. And if a moment where we can focus on continue to build efficiency and continue to improve our factories. We see also a very good opportunity long term, especially for the Energy Cleantech and the Medtech & Life Science segment where we have built a significant position, and it has also delivered within the quarter. And then finally, last but not least, I mean, we have had a cash flow from operation that has been clearly positive in the quarter. And you can also see that we are reducing our inventory level, and we are generating cash flow, which was a good development. So all in all, a quarter that was solid and positive. When we look at our outlook, I gave guidance of revenue towards the end of the year between EUR 880 million and EUR 120 million and the profit level that will be between EUR 50 million and EUR 66 million, which will be a report year for Scanfil. What we are keeping the focus on is obviously to continue to drive organic growth through the penetration of segments that we believe have a long-term future and the long-term positive outlook. I have spoken about one of them earlier today, which was Energy & Cleantech, but we value medtech as well on that sense. We are also working on efficiency of our factories for automation and digitization. During the quarter, we had the launch of 2. We are actually implementing similar programs in operation, and that's a focus area for the rest of the year. Then we have a very strong focus on maintaining our profitability within our long-term goal and making sure that we deliver on a consistent basis on those targets. And then we'll continue to work on net working capital and the inventory reduction that have shown a positive development, but we believe there is still improvement to be delivered going forward. So all in all, positive outlook towards the end of the fourth quarter of the year and a lot of activity that would make Scanfil stronger ending this year that we were starting. With those words, I will hand over to you, Pasi, for Q&A.

Thank you, Christophe, and thank you, Kai. We have a lot of questions actually via chat at the moment. Let's start from the first one. You adjusted your financial guidance somewhat down 2 weeks ago after 2 upgrades. Is this related to change in demand outlook in one of or 2 of your biggest customers or overall change in customer demand outlook. Today's report rights that Scanfil continues to rebalance its customer mix. Can you elaborate what that means? That's 2 separate questions. So is the guidance change related to 1 or 2 biggest customers overall and then the other one was about the customer mix rebalancing, what does that mean?

I think that there is exactly 2 questions. I mean the first one on the change and what drove the change. I mean we have a change in the landscape, and it impacts many things. The first thing that I mentioned before is we are now getting back to a situation where PPV and which is the onetime purchase, the purchase we do for extra components for clients is becoming very small, which is a good thing for us because that's not something that we make money, but it's in one way less revenue, but it's positive on the profit level. So that is one impact. Then the second impact we get is we have a readjustment from many of our clear clients. So it's not 1 or 2 biggest. And we have that a little bit all the time. I mean, we have clearly clients that are growing faster than they were expecting some clients that are growing slower. So that's why we make that change. But if you look at the change in reality, it's quite minor change. We had to adjust it because we have now the windows. But the change is in reality, pretty minor and still favoring a quite good development of our profit level if you look at the adjustment of the profit. Then on the second question related to the customer mix, we have actually, as you saw on the slide that I presented earlier, a quite good rebalance within our top 10, 11 clients where they are becoming more equal in size. And we believe it's very positive because it means that we have an exposure to different type of sub-segment, and one might go faster in growth, one might go a little bit lower, but it is a little bit more balanced. Then what is good is in these top clients, quite a big amount of them are clients that are acting in segments that are having a very positive long-term perspective. I have been mentioning today and putting quite a bit of focus on Energy & Cleantech, and what we can see is this energy transition is going to happen. It's not going to happen in a year. It's going to happen on a much longer period. And that we are very positive about. And we can see that in the outlook of those clients, and we can see that also in the development on their sales in that quarter. So I think that the customer mix will continue to rebalance and we believe that this sector will continue to grow faster than the other sectors. And I think that's the truth for our industry in general, it will happen for all the people in our industry that are those clients. Then the chance we have is we have quite many of them, and they're a leader in their field or they are a big player in their field. So I think that's very positive.

Okay. Thank you, Christophe. Regarding the same matter, what are the main customer segments adjusting their inventories. So trying to get into which are the kind of affected the most regarding the destocking.

I think on that one, I think that we cannot point one customer segment. I will say different, within customer segment, you got sub-segment and you get different clients that run operation differently. So I would say we don't have a patent that say, okay, there is one that totally destocked. I think there is many that are adjusting in different direction. And I think it's an overall trend that maybe we can see at the end of this year, people trying to get back on cash flow. Then some have talked a bit more than others. But there is not a trend per segment. It's more a per client basis that this is happening.

Okay. Visibility obviously is one of the key questions what investors currently have. What is your visibility for customer orders, is it some 3 to 9 months forward? We used to have actually quite long visibility during the semiconductor prices.

So on the visibility element, I mean, we have a long-term contract with our biggest client. And then they obviously purchase component based on the long-term forecast that can, in average, I would say, on a 6-month basis. And then they can make adjustments on that period because they need to also match their demand. They might win big projects that they are not foreseen. So I would say that we have quite good visibility on the coming 6 months. Then after that, I mean, it can obviously, the more you go, the less it gets fine-tuned. But for now, that's what we can say about the future, [indiscernible].

Yes but actually, we have guided now the midpoint of EUR 900 million for this year's revenue. And there's a question regarding how do we see actually the net sales growth in the next year? So are you able to keep net sales in a growth mode in next year?

I mean as we reiterated, we have now guided between 80 and 20 for '23, which we believe is a realistic target for the coming quarter. We also believe, and that's reiterated by everyone that the average growth of our industry is between 5% and 7%. And that on the long-term cycle, we should be able to grow a bit faster because of the customer portfolio we have. Then next year is a bit early, as I said, if you make the question of the visibility and the time we are in the year, it's still a little bit of time towards the end of next year. So I think that we will elaborate more on that one when we meet you again during February next year.

Okay. Question regarding the growth actually still, if and we do not disclose our view for the 2024 at this point, like you mentioned. But what is our view regarding the industry growth for 2024, approximately some kind of a guesstimate?

I think on that one, I think the answer is a bit the same. I think that for now, I think it's still a bit early to give an estimate on the overall industry. I mean the overall industry includes a lot of segment where we are actually not part of like automotive, like consumer goods and where we actually have no strong opinion about and have no impact on them. So I will say the overall and the industry is partly relevant to us, but it's not the key factor. And it's a bit early to give anyone an opinion. But I will also say that for the overall industry, we are maybe not that dependent of the total. I mean some of those segments we are not acting into.

Question regarding the growth view, when did you begin to see demand getting a bit softer, as you mentioned in the profit warning. Could you comment on month-on-month demand developed after this moment? Of course, we do not actually comment anything at the moment, how do we see it currently for the [indiscernible] for example, but?