Scanfil Oyj (SCANFL) Earnings Call Transcript

Good morning. Welcome to Scanfil's Q3 Results Webcast and Live Event. My name is Pasi Hiedanpaa. I am the Director of Investor Relations and Communications at Scanfil. Together here with me is our CFO, Kai Valo; and our CEO, Christophe Sut. Christophe, please start.

Thank you, Pasi. Thanks to all of you for joining, and let's get started with our Q3 report. A few key events for the quarter, starting with a few news about our customers. I mean, we continue to move forward in acquiring new contracts, EUR 41.7 million of new contracts in the quarter, which we believe was a very good number if you consider that we have 2 months more or less of vacation in the middle of it, which are usually not months, where you sign contracts. So that was very pleasing to see. And it was a mixed bag of an established company that continue to trust us and to believe in us and bring us business, but also a few exciting opportunity. I mean, you have a few on that slide, Skytree and Herma that are some of those companies that have a great potential and that also are trusting us for their manufacturing. So that was very positive. On the quarter, we also announced an adjustment to the organization. From 1st of January, we will have a new management team, and we will have a regional organization, as we presented before. It will also mean that we will have a new way of reporting, and you will get from them more granularity on our numbers since you will get the full visibility per region. We also moved forward on the sustainability front, where we got our SBTi target approved -- our target approved by SBTi. And we also had our employee engagement survey. That was a positive result and still very strong even in difficult market conditions. Employees are close to us, and we are close to them, and we keep moving forward on that front. And then finally, we continue to focus on performance, and it shows in the quality of our delivery. We were still at very high number on on-time delivery in the range of 98%. And it shows in the satisfaction of our customer that was actually achieving record high numbers since we have been studying the -- our performance towards them. So all in all, quite many happenings in the quarter that were going, I believe, in the right direction for the company. One element that don't belong to that quarter 3, but in reality, we made a lot of effort during Q3, and then it was closed just after Q3. So good to remember since it happened beginning of October, the official date. We acquired a company, SRX Global that has 2 sites, one in Malaysia, one in Melbourne, a company is EUR 39 million revenue. We paid EUR 23.3 million for that company will be an earnout when they achieve their financial results towards the end of next year. And this is a company that we are very pleased about because it complements Scanfil very well. It gives us a footprint outside of China, in Asia, both in Malaysia in a very good location in terms of logistics and the mix between, I would say, logistics and cost level. But also in Australia, where we know that a lot of our global customers have business there and appreciate to have an offering to complement that. So that was belonging to Q3. But obviously, as you realize, it was a lot of activity -- it was belonging to last quarter, but as you realize, it was a lot of activity during Q3. So an important milestone for Scanfil and it also marked a return to M&A and acquiring players. Moving now to our financials for Q3, we achieved EUR 173.3 million, which was negative organic growth, 18.6% in the quarter. And it was mainly driven by still a bit of challenging market conditions for our customers. But we managed to keep a solid level of margin, 7.2%, which shows the effort we have made during the whole year to make sure that we adjust our cost level to the market situation. And as you will acknowledge, it is not always easy, mainly in a market that has been very volatile with quite often changes for our customers on delivery dates and things like that. But I think on that level, we have done a very good job. And I think for me, it's really a good sign for the future. If you combine that with the activity on the new win that we have had EUR 41.7 million, it's a very positive development. We have now acquired EUR 126 million of new contracts during this year, which is something that will obviously start to pay back in the coming quarters, as now we start to move them into manufacturing. Finally, we have still a very strong position at the end of Q3. We had a debt level of [ 0.15 ], which was the lowest for quite a long, long, long time, which gives us strength and the capability to invest, obviously, in M&A as we did. But as you can easily calculate, I mean, we are far to have utilized all our firing power. So we still have room and can continue with that. And then we had also a very strong cash flow position. So I will say, defending the margin in a very good way in a challenging market and making sure that the company is in a healthy situation financially when in the same time, moving forward in our strategic goals, both acquisition, but also preparing the company for the next step. Here, you can see the development of our revenue, which is in line with what I mentioned before. And I think what is very interesting, you should look at this graph over the history and then you match it a little bit with the coming graph that gives you the profit level. And if you look things a bit what you saw on the previous graph, you will see that the profit level we have now consistently even in a lower market is much higher than what we used to have. And that, I think, is really paying off the effort we have made to build flexibility and to adjust, I would say, our cost level with the cycle. So I think that is a very pleasing position. And you can also see that we have had a trend and now are back into the corridor we have announced between 7% and 8% in a consistent way, no matter the level of revenue. So very pleasing and very, very proud about that part. On the customer front, we continue to I would say, diversify our portfolio. Biggest customer is now 12% of our total revenue. And we have 42% on the top 10. And after that, we get a certain number of customers that have also potential to climb the stairs. And we have a dynamic situation, as I mentioned previous quarter, between the, I will say, 8% and 15%, things can move back and forth. And that, I believe, is quite good because it makes the company more robust since we are getting sizable. Then Industrial segment remained the biggest for Scanfil, but Medtech and Energy & Cleantech are also now getting more and more sizable. If we look at the detail of the different segment, Industrial was negative 15% in the quarter in terms of revenue. And we, however, had a better position in acquiring contract than the previous quarter. We won EUR 17.5 million of new contracts in that quarter, which was actually a mix of quite many deals of midsize and a big part of it was acquired with existing customers that have new projects to give to Scanfil, which is a good sign in the trust. And if you match that with the satisfaction number that we get from our surveys, it really speaks for a good performance from the company towards our customers, which is a good sign for the future. Energy & Cleantech remain very dynamic. We have EUR 16.1 million in the quarter, which brings us -- of new contracts, which brings us to above [ EUR 50 million ] since the start of the year. So obviously, we keep building portfolio in that segment. Revenue was negative 28.4%. Obviously, we are still fighting very high comparables. For me, I think there is one thing that is important in that quarter beyond the number, and it will give you a little bit of a taste for the future is even if the revenue was lower than last year in a significant way, we start to see stabilization in customer demand, which means that customers that have been totally at on where demand has been at on for a couple of quarters are now coming back. So really confident that now this segment will start to step-by-step rebuild a higher level of revenues. And then the last segment that in a way, was a bit disappointing short term, but that we remain very confident long term. Medtech and Life Science was slightly negative, 6%, 6.9% in the quarter. We, however, won contract for EUR 8.1 million. So we keep moving forward in that segment, and we have a lot of activities. I will say that we see stabilization on that segment. We see growth coming back. We have been hoping for that to happen during that quarter. It didn't. It was slightly negative, but we still have a positive outlook on the segment. So slightly disappointment in the quarter, but still a dynamic market and the position that is building up. So we are positive on the future of that segment. With that, I will hand over to Kai for the financial presentation and get back a little bit later. Kai?

Thank you. Good morning also from my side. I think the first slide of mine is telling quite well about our operational performance and how we manage the operational expenses. The left bar on the left is showing the operating -- adjusted operating profit Q3, 2023, EUR 15.2 million. And in a challenging market, like stated already by Christophe, the revenue was dropping by EUR 39.5 million, 18.6%. However, we were able to adjust our expenses exactly with the same value than the revenue dropped, which was then well resulting to operating margin of 7.2%, exactly the same, as we did last year with the higher volumes. Euro terms, the OP or adjusted OP ended to EUR 12.4 million. A few words about the balance sheet. Starting from the right side, you can see the equity -- equity being growing EUR 15 million, that coming from EUR 30 million of positive -- net profit year-to-date, and then we paid approximately half of that as a dividend out and then half we kept in the pocket and then paid -- increased the cash in hand and then paid some loans off. And the rest of the improvement in the cash and the net debt is coming from the inventories, EUR 35 million reduction in the inventories, which is very good in the challenging market. I can say that trade receivables and payables are more or less netting each other out. [ Resulting ] those, the result and operating result and then the improvements in the working capital, then the cash flow was fairly good, seems that somehow we have a trend to have every second quarter better and every second a bit lower. I don't know why that happens. But never mind, EUR 22 million of cash flow from the operations. And then year-to-date, we are on the level of EUR 70 million, out of which then about 50% is coming from the improvement of the inventories and then the rest from the operational result. Rolling 12 months, last 4 quarters, then the cash flow is as high as over EUR 100 million positive. And again, like 50% of that is coming from the inventories, cash to inventories and then the rest is coming from the profits. You can see also that then the cash flow has more or less like -- more than doubled in comparison 12 months period. Following the cash flow, naturally, the net debt has decreased. We are now at the level of EUR 11 million of net debt. And when taking out of the leasing liabilities, we are debt-free basically. So we have more cash than we have financial liabilities. Cash EUR 52 million and then the interest-bearing liability is EUR 63 million, but I could say that like bank loans are EUR 40 million plus. And the total liquidity is EUR 143 million, which consists of the unused credit facilities of EUR 90 million, and then we have the cash EUR 50 million besides that. So that is those famous bullets, which Christophe mentioned. Key figures, equity ratio growing. We didn't pay out all the -- we haven't paid out all the profit as a dividend. So the equity is growing and continue to grow. And then the total balance sheet instead has been lowering a bit when we have been reducing the working capital. So that's a 10% growth in the equity ratio. Gearing becomes, like I said, then, of course, because that is coming from the net debt and then in relation to the equity. So net debt is very low already. So only [ 4 ] is the value for the gearing. Return on equity is on the good level, however, less than it was quite naturally because challenging market and the net profit euro terms has been a bit declining. And then at the same time, we are with higher equity value, but not a bad result. And then earnings per share following the net profit development. And yes, I think that I give back to Christophe.

Going on outlook, we foresee a stronger fourth quarter. We can see that the demand has been building up already opening the new quarter. So we foresee a stronger fourth quarter and then have kept our guidance the way they were before. The focus area today, we continue to build pipeline to acquire new contracts. We believe that it has functioned very well during the first part of the year, and we still have many opportunities in pipeline. So we continue to work on them. We will continue to have focus on profitability, as revenue is going to climb up. Again, it's good that we make sure that efficiency remains a priority in the company. And that's something that we have demonstrated good capability on the previous quarter and that we should keep with us on the journey. And then we have acquired a company actually during the quarter to come. But obviously, it was an exercise from the previous one, and that's something that we are continuing to do. I mean, we have now built capabilities within the company to be more proactive on building a pipeline and being able to close deals. We have this first experience, and we will build upon that one. So a lot of positive things in the pipeline and to work on going forward. With that, I will hand over to Pasi for Q&A.

Already a couple of questions online. So you can use the chat functionality and what you can see actually in your window, so you can post questions via that. And also, we will take questions on floor as well. So let's start from the chat questions. James is asking about understanding that your company doesn't announce specific companies, but do you have any major -- new major customers or agreements that you can further contribute to profitability?

Yes. As we said, we acquired EUR 41 million in the quarter, which is a mix of existing customers that are giving us new projects to increase I will say, to increase the trust they have in us. But also, customer like Skytree, for example, that we didn't have any business within the past that are coming as new customers. So I will say, it's a mixed bag, but the big chunk of that is new things that we didn't do before. Then I think that I mentioned that a bit before. I think the way -- I know it's not easy because we have no history on those numbers. But the way we should look at those numbers is to sustain the level of revenue of today, we should probably renew 10% of our contract every year or at least in value. And then everything that comes on top of it is creating growth. So I think that if you take those assumptions, I mean, you get a little bit of an idea on how it could help us to move forward.

[ Erika ] is asking about Scanfil's new project win -- wins were EUR 41.7 million in the third quarter and EUR 126.1 million in January, September. How significant growth this means for 2025 compared to 2024 net sales guidance? I think that you were just referring to it.

Yes, I think I was answering that one. And then obviously, I have said before, you need to count on the 6 months to 18 months depending on the complexity of the project before those contracts translate into sales. But I think that, obviously, we have won contract earlier in the year, they will come into production in the coming quarters.

Do we have any questions from the audience?

[indiscernible] just a clarification question on the acquisition. Is it fair then to assume that starting from October 1st, we should include SRX as part of consolidating Scanfil?

Yes. From the acquisition date, they will be included in our numbers, absolutely, which is not 1st, but very close to that.

Perfect. As a follow-up then, starting from that, you don't disclose in your reporting today about current split in different contributions to growth. Is this something that you will start with or something that you have discussed from -- starting from the integration and inclusion of SRX Global?

Yes. I think that's something we are considering. We have not, at this point in time, take a decision on, but that's something we consider doing.

Then just final, I think, from my part. You've been talking a little bit about inventory management, which you have improved in reducing significantly over the last year. Just a question on that, do you have -- is it possible to point to any specific measures you've taken during this period, but also if you look forward a bit, how much more possible to pinpoint the future environment [ of these prospects ].

Yes. I think there are absolutely 2 questions here. I mean, yes, we have taken actions on it. What we have done, we have actually reviewed all our processes when it comes to inventory management, and we have rolled that out within all our factories. So it has been a significant effort that we started Q4 last year, and that has gradually been paying off as we have been implementing it. So I will say it did not happen by magic. It's a totally rebuild of our processes on inventory management, work with negotiation with suppliers to build flexibility. So it has been a quite big job over the last 12 months. Then we don't believe we have come to an end. We believe that we can continue to decrease inventory even with the market turning up because of those activities. So we are positive on the development on inventory for the quarters to come.