Detection Technology Oyj
OMXH:DETEC
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Good afternoon, everybody, and welcome to follow Detection Technology Half Yearly and Second Quarter Results. My name is Hannu Martola. I'm the President and CEO. I'm pleased to be reporting to our proceedings from second quarter.
As total, we actually did not reach what we expected. There is some positive news on -- that took place in second quarter, but also some negative news. Due to an unexpected event in our supply chain for Medical Business Unit products, actually, we went down as a total company. So the sales were 3% less than last year. We reached the sales of EUR 22.8 million. And due to the low sales as well as some other onetime costs, which we'll come back to. We reached an EBIT of 5.2% and EUR 1.2 million.
Then looking more closely what took place. I think we are very, very pleased and happy of the strong performance of both Industrial Business Unit and Security Business Unit. Industrial business has reached even a 29% growth. It was driven mainly by demand in the food industry. Security business unit reached a growth of 25% and the demand was actually strong in all segments. And then when we go into the Medical sales, it went down even 25% due to this unexpected event and -- we -- what we know this event has been corrected and things are back to normal. And overall, we see some shortage now on components materials, which affect our sales and also affected all our business units in second quarter.
We also had extraordinary high R&D costs. We were developing replacement and modified product for some of our semiconductor components and also because of the shortage overall in semiconductors, we were purchasing spot market components, so semiconductors from the spot markets, and that added some onetime extra cost for the second quarter. And overall, I mean, despite the very strong growth in Industrial and Security, the growth did not compensate for the loss of -- in Medical Business Unit.
If we look then net sales by quarter, we clearly see that this is in a way outlier, 2020 was the Corona year. We were more normal in 2019, and we were expecting a much better result. And this actually took place in late May, early June. And overall, when the situation that there is a shortage, I mean supply chains get very strained, and there's no slack actually. So if there's an unexpected event, there is no time to compensate for that, which would be in normal times. And that's the reason why it hit actually into our sales, which then was more back to normal in July. On profitability, also, we see an outlier due to this low sales and more of the onetime cost of spot markets and R&D. The profitability was not where it should have been.
Looking then business units. IBU had even EUR 4 million sales. That's very, very nice for 30% growth, MBU EUR 10 million, 25% down. This is not something we have been used to be seeing in MBU luckily, and MBU has been the most predictable business of our businesses. So that's also the reason that we are fairly confident on the future quarters on Medical. Security nicely up 25%. So it's really great to see security back on track, back on growth track after this terrible corona times that hit extraordinary hard our Security business. Overall, Medical was 45%, Security, 38%; and IBU even 17.5% of our total sales.
Looking geographic wise, I think the second quarter was a bit extraordinary. So there you see a quite high negative percentage in Americas. I would not be seeing it very sort of a severe it-- the sales was only EUR 2.3 million. So this kind of like fluctuation, normal fluctuations and so on. And actually from small sales, then the percentages are quite big. On Asia-Pacific, still our strongest 70% of our total sales. And Europe, Middle East and Africa, single-digit growth, reaching EUR 4.7 million sales and having 6% growth.
First half, okay, -- due to the second quarter. This is also a bit exceptional. So only 3% sales, first half EBIT EUR 2.7 million and only 6% EBIT, single-digit EBIT, which, of course, is something we don't like to see.
Our business units, IBU had very strong growth, first quarter, so IBU is now up 36%. MBU, even though had a nice first quarter, should have had, by the way, nice second quarter 2, but it did not. So it went down 12%, and then SBU, also very, very nice, thanks to strong performance. Second quarter is 17% up. MBU roughly half of DT business and SBU 35% and IBU then a bit less than 20%.
On by region. Also here, we see Americas minus EUR 20 million. This is not something that is sort of a trend. I think the Americas will be growing in the future. There's also a very nice -- some perspectives of our Security business in Americas. Asia-Pacific, EUR 30 million, 1% growth. And Europe here, we can see a fairly strong growth, 23%, which I think is more like a normal sort of a trend that we are now seeing.
On the key financials, key numbers. I think specifically here, what we can pick up and note is the strong investments in R&D. They are actually recognized as cost. They are not capitalized, so strong input into R&D. So R&D costs actually increased from 11.4% to 14.1%. In monetary terms, that's about EUR 0.5 million more. We spent second quarter '22 versus year-on-year. That's quite much in our scale.
Another topic that we -- is actually in here in these numbers is the spot purchases. I think we roughly -- we bought worth of EUR 1 million spot components during the second quarter. And out of that, the net cost to the company after charging some of these costs from our customers was a bit over EUR 600,000 extra costs. And overall, I think the -- has also the market information there, semiconductor shortage is easing up. So there is sort of a easing up of the situation, and we still will have some issues in third quarter, but I think fourth quarter will be even more of sort of a hopefully normalized in the components and materials point of view.
On cash flow, one item that is visible in these numbers is that we had very heavy sales in June. So actually, that has impacted our accounts receivable and increased our net working capital. Also, the inventories are very high due to the situation of having this fairly long shortage on materials and components.
On strategy highlights. I think we -- 1/3 -- as I've said, 1/3 of our R&D resources are being spent into modifying our security and industrial products that they would not be using a very key shortage components. So that's -- and this has been, we call it, art project. It's the main project here. It has proceeded very well. I mean, as planned and targeted and we are in the final stages of verifying and validating these with some customers, we don't need to validate with every customer. Some key customers, we need to do it. And we are expecting already starting sales of the new modified products in September. So that would be in third quarter, and then it would be more full in use for fourth quarter.
Then we also launched myDT+ service portfolio. This is a online platform, now dedicated for industrial and security products, providing customers an efficient way to communicate with us, all kinds of application simulation and testing. And we can see what's going on at the customer side, they can see what's going on in our sort of test sites and so on in Wuxi, where we have our customer experience center. And this is the way now to increase DT service to our customers.
On other events, we are going forward with our environmental programs and targets and we've done some improvements at Wuxi, which is our second factory in China. We also, I mean, are now biannually measuring our employees sort of heartbeat meaning that all over sort of employee feedback twice a year. We also launched whistleblowing in June. So that's now active. We were active in China on the 21st China Work Safety Month. I think we have outstanding record on work safety and a top level of -- the way we run it and so on, and it was a very sort of a promising and positive to participate there. Also, we became a member of Ahlstrom Capital Collective -- or Ahlstrom Collective impact cooperation with UNICEF. And we have a network in Finland, and we are doing and improving the well-being of children globally through this initiative.
On business unit wise, what we expect then for coming quarters. In Industrial, we expect sales to grow in third quarter. Medical expect a double-digit growth in third quarter. In Security, double-digit growth in third quarter. And overall, for the full company, we expect double-digit growth and also for the second half, which is now our then official guidance. So business outlook. We see that the demand is strong, will continue to be strong in all the main markets and expected then for DT Group double-digit growth in total net sales, both in third quarter and also in second half, even though there is still component and material shortage impacting our sales.
And we must now remember that also there are exceptional challenging times in the world economy and many sort of big unwanted crisis going on and risks taking place. And those also might have impact for DT business, as well as the global economy outlook, even though we don't see it that way in our businesses, but the global economy outlook is softening and there are some dark clouds, which, of course, indirectly also can affect to what we are doing.
Overall, there is not very good market growth information available still due to the exceptional corona times and so on. Overall, we see Security market growing. 5% is still the official statement. I think DT management believes it's faster. Industrial, about 6%, that's probably in line. Medical has been growing faster than 5%, but there is some, as I stated also, after first quarter. So we see that the very, very strong growth in Medical is a little bit marketing down even though there still is good growth out there.
On financial targets, no change there. So annual sales growth, at least 10% EBIT. Operating margin at or above 15%. And then on dividend policy between 30% to 60%, we will share of our net proceedings with our owners.
So with these words, I would like to thank you for following us, and I'm now open to questions. Thank you.
It's Matti Riikonen, Carnegie. If I start with a couple of questions. First of all, now part of your net sales has been delayed in the fourth consecutive quarter already. Have you lost any business so that customers would have kind of canceled orders or have you lost business to competition? Or is it so that all the revenue that has been postponed, you will ultimately get when you just get the production rolling and the components?
We don't -- we have not seen that we would have lost customers. Of course, there can be some very small, but I mean, nothing sort of visible that would have material impact. We have not had cancellations in orders. So for both of your questions, the answer is, no. I think also that thinking what the world looked like before this unexpected event for Medical. And after that, I think still our view for the full year is about the same.
Good. Then secondly, you mentioned that some customers are buying more value-added products in Security. Is this related to aviation? Or is it also visible in other Security segments?
It's -- this is a very, very interesting topic. I think there's a good saying that there's always a silver lining in any dark cloud. So the thing is that we all are suffering of component shortages and have been, so has our customers and some sort of new customers. And we have sort of been able to manage many of these areas a bit better. And therefore, we have been winning more value-added business from some customers due to the fact that instead of trying to do something themselves, which they don't have had components for, they have then bought from us more value-added product.
And is this applicable to Security?
This is mostly in Security, yes.
Good. Okay. And you mentioned also that you have been gaining new customers in Security. So what kind of new customers are we talking about? Are they large or small and which geographic areas, are they coming from?
More and more like small and midsize. There has not -- at least not yet been any big changes in the large customers sort of.
Right. And then you mentioned now the Chinese aviation standard coming out in June. What is -- you mentioned that it is a factor that affects your potential positively. How in practice will it see in your numbers? Is it basically something you expect to see already something this year? Or is it going to be more 2023, '24 loaded? And how much in absolute terms might we be talking about?
That's a very, very good and important sort of question. I think first, the impact to sales is some minimal possibly for this year, then it should start '23. The challenge here is that we do not know and -- to our knowledge, it has not been. It's not public information, what are China's plans. I mean, we've heard some information that they are planning to install CT technology to all their Class 1 airports, which means the main airports like Beijing, Shanghai, Hong Cho and Pudong or Guangzhou, Shenzhen, et cetera.
But I mean, there's no -- we don't have any information on what kind of time span they have and when would they start there is not yet any big bids out. We believe that we are well into this business, of course, it remains to be seen when there is a tough competition for first big programs to come, what kind of competitive -- has the competitive landscape been changing, whatever -- so are there new things going on. And we have been, I mean, part of also in testing for these standards with our products and so on. We should have at least the information we have that we are well -- sort of well placed for that business.
As size, I think it most probably will not at least at the beginning to be the size of what U.S. is doing right now because U.S., United States, they are renewing all their airports. And China is, to our knowledge, it's just will be renewing the level 1, the biggest airports. And as we know, there's a lot of, I mean, needs in China to develop the society and infrastructure. So we don't know how much they will actually be funding these kind of events. So it's a bit -- it's open question. What should be a nice addition.
All right. I will give the floor to others. I have some technical questions also, but let's save them for later.
Juha Kinnunen from Inderes. One additional question about this sorry, now aviation standard, it was basically what you are expecting -- we're expecting. So technical demands and everything like this, it's all in line with your products and you should be able to roll them out quite easily.
Yes. Yes, it is. I mean we have -- I mean, this standard -- I mean, probably we waited it for 1.5 years. Finally, now it came out. That's good. If there were no surprises in that. But I mean knowing China is that everything can change, and that's the exciting part of doing business there. And that's the reason we have been very successful is that I mean, there can always be some new sort of new deeds and so on, and then you adapt so and then you get going, so.
All right. Very well. And one additional question about the topic that we haven't been discussing a lot lately, multi-energy products, I think they are an Industrial Group as far as I know, and there is a good demand there right now. So I'm just wondering, have you found good applications for them? Are we seeing a good demand for them? Or is it other products that are doing well in the Industrial?
Yes. The multi-energy products did not contribute at least very much to this Industrial business growth. I mean we have some tests ongoing. It's challenging to bring out new technology. It's sort of a no-man's-land, and we are proceeding -- actually, the performance is outstanding. And I think the challenge there is the cost side and especially to find applications which can benefit from this super performance.
Excellent. And this is probably a technical question that maybe Matti was referring to, but non-recurring items that you booked here. I understand that there were plenty of non-recurring items in some sense. But I don't know how you came up a bit this number because all of these issues have been already here before at least in some way?
Yes. I mean, this non-recurring item that we had for the second quarter is related to actually developing and managing the group structure. So it's -- actually, it's external advisers.
All right. So it actually nothing to do with the spot prices but...
No, no. Spot prices are diluting, yes, our EBIT. Actually, the spot -- the purchase price variance, as we call it, the spot price in detail, it's actually a part of the production fixed cost. It's not in the -- what we call throughput, which is the bill of material -- I mean, sales just by the bill of material, material costs. So it's diluting the EBIT.
Yes. This is clear. One more for me. This is related to fixed cost. They are growing rapidly. I suppose that's understandable when personnel is growing and the personnel expenses are going. But is there anything like more cost inflation coming? And is this figure that we can use when we are going forward, estimating forward.
That's a good question. I think the '22 is -- there's many sort of also small items increasing the fixed cost. By the way, one is logistics. There's also one-timers that will not continue. I mean, overall, we have not seen inflation in our materials as an example, except this spot purchases, which should go away.
On inflation affecting our costs, we have some salary inflation due to salary increases that is increasing the sort of fixed cost outside that. There is no major items. But also in this -- in salaries and so on, we are using also external services in R&D on when we do these modifications and so on. So there is a higher load on R&D spending that there would be normalized.
All right.
Nikko Ruokangas from SEB. You told that your order books are now bigger than ever. So what are your current lead times?
Well, that's -- there's high volatility there. It very much depends on, is that product being forecasted. And then there's quite -- I mean, in some products, we are talking even 1 year. Also answering the -- on this order stock is that we also have some customers, especially Industrial and some Security. Well, also Medical overall, I think, is that are ordering very fairly long time. I mean we have orders already also for '23. So this order sort of backlog is also in -- it's longer than before, but also it's healthy from the thickness point of view.
Okay. Then on another topic. So how much do you believe that you would have lost sales due to the component issues in Q2 if we leave that one quality issue aside?
Too much. I mean we have been talking here also on how much sales was postponed, but now it's been so many quarters that we have sort of delayed that it's very, very difficult to sort of earmark and give an answer. I think the -- overall, the best picture is that you look at our sort of guidance what we see as expectation for the second half. And also like second quarter was -- should have been much better. So we sort of -- we lost -- it was -- we delayed some sales from there. So -- but to give a precise number for that reason, earmarked would -- is a bit challenging.
Okay. But compared to the previous quarter, so is it on the same level?
It probably still for second quarter is probably in the same level.
All right. Then one last one from me. So you talked that you are taking actions to improve your net working capital. So can you open a little bit your current net working capital situation and access on that?
It's -- well, it's way too high. The current network capital -- in our business, we've always had a little bit high net working capital, also due to the fact that some of the normal conditions, also the lead times are for like the special semiconductors like photodiodes, we use, lead times are very long. So we have to be prepared for that.
On second quarter, okay, the account receivable was exceptional due to the sales so much concentrating in June. Also going forward, I think when meeting the second half sales that will lead that also the accounts receivables will increase, of course, due to the longer sales. So what we need to be looking now really is the first material stock, I mean, what do we have in stock and what can we do about that? Then another thing is now we are coming to the second half of the year, we will have also annual negotiations with customers and suppliers.
I mean, what can we do on accounts payable times, what can we do on accounts receivables times and so on. I mean, so far, we have been very focused on growth, and that has been the major priority. And now we need to be seeing that in this new, let's say, also new era. I mean, if the global economy is getting a bit softer and so on, that should be a little bit be more tight on managing it and setting out KPIs for our sort of key employees.
So what we have done is we have very -- with a very large group with -- gone through on all aspects with the team so that we are well unified and we are one team in leading that to be really having big effects on that kind of topics would take come in 2, 3 years because it's also -- it's a lot of psychology. It's a lot of negotiations with all the stakeholders you have and so on. And it's a tough topic. Of course, nobody gives out what they have, for sure. But we need to make sure that we get what we need to get.
Okay. That's all from me.
Yes. Joni Sandvall from Nordea. Maybe a follow-up on the R&D cost. So can you open up a bit about the split, how you are splitting those on the cost items? We were speaking about higher external personnel costs, but can you split a bit about the...
It's -- I mean, it's still -- I mean, the biggest chunk, biggest part is salaries, I mean, own salaries and so on. We have also some, let's say, the shortage of certain talent, and then we are using them outsiders to help in those bottlenecks and so on. It's -- as an example, there's a huge demand in China for any competent qualified, like ASIC designers typically. I mean there's -- those guys can name their salaries and so on. China is building up their own semiconductor capabilities and competencies, and these guys are very, very wanted and so on. And so there's also a certain sort of specific topics that we need to address. So it's overall, like I said, so salaries are way above 50%, still internal salaries.
Okay. Then still on the R&D costs now for the Q3 and H2. It was, what, EUR 3.2 million now in Q2. So should we see a gradual decrease in the R&D costs now in H2?
You should see lower cost compared to the sales. Hopefully, we are able to grow the sales and then we can also invest more into the future and sort of do more with our R&D. We must now also note that for a couple of quarters, 1/3 of our R&D has been working on this modification projects. And that should be after third quarter, we should be able to then use that sort of -- those individuals into future projects.
Okay. Last one from me. In which business areas you are expecting the most issues with the components now in Q3 and H2.
That's a good one. I think overall, I mean, this -- the modification projects help mostly probably Security and then also Industrial and then in sort of a comparison to the sales probably, I mean least Medical, but also there's some effects in Medical.
Okay.
We also must -- just to add here, we must remember that it's -- the sales has not only been limited because of DT not getting materials and components. It's also indirectly. I mean customers getting materials and components. And then actually, the third item really is that nobody knows in the markets or any markets that how much actually are customers capable of selling through.
So everybody is most probably is over ordering what they need. And when things start to clear out and so on, then you really see what the picture is. But that's -- I mean, as we see, I mean, we believe that the security market has been underinvested during the -- just -- I mean in normal times, it's underinvested plus the growth of new topics that are driving. So then therefore, we are quite confident on Security. Also still, despite whatever these things are going on, the healthcare overall in global scale is a focus topic. I mean all countries are improving and making their healthcare infrastructure stronger. So that should yield good medical business, even though the growth probably percent-wise, is a bit less. And then Industrial overall so we are quite confident and we have placed our, let's say, eggs well in that basket. So this is the explanation that we sort of believe positively on the outlook on the business.
Arttu Heikura from Evli. Regarding your Q3 guidance, especially for IBU, so you expect that the business unit should grow. Does it reflect that the business unit is expected to grow less than double-digit figures? Or is your visibility to the market weaker or.
I think 2 things there. It's -- we were not courageous enough, let's say, to -- I mean it's possible that it grows double-digit. But I mean there's also some like component shortage issues and so on that effect. Yes, the market, I mean, looks quite good there. But also, we must remember that the third quarter also for Industrial business was quite good. So it's -- this always is what's the comparable year-on-year quarter and so on.
But the thing is that we really -- I mean trying to look -- I think it's -- it can be that, I mean, some part of the Industrial business a little bit is -- the growth is sort of, let's say, mildening down like we had very heavy growth in food scanning for IBU for second quarter. I mean will that continue and so on, if there's huge pressures on the global economy and these kind of things. So it's let's -- a little bit less clear, let's say, and the strong underlying quarter.
Okay. Also, could you open up the setback in medical supply chain? Is it a thing that could recover?
I would say that in normal conditions, if the supply chain would have been normal, actually, we probably would not have seen this effect. But now, I mean, in -- I think at best, we have -- I mean when we get anything, 2 days, it's already at our customer. So I mean when you really have a supply chain, it's lean as lean as possible and so on. So any error actually will really in real-time, almost be visible in the sort of output. And then if you have something this kind of thing on the later part of the quarter, as an example, it's very difficult to prevent. It doesn't hurt your sort of that quarter sales.
So anything can in a way, happen. But I mean, like in normal conditions, this would not be, I mean, visible. And one thing also is it was not just one. It was 2 suppliers, suppliers. So it was a little bit a topic that happened to hit 1 quarter, but then it's out, and we go forward and next quarter is the better.
Okay. Good.
Matti Riikonen from Carnegie, with the other questions. Could you discuss the component redesign or replacement activity a little bit more? So what kind of components are you actually replacing primarily? Are we talking about the infamous Intel programmable chips? Or is it...
We are very much talking of this program on biologics and then also changing the complete supply chain for that part.
Right. And then if you are now doing it in 2 stages where the first one was completed by the end of Q2, so it should have a positive impact as of Q3. And then the second one in Q4. What kind of revenue easing impact will these 2 have? So is either of those more important than the other. So is it a kind of linear improvement in terms of component availability or something other? Just trying to understand...
Yes. I think we completed a little bit already, I think, very late second quarter, but the biggest chunk now the big -- and we're talking of tens and tens of different products, which are under testing right now and under getting approval from -- part of our customers approving. So this -- we should be able to then deliver in out and recognized our sales in September. We must remember that this is, again, these components are coming from our, let's say, suppliers, suppliers. So we need to get approval. We need to get these into our subsupplier, which is typically a contract manufacturer. So -- and then they need to make those -- they need to ship those to us. We need to put them together and ship to our customers. So there's some lead time here, which takes some time.
Right. Okay. Then about the underlying demand in Medical now that you have had the dip in sales, of course, interesting would be that what kind of normal demand and top line growth would you have had excluding that one? So should we understand that it's pretty much in line with Q1, where there was a single-digit growth or something else?
I mean that's -- it's challenging to answer, but I don't think we would have seen such strong growth that we saw like in Industrial and Security due to the reasons, probably it would be very close to like somewhere, I mean, double-digit around that in -- but also that would have included component shortages as we had in the first quarter. So I think this kind of component shortage has now taken so long time that it's -- everybody is a bit blind what really is going on. And now we -- I mean, you see all the major semiconductor companies actually including TSMC had announced already much sort of worse sales results, especially a weaker outlook. I think so we will be -- when we are talking as the third quarter, I think we are -- it's totally different.
I mean Intel just came out with there. I think they were 20% less than what was the predictions. And Micron did come already in July, okay, they are in consumer in memory chips and so on, they even had heavier drop. So if you look at the mobile phone sales like in China, it came down in April and May, I think it was 1/3 less. So there is -- in the consumer demand, there's already big changes. It's possible that even automotive is coming down a little bit despite the strong, let's say, electrical -- electrification is driving the demand hugely. And the thing is that when everybody has been short, you don't know actually this is the real sort of selling through.
To add here, I think one thing is that now we are talking also of regionalization, I mean it's -- U.S. is building their own infrastructure. Europe also -- China has there and even South Korea and Japan. So it's also -- it's a thing that the whole world will not live as lean as before. So globally, the supply chain for any business using electronics will have a little bit more -- will be also maybe 1%, 2% growth for some time. So it's big changes. But I don't think in history like this rapid drop on -- like if you look at the semiconductor equipment and how much the spare sales have been coming down. It really is like from huge demand, it's coming down. So there's going to be big changes.
All right. Then a question about your capacity. Now that you seem to have quite good demand and you have the second factory running. I think many would be interested in knowing what kind of spare capacity do you still have at your plants? How much extra demand could you kind of take without any significant additional investments?
A lot. So I think the production capacity is not the bottleneck. We are doing a very critical, let's say, light assembly. We are buying from our vendors with high capital-intensive demanding parts. So basically, what we are doing in certain [ treats ] a lot with our light assembly processes and then the testing. And also, if there is -- if there would be a shortage on any bottleneck, we would -- and we could buy a new equipment and increase that capacity. And right now, also the lead times to all kinds of electronics equipment are getting much shorter. So that's not -- I mean, that's the least of my sort of -- I mean, fixed list items.
Very good. Then regarding the delay in the Medical segment, related to your subsuppliers. Did you have to pay any penalty?
No, no. It's -- no. It was technical problems, and they were not able to produce. That's what it was. So they were not able to ship to their supplier, which is our sort of supplier -- I mean contract manufacturer and then it hit. And because there's no slack in the supply chain. This came out immediately.
Okay. And then finally, the myDT+ service that you talked about, how should we understand that? Is it a kind of new business area in a way that you are trying to create new revenue from that? Or is it just a kind of additional service to the customers that they don't pay for?
At beginning, it's more of additional service. It's on -- indirectly then helping our sales and making us stronger from the point of view of customer helping their business. We don't know yet could it be something that we could build as a business, but that's why we are piloting, we are testing, and we are active with that -- with all kinds of customers and getting feedback. And we'll see where it leads to.
Right. So, so far, it's basically sales support function and then the opportunities to develop perhaps into chargeable services.
Yes.
Okay. Great. That was all for me.
All right. I think we have spent the time that was reserved for us. Thank you for your patience, everybody who is there with us and looking forward for delivering much better third quarter in 3 months, and I wish everybody a nice last part of the summer before we've hit the heavy working fall, but I'm very excited of what's there up for us. Thank you, and goodbye.