Scanfil Oyj
OMXH:SCANFL
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Good morning. Welcome to Scanfil's Q1 2022 results webcast. My name is Pasi Hiedanpaa and I'm the Director of IR and External Communications at Scanfil. Here today I have our CEO, Petteri Jokitalo, with me as well and he will go shortly through our results. Petteri, please go ahead.
Thank you, Pasi, and welcome all also from my side to Scanfil's Q1 results call. Q1 '22. strong demand continued under demanding circumstances. Record high sales EUR 197 million, a 20.4% increase year-on-year pretty much driven by all customer segments. What come to individual products, I could mention some locker solutions, elevator products, reverse vending machines for drinking bottles, control systems for battery solutions, indoor heating, indoor cooling systems and so where we saw very robust demand. Q1 operating profit. EUR 10.3 million or 5.3% operating margin; EUR 8 million net profit and EUR 0.12 earnings per share. Other highlights or should I say low lights during the quarter, for sure material constraints continued. We were really suffering from challenges in material markets especially electronics, especially active electronics meaning semiconductors was causing higher cost.
We needed to use more spot market in order to secure our -- and maximize our customer deliveries. That was also impacting to our inventories so that inventories were growing. And also those continuous material constraints were causing extra work, decreasing productivity and so on. If going to strong customer demand, as said, strong customer demand was coming from all the customer segments. You see here the year-on-year Q1, as said, more than 20% growth and you see -- you can see here that all segments were growing, growing very extraordinary high level. I have to say that we also had very high spot purchases during the quarter and in order to secure materials and together like EUR 17 million. And here you can see the split between different customer segments, how much we use the spot market. The spot market is something that we are able to invoice that from customers, they are paying that.
So that point of view it's not causing any extra cost, but that invoicing is non-margin or very low margin invoicing. So not -- no remarkable impact to operating profit from that sales to customer. And that kind of sales, we have like EUR 17 million during -- and then during the first quarter. And cleaning that out, you can still see that we had very nice growth rate in different segments. Advanced Consumer Applications, almost 16% year-on-year; Automation & Safety, 17%; Connectivity, even 31%; Energy & Cleantech, 17%; Medtech & Life Science, 9.7% and in total 10%. Some maybe wonder that why the total is only 10% because all segments are above. The reason is very simple. 1 year ago we had so-called not continued business still in that traditional telecom business. Telecom cabinets business we stopped somewhere last year so that's impacting that. We don't have that business anymore. That's causing -- or why the total growth rate is only 10%.
All segments -- existing segments are growing faster except Medtech which is above 10%. Some other key numbers. We went through sales and operating profit numbers. Return on equity pretty much same level, 15.2%, we had 1 year ago and also the whole last year -- end of the last year. Equity rates are pretty much same level as well, year-on-year it's down by 7% from 52% to 45%, but we are at the same level where we were at the end of the last year. Net gearing a bit decreased now to 37% like a negative development there in year and 28.9% last year, 5.9% only. And then you can see here the net cash flow from operations are negative means EUR 13.6 million, pretty much driven by of course our increased net working capital and key drivers there are increased receivables from customers. There we do not see any drama. It's very natural and reflecting our growing top line and growing sales.
Other driver growing inventories are something we need to pay attention and I'm going to speak about that a bit more a bit later. Employees at the end of Q1 are almost 3,300. They are like increased year-on-year and very clear reasons. Our top line has been increased quite robustly since that and our employees are growing in line with that. If going to balance sheet, the total balance sheet now EUR 486 million. We see strong equity ratio, still sustainable net gearing 37%. But as said, something to pay attention is inventory growth and we see that year-on-year we were growing our inventories by EUR 92 million and of course drivers very clear: very strong realized customer demand development, continuously increased customer outlook. We are preparing to meet the rising demand by buying more materials in and same time, we are facing material availability challenges and we have used quite a lot for the spot market.
And we have seen components material prices increase and especially spot material price level is high and this is impacting our inventory level. And so now, EUR 210 million our total inventory value and we have been financing that inventory growth by our cash flow and on top of that by increasing our loans. And we can clearly see here that our interest-bearing bank loans were increasing year-on-year like EUR 42 million and pretty much put to inventories. And of course, that's clear that even our financial position is still stable. Our cash end of Q1 was EUR 8 million. On top of that, we had still unused credit limit like EUR 50 million. It's clear that we need to be able to level off the inventory growth already during the year or really need to start to see some result during Q2. Here as quarter sales growth, you can see a nice trend here. Maybe the other message here is that if we see that typically the lowest quarter of the year is Q1.
You can see here Q1 '19 was the lowest, Q1 '20 was second lowest, Q1 '21 was the lowest as well. And that point of view, this EUR 196 million is of course excellent start of the year and fully in line with our understanding and with our customer forecast that demand for 2022 looks very strong. And even if taking those PPV or those spot market purchases away, we can see the same trend here that actually our sales, if we are reducing the sport market purchases EUR 17 million away, was like EUR 179.6 million during Q1, clearly 10% above our Q1 last year and this is also indicating very good for the year 2022. Here you can also see the trend that the spot market purchases trend has been growing and now we see still high PPVs to continue during Q2, maybe even Q3. But as soon as electronics market situation start to improve, we see those PPV or spot market purchases to start to decrease.
As said also in February when we had the last year result call, we have been quite stable now for a while like a EUR 10 million level what come to absolute OP and we have seen declining operating margin. Now it looks like we are at the same level, somehow that decrease has leveled off, we have like 5.3%. If we are comparing our operating profit to our sales without spot market purchases, the operating profit was like 5.7%. It's that point of view going to right direction, but we have still work to do. And one focus -- other focus area besides inventories this year is to get our operating profit back to growth path. What is supporting that, we see very good demand -- customer demand for rest of the year. We believe that when volumes are increasing, we are able to see our operating profit to improve through the year.
And then maybe to mention that yesterday we had Annual Shareholder Meeting and was decided that we will pay from last year like EUR 0.19 dividend and that is like a ninth year in line when we're able to grow our dividend. Our policy is so that we plan to pay about 1/3 of earnings per share as a dividend and payment will happen 2nd of May. Outlook and focus in 2022 mainly driven by very robust customer demand and also higher-than-expected spot market purchases and also maybe a bit changed outlook for spot market purchases continuation. We needed to change our guidance for 2022 sales last week Thursday, April 14. Our new guidance is so that we estimate that our sales this year will be somewhere between EUR 750 million and EUR 820 million. Before that the other estimate was EUR 710 million to EUR 760 million. And the same time, we didn't see any reason to change our operating profit estimation and it's like unchanged and still like EUR 43 million, EUR 48 million.
And also that's clearly indicating that we believe that our profitability will improve and absolute profit will improve through the year. Of course it's clear that there are a lot of uncertainties, lot of risk around us and that this semiconductor availability issues will continue for sure in some level the whole year, maybe also next year. We have war in Ukraine. We have COVID-19 especially in China right now and causing risks and no one of course know exactly how the work and environment will develop from now on. Our focus areas are very clear that we see very robust organic growth possibilities. Our customer forecast very strong and how to realize that, we need to secure our materials. We need to get materials in and we have an excellent possibility to grow. Profitability improvement clearly that we need to be focused -- focus more to improve our profitability during the year.
There are of course some risks related to cost inflation and so, but other hand, our business model is not -- definitely not the worst one to tackle that. Now for instance that very widely used open bulk pricing model help us to get our costs in. And in very many cases, we are even negotiating and changing the prices monthly level, at least quarterly level. And I'm confident that we are able to get those cost increases to customer prices. We have done that and also in future we are able to do that. And then third focus area definitely is inventory growth, we need at some point to level off and we are working very hard to see some positive signs already during Q2. Long-term targets unchanged of course. Annual organic growth 5% to 7%. Q1 if we are cleaning spot market purchases away, 10%. We are quite nicely in that target, a bit above. Operating profit level at 7%. There we are not yet -- we have work to be done.
I believe that this is a realistic target to 7% and we are able to get there. Now 5.7% if cleaning those spot market purchases out, 5.3% if spot market purchases in our operating margin in Q1. And dividend level is about 1/3 of what was already last year, about 1/3 of annual earnings per share. And that kind of great organic growth what we are facing right now of course means that we need to make sure that we have decent production space everywhere. And we have already published news that we are going to increase or we have increased production space, both Atlanta and Wutha, and we are still studying our options in Suzhou what to do and definitely going to do something there as well. Besides this, we have quite many considerations, smaller or a bit bigger expansion consideration, related some other factories. We are hopefully able to come out with our release -- press release about this later spring or summer time.
In the long run, as already discussed last time in February, we definitely see North America and Asian market as interesting areas where we should have extended our factories. There are quite many macro level things -- trends which are supporting that. Geopolitics increasing insourcing to continents. Both North America and Asia are definitely growth markets and so for us that's something coming maybe 3 to 5 years perspective areas where we would like to see to have wider factory network. Central Europe definitely still seen as an attractive growth driver for Scanfil. Last year we had a tough year. Operationally we closed Hamburg. We moved big part of that production to our other German factory Wutha and our focus was really much on that technology transfer. Now we are able to somehow start to look for other growth opportunities again in Germany and actually the market looks good and the business looks good. We have seen signs that Wutha factory acquisition really starting to fly, seeing lot of positive there.
I think that now we have moved to questions-answer session. Pasi, is there any question so far?
Thank you, Petteri. [Operator Instructions] First one came from Pasi Vaisanen from Nordea. How much from the reported sales growth was underlying volume growth? Well, he asks if changed, what volume growth in Q1?
Yes. If 20% in Q1 and 10% would say that driven by spot market purchases, we have 10% left and how much were then driven by price increases out of that 10%. It's of course impossible to answer it exactly because price increases are not happening 1st of January, but somewhere depending on what kind of schedule we have with each customer. But a few percentages I would like to say, only a few, definitely something maybe 2%, 3%. So the remaining would be like definitely -- more than 5% would be like real volume increase. 5%, 7% clean volume increase.
Okay. Pasi continued regarding China -- the investment in China what we are currently doing. Have you seen weakening economic growth and weaker end demand for Scanfil in China?
No, we have not seen any. Of course we understand the risks and following clearly that macro view and real estate market and so on. But so far we have to say that we have not seen any weaker demand in China. But of course there are some short-term risks like our factory located in Suzhou close to Shanghai. We all have been able to read the news about lockdowns in Shanghai and also other cities and those are like causing short-term risks including material availability and so. So far we have been able to keep our factory open in Suzhou every day.
One more question from Pasi. Is there some components which are now impossible to get from the market? Could it reduce sales volumes? A good question.
Yes. There are all the time components what you are not able to get for instance today or next week, but of course there are no components that you are not able to get with any time schedule. The time schedule can be after months or something like that. This is exactly the environment where we are living and that's exactly why it's causing so much extra work to make changes. We have also quite many redesign exercises ongoing with our customers in order to replace some components, which are very difficult to find or even impossible to get in near term. There are a lot of activities ongoing to survive in that kind of circumstances where we are. But how much impact to sales yes, we have been living in that kind of environment now about 1 year and we have seen our sales to grow very robustly all the time. But it can be very difficult depending on one individual product or so. But we are low volume, high mix kind of EMS company so that means that we have thousands of products what we are producing. We are not so much depending on one individual product.
Okay. Actually quite good to continue here with the customer accounts. Joonas from Evli. You mentioned new customer accounts within Advanced Consumer Applications. Could you elaborate on the type of the products these involve?
Yes. Actually that new customer, which is growing very quickly in that segment, is quite interesting one. It's not -- it's like kitchen [ mosaic ] kind of customer that point of view, not exactly like industrial customer where we are focusing. And professional kitchens and also consumers. And we have been able to ramp up the remarkable volumes really assembling kind of gives the message.
One from [indiscernible] regarding the profitability and guidance there. Scanfil is guiding profitability to go up towards the end of this year even though the full impact of the European war is highly uncertain. Can you try to elaborate how much of this high confidence is related to better knowledge and handling of corona related problems?
Where this confidence is coming that why we believe that our profitability is growing through the year, it's pretty much -- first of all it's related to our customers' outlook, their growing needs. It's also reflecting our growing confidence that even generally we do not see the material market to improve through the year. But we have learned a lot how to fight and how to survive in that kind of market through the past year and I believe that we have also developed our skills to find materials and survive in that market.
So we have more confidence that we are able to utilize that huge potential what we have this year coming from customer demand to increase our sales and doing that, increasing volumes in our factories are helping us to improve our profitability. It's not so much to do that we try to understand that how the war in Ukraine is going to develop or is there -- if there will be more COVID waves in Europe or if COVID-19 is really escalating in China.
We don't try to do that. I think that no one knows what's going to happen with this crisis. But if what comes to COVID, what comes to Ukraine war, what comes to component market? If the circumstances remain more or less like we see today, then we believe we are quite confident -- we are confident that we are able to slowly improve our profitability through the year.
Quite many questions from Antti Viljakainen from Inderes. First one, could you describe how Suzhou factory is operating in current COVID-19 situation in China?
Let's take that first. Yes, there have strict rules. For instance, all our personnel is tested every day. And we have been maybe also a bit lucky that point of view that at Suzhou we have not seen that kind of amount of new disease cases per day in Suzhou than what we have faced in Shanghai what has led to wider lockdowns in Shanghai than in Suzhou. So our operators have been able to come to work and factory every day. White collars of course can pretty much work at home. So we're able to get our operators to work and after testing this, we didn't face any -- so far any bigger issues. That's the way to do it. Of course we are facing then, as said, some issues with materials nowadays what is causing a lot of extra work maybe and that situation will continue for a while. And of course we are following daily basis the situation in China, how it continues.
Antti continues regarding the logistic problems and lack of employees. Does the big risk for production disturbances come from logistics/raw material availability or lack of employees?
So far of course has been -- we didn't have any risk or lack of employees was not realized risk so far when it come to COVID-19. But so far COVID-19 risk in China has been related to materials availability.
Okay. Antti continues does the recent COVID outbreak delay your plans with the expansion in Suzhou?
Not so far. We're still evaluating different options and communicating with authorities what could be done, what is not possible to be done also.
Okay. Antti also looks into more -- into detail when it comes to the inventory levels. Do you see any risks that Scanfil's inventory levels have increased structurally?
Of course it's not positive that inventories are the level where these are and this continuous growth of course is worrying and can also include risks and that's the reason that we need to level off that growth. Risks, I'd like to guide up that our money is now pretty much in inventories.
And secondly, of course it can also lead to situation that if you are not able to consume those inventories during some kind of decent time and if materials stay in inventory very long time so let's say years, that also leads kind of excess obsolete kind of risks. For that kind of situation, of course we have quite good agreements with our customers, but still of course can lead to difficult discussions with customers. And then basically it's not win-win, it's not positive from any perspective even we believe that we are well protected by our agreements. So that yes, these are included in longer term if we are not able to change that development.
One more question if there are no other questions coming in. [indiscernible] is asking about our acquisitions. How about acquisitions? It has been quiet for many years now.
That's true and that's definitely good question besides other good questions. Yes, it was 2019 summer we bought Wutha in Germany and no acquisitions since that. I have to say that it has been a bit more quiet period now. Not much investment banks have been offering like acquisition opportunities. Maybe this insecurity what we see; war, COVID, material availability; is not the best time to sell a business if you somehow believe that for long term. Maybe that's one reason if you want to speculate.
Other hand, this year we have like a great opportunity to grow organically and our money -- and the fact is that our money is pretty much in inventories as well. But for sure, acquisitions are definitely in our toolbox still and especially when realizing that growth opportunity -- longer-term growth opportunity in Asia outside of China and United States, definitely I see that this is a very strong option to look at good companies to be bought.
If there are no further questions, so we could wrap this webcast up. Would you like to say a couple of words still?
No. I think that a lot has been said. Thank you very much for your good questions and interest.
Thank you.
Have a good day. Thank you. Bye.