Basler AG

XETRA:BSL

Earnings Call Transcript 2022-Q1

[Hardy Mehl, executive]

So it looks like, as everyone is in. Welcome, everybody, to the Q1 earnings call. My name is Hardy. For those of you who don't know me, I'm CFO, COO of the company. And I'm very happy to present you today very sound, solid and good numbers for the first quarter of this new fiscal year.

The agenda of today's presentation is like the last ones. We start with an executive summary. We then dig deeper into the financials, have a quick glance at the share development within Q1. And then last but not least, come to the outlook for this year and also for the next 4 years until 2025. And at the end of this call, we also have enough time for a quick -- a sound Q&A session.

Yes, starting with the executive summary and with the market environment around us during Q1. So first of all, the numbers of the industry, of the German vision industry, bookings were up 16%, billings were up 13%. So we were in a growth environment as the long-term average growth rates are in the range of 7%. So the market conditions, in a nutshell, were good.

We saw a strong demand across the board in different verticals, also strong demand of our peers -- that our peers had. We saw a little bit of a cool down by end of March. And then also looking now into April, we also saw that the demand cooled off a bit also because of the lockdowns in China. We come to this in the outlook session.

But all in all, order entries are -- were high, order backlogs were high. We are still having very long lead times in the industry, long order horizons from customers due to those long lead times. And this is all caused by a mismatch and this is no news of supply and demand. The whole industry is suffering from chip supply constraints that remains very challenging. And what we have also seen in the industry is an ongoing consolidation trend. There was quite a significant M&A transaction happening during Q1. The company of Zebra acquired Matrox for a pretty high multiple. You can look it up. Zebra is a public listed company, you will find it easy.

How did we compare against the industry? Again, we have beaten the industry with regard to bookings and billings. Our bookings were up 25%. Our billings were up 21%. So this means -- and also here, we have great news. The sales has a new record, quarterly record. We achieved EUR 66.3 million in the first quarter.

Our earnings came back to double-digit numbers, earnings before tax margin, 14%. We have stabilized our gross margins. We talked about those in the second half of last year. This needs to be here H2 2021. Actually, there is a typo in -- so compared to the second half of last year, where the margins went down. And then since then, we are making a site move. So we were able to stabilize, even though we have some effects because of spot prices. We have also some effects on the M&A transactions that we recently did, but I come to this in a moment.

Free cash flow was significantly impacted by the 2 acquisitions. Also here, I'll give you more details later on. We are having a significant backlog. So by end of Q1, we were in the range of EUR 150 million. So this is really substantial. For those of you who do not follow up us in the long -- for a long time, this needs to be really kept in mind when we talk about order entries and sales and also outlook for the future. This high order backlog is also due to the imbalance of supply and demand and the chip shortages.

Last but not least, we made quite some progress on the M&A activities announced in December and then closed in January. We acquired 2 of our Korean distributors, so the closing went well. Also the integration started right away in January. And yesterday, we announced also another transaction. We have -- or we are in the midst of a process to create a joint venture with our French distribution company, or distribution partner, and the joint venture will start to operate, hopefully, mid of the year under the name of Basler France. So also here, we will increase our direct presence in one of the largest European country markets.

Looking at the team. So what happened here, especially due to the M&A transaction, but also due to organic hires, the team increased to almost 1,000 full-time equivalents. We are keeping the foot on the gas pedal with regard to scaling up the organization. So our plan is, this year, to hire approximately additional 100 new colleagues over the course of this year, on top of the ones that you already see here.

Just a quick reminder, the transaction in Korea was about 50 new colleagues -- local colleagues, 10 from one distributor, 40 from another one. So in total, about 50 new employees in Korea due to the M&A transaction we did recently.

The split changed a bit, 39% in sales and marketing. This is especially due to the offset of the M&A transactions and the rest stays more or less stable.

Yes. What did we do on the product side? Maybe first of all, we continued to heavily invest in R&D. In the first quarter, we invested almost EUR 8 million in R&D. This is approximately 12% of sales. We had still some glitches due to the causes of the cyberattack we had back in November last year because the R&D systems are pretty complex. So -- and in the recovery and the renovation of this system and also in the way of making the systems even more secure, we had still some busy work to do in Q1, and this disrupted also the R&D projects.

On the product side itself, we planned also to have very limited launches in Q1. And maybe here's just some or 2 highlights I want to mention over the -- in this call. One highlight is that we are starting to extend our technologies that we are offering on the 3D side. You might know that we have already the so-called ToF technology, so time-of-flight technology, on board. But we are now also offering stereo technology, as you can see on the picture here. And those products run all under the pylon software development kit.

On the other hand, we also extended our product line for our medical customers who typically need special dust protection and special cleanliness requirements in their applications, for example, in lab automation devices, so laboratory automation devices. Here also, we brought out new products with new features in all that with a special dust protection for such applications.

These are just 2 examples. What I also want to stress again is with the heavy investment that we are doing, they go mainly into 3 different areas of R&D work. In the center, you see the focus point of our investments, this is our software development kit, pylon. So on a continuous basis, we are extending the feature set of this software. And the software is for our clients, the gateway to our products -- our hardware products. You see this in the next ring. And this ecosystem of hardware products from cameras, cable, lenses, lighting, enables the customer together with the software to build their vision system -- to design and later on to build and sell their vision systems.

And in the other ring, in the wide ring on top of it, because so far for pylon and the hardware products, we talk about standard products. With the other -- for special clients and special projects, we are also doing customized designs and adapt mostly standard products to the needs of our customers and sometimes also to full design for a special customer.

So also here, just a reminder, we are on our path from an originally single component company, so a camera company operating in factory automation. This is at the lower left. We are step by step by step making inroads into becoming a full range provider for computer vision. So on the Y-axis, we are extending our product line with cameras, lenses, cables, processing units, lighting technologies. And on the X-axis, we are diversifying our business into new markets from originally very factory-automation focus towards medical, traffic, logistics or retail automation applications.

So we are well underway. Also the recent transactions on the M&A side, where we acquired our distribution companies, is helping in this journey because on the Y-axis here with the product portfolio offering, the change in our profile as Basler needs to be directly also executed at the customer. And if we have no conflict of interest because it's all one party, it helps to execute this strategy.

So having this said, we are leaving the executive summary, coming to the financials. Let's have a deeper look and start with our bookings and billings. So top line, you can see Q1 was again a very, very strong bookings quarter. We stay in the range of EUR 85 million bookings. I have to mention here also, I mean, a little bit of extra bookings we had on the transaction in Korea. So the organic bookings were a bit weaker. However, they were much stronger than in Q1 last year. And Q1, the EUR 67 million last year was already quite a strong month -- quarter, excuse me.

On the revenue side, you see that we are significantly growing compared to the level of the second half of last year and also compared to the Q1 of last year, and we are happy to see this upward trend on the revenue side. Nevertheless, you see again a month, bookings higher than billings. And you see for here now in this chart, 5 exact consecutive quarters, a significant higher booking level than billings level, and this led to the already mentioned high backlog of approximately EUR 150 million.

The regional split of the EUR 66 million quarterly revenue, we have 17% we realized of the revenues in Americas, 27% in EMEA and 56% in Asia. So no news here, very Asia-heavy revenue streams and businesses. And there is -- in the region of Asia, there is a little bit of shift -- or happened in Q1 from China that was -- which was a little bit weaker in the first quarter compared to other areas of the world. But again, we acquired also some business in South Korea. So there was kind of a little bit of a shift there within this 56% points.

Yes, further down the profit and loss sheet, making a hold here at the profit -- gross profit margin and absolute gross profit. Also here, good news from our side, we stabilized the gross margin, as also projected, at a level of 50%. Here are multiple effects that needs to be considered. On the one hand, we are still continuing to have heavy spot price for higher prices due to the shortages on the chip supply. We are also facing, on the one hand, higher price points from our suppliers.

We also have increased our prices. But it will take until the second half of the year until this kicks in because we have such a high backlog that there is a time lag in between. We had positive momentum here on the margin side with regard to the exchange rates, especially on the Chinese RMB. And we have multiple effects with regard to the M&A transactions within Q1. The 2 that I mentioned, we acquired also third-party revenue that has typically lower margin points.

And we also acquired inventories of Basler products in Korea, which we now need to onetime turn around in order to be back to a normal level of gross margin. But all in all, even though it's so dynamic, we are happy to have stabilized here the margin on that working point. And we also expect the margin to stay in that realm, maybe even go further up slightly over the course of the next quarters.

With regard to absolute gross profit, EUR 33 million, so high gross profit. And also happy to be -- have realized this mainly due to the higher amount of sales.

Yes. Looking further down to the earnings before tax in absolute terms and in margins, you can realize, if I'm flipping back and forward, or even though we have higher gross profit compared, let's say, to Q1 last year, in absolute terms, we are -- when we look at the earnings before tax, we have a little bit lower absolute earnings before tax. And the reason -- the main reason behind that is we scaled up the organization as projected and as expected. We are on the gas pedal with regard to our midterm growth plan and this, at the end, led to a situation where the absolute profit isn't slightly lower than Q1 last year. However, it's on a very high level if you compare it in the long run.

And the earnings margin, we are back here in a clear double-digit area, so at around 14%. Here, 13.9%. Also here, happy to see the trend towards the 14 -- to go to the 14% after this single-digit numbers in the second half of last year. In comparison to Q1, okay, needs to be considered that Q1 was very, very strong -- Q1 2021 was a very, very strong quarter.

Yes, in the summary, the numbers again, so Q1-to-Q1 comparison: order entries up 25%; sales up 21%. Gross profit, lower. I explained this compared here to Q1. EBITDA, so all the earnings parameters, due to the larger organization, are lower than compared to Q1 last year. And at the end, also net income, we had a little bit higher tax pay. Net income was at EUR 6.8 million, so 13% lower than Q1.

But also, again, I would like to stress looking at the long-term numbers, Q1 was a very strong quarter. We are, as a company, very happy with the Q1 results of 2022 and this start of the year, especially in the context of all the dynamics around us that happens in the market and on the supply side.

Yes, free cash flow needs to be explained. I mean it's going sharply downwards. As you can see, free cash flow was minus EUR 6 million in Q4 and now minus EUR 28 million in Q1. There are a couple of extraordinary or special effects, maybe starting with the special effects. Due to the chip supply constraints, we have a situation, and this started already in Q4, but also continued in Q1. We are getting most of the materials in. We are lacking a few part numbers of chip supply. So -- and at the end of the day, what happens is our raw materials are rising sharply.

We are willing to ease this. We are also willing to go further this route because, at the end of the day, we think it's -- it creates competitive advantage once the bottleneck materials comes in. We are able to ship quickly, but this leads to much higher raw material levels, and you can look at the numbers so that the raw materials are rising significantly.

We also had, due to the increase of sales, we had rising accounts receivables in Q1. And then there is another inventory effect we acquired, as I mentioned multiple times, our Korean distributors. These distributors had finished goods stocks, and this is also what has an -- had an impact on the Q1 operating cash flow, so the minus EUR 5.1 million that you are seeing here.

And last but not least, the biggest deviation or the biggest impact in Q1 was the purchase price for those 2 transactions that you are seeing in the investing cash flow of this chart. The other CapEx investments are in the range of what is normal, as you can see in the earlier quarters. So there is no big differences. The big difference comes from the M&A transactions.

Yes. Liquidity and cash flow, also in comparison to Q1 last year, we started the period with EUR 54 million, so almost EUR 55 million cash position. So then we talked already about it, cash flow from operations in Q1 was negative due to mainly the stock increase and accounts receivables increase. We had cash flow from investments minus EUR 22 million or minus EUR 23 million almost, mainly because of M&A transactions. So the free cash flow, minus EUR 28 million.

We increased our bank loans a bit, especially as you can see here on the EUR 13.6 million in cash flow and financing so that we end the period or ended the period with 40 -- approximately EUR 40 million cash account.

Yes. Let's have a quick glance to the share development. It's not very spectacular. I mean all of us know the sentiment is low at the moment. We are making more or less side moves. We had a drop in the beginning of the year, but then making more or less side moves for a couple of weeks and months, is now in -- quite parallel to the market development.

Yes. And this brings me already to the outlook. Also no big changes here. What do we expect for 2022 in total? First of all, we have seen, again, very high bookings in Q1. We might expect also bookings coming a little bit down already in Q2. We need to see this, what the lockdown in China brings.

But definitely in the second half of the year, we still believe there will -- a slowdown of bookings start because of the big mismatch of supply and demand. And at a certain point in time, we believe customers will push back. But also here again, please consider the absolute amount of 85 bookings -- EUR 85 million bookings we are having at the moment and for the last 4 quarters already, and please also consider the EUR 150 million backlog.

So it would be natural. It would be also healthy if there will be a certain correction in order to better balance supply and demand, and this was still a situation where we have good opportunities to continue our growth path.

Yes we are, and we will, have supply shortages within -- this is our expectations over the course of the whole year. I mentioned this already in the former earnings call for -- we are considering this in our guidance that the supply constraints will continue, especially with a few very short supply or critical materials over the course of this year. And it will also -- may have impact also in the next year, we need to see.

Our gross margins will also continue to be under pressure because of the spot buys we are willing to do. However, you have seen we have already stabilized the gross margin. And once our own price adjustment kicks in, then hopefully, also we are able to increase the gross margins a bit. But we are still now in the -- or we are in the range of what we consider normal in our business model, in the range of 50% to 52%.

Yes, we also will continue to increase our staff. As mentioned earlier, this will lead to a situation where over the course of the year, the OpEx and the personnel costs will rise. And on top of this, we also expect that now in the summer months and early autumn and, hopefully, also next winter, but we need to see that there will be less travel restrictions with regard to COVID and less restrictions on events so that also these cost positions will rise over the course of the year.

Putting this all together, we confirm our guidance. And the guidance we have given out is revenue, EUR 235 million to EUR 265 million; and the corridor on the EBT margin of 9% to 12%. And we are, at the moment, clearly at the upper end of this guidance with the first quarter that we have seen. However, we talked about the uncertainties, chip crisis, lockdowns in China, so disruptions, corona disruptions. And we want to be -- want to stay careful here, and we will see what the second quarter will bring. But we feel very comfortable with the guidance we have given out earlier this year already.

This also would bring us a major step forward to our midterm plan, the 2025 plan. And in this plan, we want to grow the company from EUR 215 million last year to EUR 400 million, so almost doubling the company until 2025. We want to realize this with a sound and minimum earnings before tax margin of 12%, also a strong free cash flow. So cash conversion rate of 70%. So there is no change in our business model. This cash conversion rate is before M&A transaction so that in order to enable us to pay good dividends and to do M&A transactions along the way. And the compound annual growth rate on the top line that we are aiming for is in the range of 15% per year.

This brings me to the end of the presentation and to the Q&A session of our call today, and I'm happy to receive lots of questions. We had a lively debate last time. So hopefully, we have again a lively debate. So please go ahead, raise your questions.