Stemmer Imaging AG

XETRA:S9I

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Arne Dehn, executive]

Yes. Thank you very much. Good afternoon, everybody. Thanks for joining our earnings call, Q1 2024. With me is Michael Bulter, our CFO; and Julia, responsible for our HR -- IR response activities, sorry.

Yes. Typically, we don't do our calls costs like this, but I think it is necessary to put some faith and words to today's publication on Q1. You have seen the share price, not only from our company but from some other companies in our sector, have not really changed. So I think it is clear that we are facing some challenging conditions, not unexpectedly. So I think we were well prepared for that and navigating through these challenging conditions.

And today, we just want to give some more, let's say, details to the situation. Q1 obviously has been impacted, I would say, heavily, especially in the level of revenue decline really by weak demand in all end markets. This industry has not seen that very often. I would say that it has never seen that without any specific single root cause. We know the financial crisis or corona.

But I think here, a lot of reasons come together to basically put us in this situation. And Stemmer Imaging typically is very late in this, in a decreased cycle, so I think this is also the case this year. But yes, we must say we also got into the washing machine, at least for one quarter, and that's what you basically see.

We see a rebound of bookings after a decline in the second half of last year. We also said that the first half year of this year is [ shy ]. We see very positive signals from specific industries, especially the medical end market, logistics, recycling, sports entertainment. We'll come back to that, how that develops over the next quarters.

We must say and are proud to say that our projections for the remainder of the year are based on very vivid and high-scale design-in wins. So I think we have -- we're very confident on the business which we have in our hands, but also what we see with our customers, which is really based on what we have done and prepared over the last years, especially last year, in our customer expansion strategies and also to win new customers. I must say that this is the time to also win market share.

We have really positive signals of important new customer wins. And really based on our, I would say, USP proposition, what we call MORE, and more than the product, which is basically the hardware, software and service portfolio, which we offer.

Internally, you have seen that also, we could temper the decrease in revenues on our cost levels. So based on our ONE initiatives, where we basically align processes and organizational efficiencies, which really helped in this case. We believe also that our scaling of our organization in terms of capacity is well prepared also for the upswing, which we expect no later than the second half this year.

Yes, we have implemented also Stemmer Imaging as one brand. Again, this was also very important as we were able to close our acquisition of our Phase 1 Technology in the United States. So this business will be consolidated as of May, and I will touch on that also a little later.

On our financials, obviously, yes, we are impacted, as I said, from the revenue decrease, not unexpectedly. But still, yes, I would say, major. We must and can say that our value-added strategy translates really in a good gross margin. So typically, you would expect that the margin is under pressure in times of weak market situations. But I think the proposition which we have and also the negotiation power, let's say, vis-a-vis our suppliers, I think, is good. So we can see that Stemmer Imaging is not impacted from this situation in terms of gross margin.

Our cost structure reduction, we saw some of this effect, obviously, coming already last year. And I must say that not only our efficiency measures translated in structural cost reduction, which we see in Q1, but also have generated the positive side of the winning new projects and especially Spain, from its development, is very positive.

Our EBITDA margin dropped below our guidance, our 17% to 21%. I can say that we don't expect that to last very long, so we expect that to recover well into the bandwidth. We'll touch on that also a little later.

And yes, I think one of the strengths we have is that we are cash generating our business with EUR 9.4 million, very strong, and keeping our capital -- working capital in good shape, I think, is really good.

Basically, today, we want to say that, yes, Q1 is weak, not a very nice feeling about that. But of the prognosis for the remainder of the year, fortunately, we have still 9 months or 3 quarters, I must say. The full-year prognosis, we are very confident on our booking developments, and we confirm our revenue and EBITDA bandwidth for the full year.

[Michael Bulter, executive]

Just a short insight in the key financials for the first quarter of 2024. What we saw was a order entry of EUR 33.1 million, which is down from the first quarter of 2023 but over 30% above Q3 and Q4 of 2023. So there is, let's say, light in channel. And in terms of order entry, we see first signs of recovery on a lower level than before based on the weak -- the still weak economy.

Revenue, Arne said it, EUR 27.5 million. This seems to be the bottom of what we would see for also the remainder of the year compared to EUR 40.4 million in the previous year. We see ourselves well positioned as a systems house for machine vision and also in our competitive positioning towards other companies in this field.

And this pays off in terms of our gross margin, 39.9% in the first quarter, above and also strong, 39.1% in Q1 2023. Due to our strong cost management, not only in the first quarter but also our really structural cost decreases, where we took the respective measures over the last year, we were able to achieve an EBITDA of EUR 4.1 million, so 14.9% EBITDA margin compared to EUR 7.4 million in the first quarter of the previous year. Yes. And therefore, the reduction in revenues was a bit cushioned by our structural cost decreases.

Yes, we show a really strong net debt development to EUR 44.7 million net cash position. Our operating cash flow, Arne said it, amounted to EUR 9.4 million in the first quarter, coming from EUR 5.5 million in the first quarter of 2023. What we see is we announced it on the German Equity Forum that our midterm target is a working capital ratio below 15%. And yes, we worked this down quite rapidly and in short term, so that currently, our working capital ratio is at 14.0%. And yes, we still see room for further improvement here and are working on this very hard.

As mentioned before, we see structurally a reduced cost base, also driven by our reduced workforce. We have 270 employees and now in now 15-plus locations, but 16-plus locations with our new acquisition of Phase 1 in North America.

[Arne Dehn, executive]

Yes. Having said that, we just wanted to go a little bit into our acquisition exercise here with Phase 1. We haven't done acquisitions over the last years, but we obviously know how to do it. And also when we have done it, what to do with it. So I can clearly say that we are -- have prepared.

Obviously, we got the control only yesterday over the business, that we have prepared well a market communication already with shows in the United States, Automate, which runs actually as we speak, and then also previous, Embedded World. We see that Stemmer Imaging has a good brand recognition in the North American market, and we strive to leverage that brand really there.

Phase 1 has a high overlap on suppliers. We have secured supplier relationships. There were some change of control clauses, which basically, we needed to get secured. That's done.

And yes, I must say that the supplier and customer feedback is very positive. So we have already held, again at Stemmer Imaging, not at Phase 1, some support sessions in the United States from multi and international accounts. And that will be handed over for local support now in the next weeks.

Very importantly is that our ambition to play in the Embedded World much more is really important that we could secure and strengthen partnership with Sony on the vision sensor business. This is a new business for us.

As we were mentioning earlier, we have a strong belief that customers will start building their own cameras based on, let's say, AI and accelerated processing platforms from NVIDIA. And therefore, it's really important for us to also be able to supply and provide a consultancy in everything, what we do in services on the sensor side itself. And so this is something which Phase 1 did in the past, and we will accelerate that now, which is really a great adjacency for our business.

And obviously, we have some ideas how to build out the ecosystem in the North American market. This will take some time. But obviously, we have been active looking at this market, and I think we have a good understanding also how we can basically leverage the first step with next one.

So I want to say that despite the fact that Q1 has been weak, again, not unexpectedly, but still not nice to see. I believe we have never been better prepared for a situation like this, especially from the market-facing side. I believe that this is the moment also to go out and take market share, both in industrial and in the artificial vision area.

And so our view on the next quarters is that we have seen rock-bottom billings. We see already rebound in bookings. We expect Q2 to have improved bookings with still some hesitation on deliveries. This is really more or less impacted by the industrial downturn, which we see especially in Europe. But we have already, partially in hand, but also very close, very positive orders and projects in hand for metrology, electric vehicle business. But also, I think I mentioned that last year, that we were able to get access to important end users here in the automotive and automotive OEM business where, for the first time, we are now supplying machine vision components to the production line. And this is really a major breakthrough for us also to accelerate our end market presence.

In artificial, we have new customer wins in sports and entertainment. We see that the security business with very short cycles in book-to-bill is ramping up, a segment which we have not really had in focus. But obviously, with the current circumstances which we all face, there are 7-digit projects coming. We have this in the, let's say, decision phase, but we are positive also to see more projects, especially on the security side. Think about public security and all of that.

Medical, I think the surprise for us this year is that medical is much more accelerating. We see that really, the post-corona effects are over, and we see really very large orders in the first half year in this field. Basically, customers who want the material on their side basically to ramp up their rollout.

For the second half year, we see a recovery in demand and deliveries already in Q3, based on the improved levels of Q2. And then really Q4, a compensation effect early also on a higher demand.

So we see a demand shift from our short-term orders to larger project volumes. This is already what we are preparing right now. So what you will see is that we will -- and have already started in April to build up -- stocking our stock levels to also be prepared for short-term, let's say, demand.

And we see a stepwise recovery in basically in demand but also in billings, while the full development or full potential development, this is only happening then in '25.

For the artificial vision part, we believe that bookings remain high in this segment and especially the food and agriculture, which still suffers a lot from destocking effects in the first half year. I think I mentioned that earlier. We see that now really coming to an end, and we see our fully deployed material from warehouses. And with that also, the demand driving.

The upside potential from North American expansion with international accounts is not calculated in our full-year prognosis. At this time, while we reaffirm our prognosis, really with a strong expected catch-up effect in the second half year, we believe that a year-on-year stagnation from basically on revenues compared to last year is what we expect. We see upside for that and not only from the U.S. but also from the projects we have basically won the design-in. And then on the EBITDA, we also believe that the guidance we have given in terms of absolute numbers, but also in terms of percentage numbers, are sustainable.

And again, we have, I believe, never been better prepared for a situation like this. And it's now the time also to put very much focus on the commercial strength, which we have. And I think with all the measures we have taken over the last year, we are well prepared for that.

So I think in total, we're not nervous about the situation. It is something which we saw coming, maybe not in the full extent. But with the positive signals we are getting now, we believe that this is only a temporary effect. With that, we hand over to questions as you might have.

[Operator]

[Operator Instructions] The first question is from Lasse Stueben with Berenberg.

[Lasse Stueben, analyst]

Just one question just in terms of the visibility you have for the second half of the year, particularly in, I guess, European PMI still looks pretty weak. And I guess that will probably mainly impact your industrial machine vision business. So I'm just wondering sort of what are the conversations you're having with some of the industrial customers? And what sort of visibility are they giving you for the second half, maybe just outside of the -- maybe some of the longer-term projects that you have?

[Arne Dehn, executive]

Yes. I can assure you that we are very much down to the detail on what is happening on the customer side. So what we see is that -- and that story is something which we see in Q1 that -- what we call flow business, the transaction business, is increasing. And so we see the flow business, which we basically define by customers below somewhere in the range EUR 30,000 to EUR 50,000 per year turnover, that is increasing. That is a, I would say, not substantial part of our business, but obviously something which is big enough to follow. So we see a -- and we have seen that coming down, basically now coming up.

And so our small, let's say, distribution business, which is very much in factory automation, we have also some smaller customers in the range of print and packaging. But these 2 segments are really the larger, let's say, distribution areas. We see that flow business, as we call it, ramping up.

We see our customers in the range up to EUR 150,000 annual volume also catching up. And then obviously, our top accounts, which also are important for our growth in total, we see that the bookings come in, in the first half year. We have seen that already. As I mentioned, for example, medical. Very, very strong order intake, an exceptional order intake really. And I think we mentioned medical, we have, I think, about magnitude of somewhere in between EUR 5 million to EUR 8 million in order intake just on a quarterly level.

We will see this again in the second quarter. And that gives us confidence that these large accounts not -- this is not the only one, but there are some others basically placed their orders already in Q1, some in Q2, and then the billings basically follow that.

I must say that we are really concentrating also on the bookings side at this point of time. And yes, we cannot really control very much the billings part. But obviously, it's -- when you have the bookings, the billings will follow. And we have an average turnaround time between bookings and billings of, let's say, 40 days. And so that -- we don't really see a strong delay between bookings and billings anymore because the supply chain is very much healthy and intact.

And the only thing we need to make sure also for the smaller businesses, that we have the material on stock and that we are well prepared for it to ramp that up as we speak. And by the way, with very good, I believe, conditions to basically secure not only our current margin but also see some improvement in the margin.

[Lasse Stueben, analyst]

Great. And just sorry, 2 more if I may. Have you seen any delays in projects? I was listening to another customer or a company today saying, particularly sort of automotive EV-type businesses, customers have delayed EV investments. And I know you said you had a big order there. But just curious to hear, on the bigger projects, if there's been any project delays, in general?

[Arne Dehn, executive]

Yes. That's what I was saying. I think when we look at Q1, I think we expected or hoped -- I don't know what the best word for it is. Hope in the business is not a good term. But we thought that the billings might be a little better.

But basically, we have 3 effects, right? We have the destocking effects, which still play a role in some customer types. I mentioned food and agriculture and some others. We have uncertainty of our customers of their own developments and some hesitation there. I think the business climate in some -- mainly in Mainland Europe is not very good, except Spain, where we see that really not happening in their case.

And the third one, I think, is the most important for us and that has to do with innovations. We know that corona times, so 2020, '21, have not been very good times for innovation ramp-ups. We have seen that innovation happened last year. So we see now that our customers have basically matured in ramp-up of new innovation of projects. And there, we still see some delay of, let's say, mass rollout of this innovation. We see volume orders already. But delay is really, to a large extent, in the innovation part, which is obviously for us, an important part.

And that's why we are very concentrated in -- with our MORE program to really make sure that we do all possible that our customers feel that they can actually go out with mass rollouts.

And again, with the orders coming in now, large volume orders, we feel that customers feel comfortable of doing that. But full deployment will be '25. That's clear. '24 is, at least what we see right now, has not -- is not showing the full potential of what we have prepared for as business and what our customers basically expect to see also in the [ full year ].

[Lasse Stueben, analyst]

Great. And the final one, just on -- I mean, Q1 free cash flow was particularly strong, I guess, largely driven by working capital. How should we think about that for the remainder of the year also given with the outlook for better revenues? Are we likely to see some working capital outflows in the rest of the year? Or how should we think about free cash flow?

[Michael Bulter, executive]

I mean, yes, for sure, Q1 operational cash flow was extraordinary high. And to be honest, really on the high end of what we expect also for the upcoming months or quarters of the year. I wouldn't say that we will see really significantly lower operational cash flows, as we still see some room for improvement here. Arne mentioned that we are probably going to increase our stock levels a bit with strategic purchases of specific components.

But nevertheless, I think on the working capital side, we still see potential to improve this. And therefore, I expect also further positive operational cash flow development and with increasing revenue and profitability levels, a stable positive operational and, in general, cash flows.

[Lasse Stueben, analyst]

Okay. So somewhere a touch below Q1 is probably the right number, I guess. Yes. Okay. Thanks for your answers.

[Operator]

[Operator Instructions] Gentlemen, that was the last question. I would like now to turn the conference back over to Mr. Dehn, Arne, for any closing remarks.

[Arne Dehn, executive]

Yes, thank you for being present today. I think it is a good practice that we are available also in this time. Again, we have our hands full with organizing ourselves to focus really on the market. I believe that Stemmer Imaging has proven that we are getting out of situations like this even stronger.

That's also our notion, but we are very much aware of the market situation and also what we need to do. And so let's not waste time also in this call to get back to work. We are available at conferences.

And otherwise, you all know how to find us if there are any specific questions you might have. With that, I wish you a good afternoon, and hope to see you soon. Hopefully then, with the numbers we project. And until then, all the best and goodbye. Thank you.