Earnings Call: Q1 2024

May 8, 2024

Yes. Thank you very much. Good afternoon, everybody. Thanks for joining our earnings call, Q1 2024. With me is Michael Büter, our CFO, and Julia, responsible for our AR activities, sorry. Yeah, typically, we don't do calls like this, but I think it is necessary to put some face and words to our today's publication on Q1. You've seen the share price, not only from our company, but from some other companies in our sector, have not really changed. I think it is clear that we're facing some challenging conditions, not unexpectedly. I think we were well prepared for that, and navigating through these challenging conditions. 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. Stemmer Imaging typically is very late in this in a decreased cycle. I think this is also the case this year. Yeah, we must say we also got into the washing machine at least for 1 quarter, and that's what you basically see. We see a rebound of bookings after 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. I think 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 than a 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. Based on our one initiatives, where we basically align processes and organizational efficiency, 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 of this year. We have implemented also Stemmer Imaging as one brand. Again, this was also very important as we were able to close our acquisition of Phase 1 Technology Corp. in the U.S. This business will be consolidated as of May, I will touch on that also a little later. On our financials, obviously, we are impacted as said from the revenue decrease, not unexpectedly, but still, I would say major. We must, and can, say that our value-added strategy translates really in a good gross margin. Typically you would expect that the margin is under pressure in times of weak market situations. I think the proposition which we have and also the negotiation power, let's say, vis-a-vis our suppliers, I think is good. 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. 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%-21%. I can say that we don't expect that to last very long. We expect that to recover well into the bandwidth. We'll touch on that also a little later. Yeah, 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 working capital in good shape, I think is really good. Basically, today we wanna say that, yes, Q1 is weak, not a very nice feeling about that. Of the prognosis for the remainder of the year, fortunately we have still nine months or three 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. Just a short insight in the key financials for the first quarter of 2024. What we saw was 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. There is, let's say, light and shadow. In terms of order entry, we see first signs of recovery on a lower level than before, based on the still weak economy currently. Revenue set at EUR 27.5 million. This seems to be the bottom, what we will 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 growth 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. 14.9% EBITDA margin compared to EUR 7.4 million in the first quarter of the previous year. Yeah, therefore, the reduction in revenues was a bit cushioned by our structural cost decreases. Yet we show a really strong net debt development to EUR 44.7 million net cash position. Our operating cash flow on a set 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%. Yeah, we worked this down quite rapidly and in short term, so that currently our working capital ratio is at 14.0%. Yeah, we still see room for further improvement here and are working on this very hard. As mentioned before, we see a structurally reduced cost base, also driven by our reduced workforce. We have 270 employees and now in not 15 plus locations, but 16 plus locations with our new acquisition of Phase 1 in North America. 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. I can clearly say that we are have prepared. Obviously, we got control only I must say yesterday over the business that we have prepared well, market communication already with shows in the U.S., 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 Technology Corp. 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. I must say that the supplier and customer feedback is very positive. We have already held, again, as Stemmer Imaging, not as Phase 1 Technology Corp., some support sessions in the U.S. from multi and international accounts, 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 strong belief that customers will start building their own cameras based on, let's say, AI and accelerated processing platforms from NVIDIA. 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. 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. Obviously, we have some ideas how to build out the ecosystem in the North American market. This will take some time. 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 the next one. I want to say that, despite the fact that Q1 has been, you know, weak, again, not unexpectedly, 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. 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. We have already partially enhanced, but also very close, very positive orders and projects in hand for metrology, electric vehicle business. Also, I think I mentioned that last year that we were able to get access to important end users here in the automotive, in automotive OEM business, where for the first time we are now supplying machine vision components to the production line. 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. 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. Really Q4, a compensation effect really also on a higher demand. We see a demand shift from short-term orders to larger project volumes. This is already what we are preparing right now. 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. We see a stepwise recovery in demand, but also in billings, while the full development or full potential development is only happening in 2025. 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 fully deployed material from warehouses. 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 upsides for that. Not only from the U.S., but also from the projects we have basically won the design in. 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. Again, we have, I've been, I believe, never been better prepared for a situation like this. It's now the time also to put very much focus on the commercial strength which we have. I think with all the measures we have taken over the last year, we are well prepared for that. 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. Thank you. We will now begin the question and answer session. The first question is from Lasse Stueben with Berenberg. Please go ahead. Hi, good afternoon. Just 1 question, just in terms of the visibility you have for the second half of the year, you know, particularly in, I guess, European PMI still looked pretty weak. I guess that'll probably mainly impact your industrial machine vision business. 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 some of the longer-term projects that you have? I can assure you that we are very much down to the detail on what is happening on the customer side. What we see is that, and that's already something which we see in Q1, that what we call flow business, the transaction business, is increasing. We see the flow business, which we basically define by customers below, somewhere in the range 30,000-50,000 EUR 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. We see, and we have seen that coming down, basically now coming up. 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 two 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. 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, unexceptional order intakes really. I think we mentioned, medical, we have, I think about magnitudes of, somewhere in between, EUR 5 million to EUR 8 million in order intake just on a quarterly level. We would see this again in second quarter. That gives us confidence that these large accounts, this is not the only one, but there are some others, basically place their orders already in Q1, some are in Q2, and then the billings basically follow that. I must say that we are really concentrating also on the booking side at this point of time. Yeah, we cannot really control very much the billings part, but obviously it's when you have the bookings, the billings will follow. We have an average turnaround times between bookings and billings of, let's say, 40 days. You know, we don't really see a strong delay between bookings and billings anymore because the supply chain is very much healthy and intact. 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 to ramp that up as we speak. By the way, with very good conditions, to basically secure not only our current margin, but also see some improvement in the margin. Right. And just sorry, two 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, you know, customers have delayed EV investments. I know you said you had a big order there, but I'm just curious to hear on the bigger projects if there's been any project delays in general. 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. Hope in business is not a good term. You know, we thought that the billings might be a little better. Basically, we have three effects, right? We have the destocking effect, 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 mainly in mainland Europe is not very good, except Spain, where we see that really not happening the case. The third one I think is the most important for us, has to do with innovations. We know that Corona times, so 2020, 2021, have not been very good times for innovation ramp-ups. We have seen that innovations happened last year. We see now that our customers have basically matured in ramp-up of new innovational projects. There we still see some delay of, let's say, mass rollout of this innovation. We see volume orders already. Delay is really to a large extent in the innovation part, which is obviously for us an important part. That's why we are very concentrated 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. Again-With the orders coming in now, large volume orders, we feel that customers feel comfortable of doing that. Full deployment will be 2025, that's clear. 2024 is at least what we see right now, 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 swing. Great. 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, you know, better revenues, are we likely to see, you know, some working capital outflows and, you know, in the rest of the year? Or how should we think about free cash flow? I mean, yeah, 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. Nevertheless, I think, on the working capital 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, stable positive operational and, yeah, in general cash flows. Okay. Somewhere a touch below Q1 is probably the right number, I guess. Yeah. Okay. Thanks for your answers. Gentlemen, and that was the last question. I would like now to turn the conference back over to Mr. Dehn, Arne, for any closing remarks. Yes. Thank you for being present today. I think it is 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. Let's not waste time also in this call to get back to work. We're available at conferences and otherwise, you will 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. Until then, all the best and goodbye. Thank you.