Good afternoon everybody, and welcome to the 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 you our proceedings from second quarter. In total, we actually did not reach what we expected. There is some positive news 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. The sales were 3% less than last year.
We reached sales of EUR 22.8 million and, due to the low sales as well as some other one-time costs which we'll come back to, we reached an EBIT of 5.2% and EUR 1.2 million. Looking more closely what took place, I think we're very pleased and happy of the strong performance of both industrial business unit and security business unit. Industrial business it 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. When we go into the medical sales, it went down even 25% due to this unexpected event.
We know this event has been corrected and things are back to normal. Overall we see some shortage now on components and 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, semiconductors from the spot markets and that added some one-time extra cost for the second quarter.
Overall, I mean despite the very strong growth in industrial and security, the growth did not compensate for the loss 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 much better result. This actually took place in late May, early June and overall when the situation that there is shortage, I mean, supply chains get very constrained and there's no slack actually.
If there's an unexpected event there's no time to compensate for that, which would be normal times. That's the reason why it hit actually into our sales, which then was back more to normal in July. On profitability, also we see an outlier due to this, low sales and more of the one-time 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.
That's also the reason that we are fairly confident on the future quarters on medical. Security nicely up 25%, it's really great to see security back on track, back on growth track after these terrible corona times that hit extraordinarily hard our security business. Overall, medical was 45%, security 38%, and IBU even 17.5% of our total sales. Looking geographically, I think the second quarter was a bit extraordinary, there you see quite high negative percentage in Americas. I would not be seeing it very sort of severe. It's the sales was only EUR 2.3 million, this kind of like fluctuation, normal fluctuation and so on.
Actually from small sales then the percentages are quite big. In Asia Pacific, still our strongest, 70% of our total sales. Europe, Middle East, and Africa, single-digit growth reaching EUR 4.77 million sales and having 6% growth. First half due to the second quarter, this is also a bit exceptional. Only 3% sales. First half EBIT EUR 2.7 million, and only 6% EBIT. A single-digit EBIT, which of course is something we don't like to see. 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 too, but it did not. It went down 12%. SBU also 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%. By region, also here we see Americas -20%. This is not something that is sort of a trend. I think the Americas will be growing in future. There's also very nice some perspectives of security business in Americas. Asia-Pacific EUR 30 million, 1% growth.
Europe, here, we can see 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 costs. They are not capitalized, so strong input into R&D. 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 2022 versus year-on-year. That's quite much in our scale. Another topic that 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. 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 cost. Overall, I think the best also the all kinds of market information there is semiconductor shortage is easing up. There's 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 then more of sort of hopefully normalized in 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 one third, as I've said, one third 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 ARC project, is the main project here.
It has proceeded very well, I mean, as planned and targeted, and then 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. 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. We also launched myDT service portfolio.
This is an 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 customer site and 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 overall 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 top level of the way we run it and so on. It was very sort of promising and positive that they participate there. Also, we became a member of Austin collective Impact cooperation with UNICEF.
We have a network in Finland, and we are doing then 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. Overall, for the full company, we expect double-digit growth and also for the second half, which is now our official guidance.
Business outlook, we see that the demand is strong, will continue to be strong in all the main markets and expect it 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. We must now remember that also there are exceptional challenging times in the world economy and many sort of big unwanted crises 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.
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 strong growth in medical is a little bit moderating down even though there still is good growth out there. On financial targets, no change there.
Annual sales growth at least 10%, EBIT operating margin at or above 15%, and then our dividend policy between 30%-60%, we will share of our net profits with our owners. With these words, I would like to thank you for following us and I'm now open to questions. Thank you.
Hi, good afternoon. 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?
Thanks. 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. 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. 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?
This is a very interesting topic. I think there's a good saying that there's always a silver lining in any dark cloud. The thing is that we all are suffering from component shortages and have been so has our customers and some sort of new customers. We have sort of been able to manage many of these areas a bit better. 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 haven't had components for, they have then bought from us more value-added product.
Is this applicable to security?
This is mostly in security, yes.
Good. Okay. You mentioned also that you have been gaining new customers in security. What kind of new customers are we talking about? Are they large or small, and which geographic areas are they coming from?
More like small and mid-size. There has not, at least not yet, been any big changes in the large customer sort of.
Right. You mentioned now the Chinese aviation standard coming out in June. What is it? You mentioned that it is a factor that affects your potential positively. How in practice will it show in your numbers? Is it basically something you expect to see already something this year, or is it going to be more 2023, 2024 loaded?
Yeah.
How much in absolute terms might we be talking about?
That's a 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 2023. 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 one airports, which means the main airports like Beijing, Shanghai, Hongqiao and Pudong, Guangzhou, Shenzhen, etc . But I mean, we don't have any information on what kind of time span or 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's the tough competition for first big programs to come, what kind of competition has the competitive landscape been changing, whatever. Are there new things going on? 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 be the size of what U.S. Is doing right now because United States, they are renewing all their airports. China is, to our knowledge, is just will be renewing the level one, the biggest airports.
As we know, there's a lot of, I mean, needs in China to develop their society and infrastructure, so we don't know how much they will, you know, actually be funding these kind of events. It's open question, but should be a nice addition.
All right. Thank you. I will give the floor to others. I have some technical questions also, but let's save them for later.
Thank you.
Juha Kinnunen from Inderes. One additional question about this China aviation standard. Was it basically what you are expecting, were expecting? 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, it is. I mean, this standard, I mean, probably we've waited for it for 1.5 years. Finally, now it came out. That's good. There were no surprises in that. 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 know, you adapt so on and then you get going so.
All right. Very well. One additional question about a topic that we haven't been discussing a lot lately, multi-energy products. I think they are in industrial group as far as I know, and there's a good demand there right now. 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?
Yeah. 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. This is probably a technical question that maybe Matti was referring to, but the non-recurring items that you booked here. I understand that there were plenty of non-recurring items in some sense, but I wonder how you came up with this number because all of these issues have been already here before, at least in some way.
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 external advisors.
All right. It had actually nothing to do with the spot prices of purchasing-
No, no.
already. All right.
The 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 part of the production fixed cost. It's not in what we call throughput, which is the bill of material. I mean, sales divided by the bill of material cost. 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 personal expenses are growing. Is there anything like more cost inflation coming? Is this a figure that we can use when we are going forward, estimating forward?
That's a good question. I think the 2022 is. There are 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. Also in these salaries and so on, we are using also external services in R&D when we do these modifications and so on. There is a higher load on R&D spending that there would be in normalized.
All right. Thank you very much.
Niklas Råilo from SEB. You told that your order books are now bigger than ever. What are your current lead times?
There's high volatility there. It very much depends on which product is being forecasted, and then there's, I mean, in some products, we are talking even one year. Also answering the question on this order book is that we also have some customers, especially industrial and some security, also medical overall I think, that are ordering very, fairly long time. I mean, we have orders already for 2023. So this order backlog is also longer than before, but also it's healthy from the business point of view.
Okay. Thank you. On another topic. How much do you believe that you would have lost sales due to 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 overall, the best picture is that our sort of guidance, what we see as expectation for the second half, and also like second quarter should have been much better, so we sort of delayed some sales from there. But to give a precise number for that reason, earmark is a bit challenging.
Compared to the previous quarters, so is it on the same level up?
It probably still for second quarter is probably in the same level.
All right. Thank you. One last from me. You talked that you are taking actions to improve your working capital. Can you open a little bit your current working capital situation and actions on that?
Well, it's way too high, the current net working capital. In our business, we've always had a little bit high net working capital also due to the fact that in 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 accounts 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 receivable will increase of course due to the strong sales. What we need to be looking now really is the material stock.
I mean, what do we have in stock and what can we do about that? Another thing is now we are, you know, 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 terms? What can we do on accounts receivables terms 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, should we a little bit be more tight on managing it than setting out KPIs for our sort of key employees.
What we have done is we have with a very large group 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, I mean, two, three years because it's also 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. We need to make sure that we get what we need to get.
Okay. Thank you. That's all from me.
Yeah. Thanks. Joni Sandvall from Nordea. Maybe a follow-up on the R&D cost. Can you open up a bit about the split, how you are splitting those on the cost items? We were speaking about higher external personal costs, but can you split a bit about the
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 then outsiders to help on those, in those bottlenecks and so on. 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 wanted and so on. There's also certain sort of specific topics that we need to address.
It's overall, like I said, salaries are way above 50% still internal salaries.
Still on the R&D costs now for Q3 and H2, it was EUR 3.2 million in Q2, so should we see 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 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 are you expecting the most issues with the components now in Q3 and H2?
That's a good one. I think overall, I mean, 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. Thanks.
We 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. A third item really is that nobody knows in the markets or any markets that how much actually are customers capable of selling through. Everybody is most probably 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 under-invested during this, just, I mean, in normal times it's under-invested plus the growth of new topics that are driving, so 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 a good medical business even though the growth probably by percentage-wise is a bit less. Industrial overall also we are quite confident and we have placed our, let's say, eggs well in that basket. This is the explanation that we sort of believe positively on the outlook on the business.
[Arttu Heikkilä] from Evli. Regarding your Q3 guidance, especially for IBU, 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 two things there. We were not courageous enough, let's say. 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 affect, yes, the market. I mean, it looks quite good there, but also we must remember that the third quarter also for industrial business was quite good. This is always what's the comparable year-on-year quarter and so on. The thing is that it really, I mean, trying to look, I think it can be that, I mean, some part of industrial business a little bit is the growth is sort of, let's say, mellowing 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? It's a little bit less clear, let's say, and the strong underlying quarter.
Okay. Also could you open up the setback in medical's supply chain? Is it a thing that could recur?
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, two days, it's already at our customer. I mean, when you really have a supply chain, it's lean, as lean as possible and so on. Any error actually will really in real time almost be seen, visible in the sort of output. 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.
Anything can in a way happen, but I mean, like in normal conditions this would not be, I mean, visible. One thing also is it was not just one, it was two supplier. It was a little bit a topic that happened to hit one quarter, but then it's out and we go forward and next quarter is then better.
Okay. Good. Thank you.
Hi. Matti Riikonen from Carnegie with the other questions. Could you discuss the component redesign or replacement activity a little bit more? What kind of components are you actually replacing primarily? Are we talking about the infamous Intel programmable chips?
We are very much talking of this programmable logic and then also changing the complete supply chain for that part.
Right. You are now doing it in two 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 two have? Is either of those more important than the other? Is it a kind of linear improvement in terms of component availability or something other? Just trying to understand.
Yeah.
What exactly that is.
I think we completed a little bit already, I think, very late second quarter, but the biggest chunk now. 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. This we should be able to then deliver and recognized our sales in September. We must remember that this is, again, these components are coming from our, let's say, supplier's suppliers. We need to get approval. We need to get these into our sub-supplier, which is typically a contract manufacturer. Then they need to make those. They need to ship those to us. We need to put them together and ship to our customers.
There's some lead time here, which, you know, takes some time.
Right. Okay. 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? Should we understand that it's pretty much in line with Q1, where it 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, you know, like somewhere, I mean, double digit around that in. But also that would have included component shortages as we had in first quarter. I think this kind of like component shortage has now taken so long time, that it's everybody's a bit blind what really is going on. I mean, you see all the major semiconductor companies actually, including TSMC, have announced already much sort of worse sales results, especially, weaker outlook. I think so, we will be. When we are talking after third quarter, I think we are, you know, it's totally different.
I mean, Intel just came out with their. I think they were 20% less than what was the predictions. Micron did come already in July. Okay, they are in consumer memory chips and so on. They even had heavier drop. 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. There is in the consumer demand. There's already big changes. It's possible that even automotive is coming down a little bit despite their strong, let's say, electrification is driving the demand hugely. The thing is that even when everybody has been short, you don't know actually what is the real sort of selling through.
To add here, I think one thing is that now we are talking also of geo-regionalization. I mean, it's the U.S. is building their own infrastructure, Europe also or China has theirs and even South Korea and Japan. It's also a thing that the whole world will not live as lean as before. Globally, the supply chains overall for any business using electronics will have a little bit more material. That will be also maybe 1%-2% growth for some time. It's big changes. I don't think in history like this rapid drop in. Like if you look at the semiconductor equipment, how much their sales have been coming down, it's really like pfft, from huge demand, it's coming down.
It's. There's gonna be big changes.
All right. 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. I think the production capacity is not the bottleneck. We are doing very critical, let's say, light assembly. We are buying from our vendors the high capital intensive demanding parts. Basically what we are doing is certain tricks and a lot with our light assembly processes and then the testing. Also, if there would be a shortage on any bottleneck, we would and could buy a new equipment and increase that capacity. Right now also the lead times to all kinds of electronics equipment are getting much shorter. That's not, I mean, that's the least of my sort of, I mean, fix list items.
Very good. Regarding the delay in the medical segment related to your sub-suppliers, did you have to pay any penalty regarding that?
It was technical problems, and they were not able to produce. That's what it was. They were not able to ship to their supplier, which is our sort of supplier, I mean, a contract manufacturer, and then it hit. Because there's no slack in the supply chain, this came out immediately.
Okay. 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, you know, 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 far, it's basically a sales support function and then
Yes
the opportunity
Yes
to develop perhaps.
Yeah.
into chargeable services.
Yes.
at some point. Okay. Great. That was all from me. Thank you.
Thank you. All right. I think we have spent the time that was reserved for us. Thank you for your patience, everybody who's there with us and looking forward for delivering much better third quarter in three months. I wish everybody a nice last part of the summer before we hit the heavy working fall. I'm very excited of what's there up for us. Thank you.