Good afternoon. My name is Hannu Martola, I'm pleased to present to you Detection Technology Half-Yearly Report on Second Quarter Financials. As total, our sales reached EUR 25.2 million sales, up 10.8% from last year. We resulted EUR 1.4 million in EBIT, slightly more than last year. The EBIT percentage was 5.4%. Altogether, I think we started to move forward, but not enough, also we are not satisfied with our profitability. Looking various businesses, industrial sales was slightly down 6%. It was an outcome of actually some reduction in inventories, also the industrial sales in China was fairly low.
We must remember that the industrial sales market in, in, in, in China is actually at the, at the beginning, and overall long-term looks promising. Good news is that the demand normalized towards the end of second quarter, so we should look forward for a little better second half. Medical sales was really strong, 22%. It's a big number, but we also must remember that the underlying quarter was soft, so affecting this, this heavy percentage. Overall, the market demand was unchanged, but it also then was softening towards the end of the quarter, actually globally. CT applications was the driver, driver for, for growth, and, as I stated, so that the, the underlying quarter was a, was a bit soft.
Security sales, it was up 5%, actually a little bit less what we anticipated. Also the sales in, in, in China was fairly, fairly low, which is, is important market for us. The good news is that as we see that towards the end of the quarter, actually, the demand and requests are now, now sort of strengthening, and we believe that actually now the, let's say, the lowest sales period for China security is now behind us. That was the first half, we look forward into some, some nice growth also from that market. We had really nice growth in the Americas, and that was very much driving the, the security sales upwards. As a total, the profitability was affected by a little bit lower sales, not so favorable sales mix.
We also had to do and did some credit loss provisions, and the some one-time spot costs also affected the profitability. Even though despite these one-timers, we actually have to now and will take measures to improve our profitability. On net sales by quarter, I mean, also visually, we are, we are now getting, getting sort of better, but, like I said, not fast enough, but we look forward into actually increasing the growth speed in the next sort of coming, coming sort of quarters. Operating profit, still very much down from the target level, 15%. If we look the quarter, second quarter sales split by business units, IBU represented 15% of DT sales, down 6%.
Medical was, was about 50% of our sales, 22% up, and SBU, 5% up, representing 36%. As, as I've said before, historically, actually, our SBU and IBU have been bigger than, than medical business, and that's also something that we look forward into the mid and long term. On, on regional split, Americas, really strong growth, say, 58%. Asia Pacific, some growth, 7%, and actually, this growth came quite a lot outside China. It was also surprisingly good in India. We look forward into long-term a nice business in India. Europe, Middle East, Africa was, was about flat. On first half, quite much similar numbers than, than in the second quarter.
EUR 48 million sales, 11%, 11.4% growth, and EBIT, EUR 2.8 million, representing 5.9%. Despite the fact that there were one-timers in both first quarter, second quarter, this is not something that we can be satisfied with, and we have started and will do actions in improving our profitability. Business units, IBU, -5% first half, medical, 18% up, and security, about 10% up. The business unit split is very similar than the second quarter out of the total sales. Looking more carefully in the numbers, I think the couple of things we can highlight here, one is that the cash flow then started to improve quite considerably.
We had a 2.4% positive operating activities cash, thanks to the tighter managing of our accounts receivables. Investments were fairly, fairly smallish. I mean, at the current rate, we don't have a need to do any, any capacity increases, and so on, and thus the need to invest is limited. R&D was 12.2% out of the total sales. On strategy highlights, the most important thing for long-term future and success of DT was the acquisition and closing of Haobo Imaging. We call Haobo Imaging now as DTS, that's DT Shanghai. We now own to be precise, 89.75% of the shares. The two founders hold about 10%. They remain leading the business.
We have organized the, the DTS as part of, actually our medical business unit. Medical, the head of medical business unit, Chen Wu, is leading, leading that. Then, then, aside, I mean, the finances and HR reporting to their relevant, functional heads. We must also note that there will be goodwill, which is generated out of the deal, about EUR 12 million, and that we will be starting to depreciate the goodwill then quarterly over the 10-year period. Instead of EBIT, we will be then talking of EBITDA, so earnings before interest, taxes, and amortization in, in, in the future. Because we are following the Finnish accounting standards, which means that we, we, we must depreciate the goodwill, which is different than, for example, what most have been used with the, with the IFRS, standards.
We also took the opportunity to move the Oulu operations into a new facility. It's luckily only 200 meters away, but it's a building that has been designed to be an office and factory building, that will enable us much better to both do our R&D administration as well as our production. We look forward also for making more of the European origin products that are originating from Europe, and we are avoiding some tariffs than in our sales to U.S., and thus having savings, plus this is a good way to mitigate any geopolitical risks that there might arise. We also expanded the product offering for TDI, X-Scan T02 products for our industrial business. Some other events, DT Heartbeat, I mean, employee survey, slightly up as a result.
We were promoting the, the value-based behavior through our leadership courses, and first time, we also had the DT Shanghai employees participating to these programs. We had 2,000 zero accident days in our manufacturing sites. That's a very good result. Also, we are an active member of the Ahlström Collective Impact , which is then supporting UNICEF Global Education Work. The most, most important really is that what do we expect from the future? I think overall the market growth is there. I mean, we expect then shorter term, third quarter industrial to grow, also grow in, in the second half. In Medical, we see quite clearly that our customers, especially Chinese customers in China, have been too bullish on, on the growth.
I mean, since COVID times, the Medical has been really, really fast in, in, in the world, and it has been slowing down. What we have now been informed by our customers that they have been too much optimistic, and they are now balancing their sort of inventories and so on, and the Medical for third quarter will decline. Decline in the second quarter as an outcome of that, and then security to have a strong double-digit growth, if both in third quarter and second half.
Due to this medical, temporary event, actually, the total net sales for DT is declining third quarter, but we still believe that we will be in growth for the full second half, meaning that the fourth quarter then will, will, will sort of improve and boost the company into the growth. On business outlook, as I said, the market information, there has been, there has not been information on that's different. If I would have a guess, I think security market, they're growing faster than 5%. It's been so down for so long. Industrial market, 6% probably is a good guesstimate. Medical market, 5%, or short term, probably a bit less.
As an official guide, as we expect the whole company net sales to decline for the third quarter and to grow for the second half. The good thing during this second quarter and also in July really is that there has been now increasing interest in China for security, also aviation. There is Hong Kong is renewing their airport with computed tomography equipment. Hainan Island has two international airports that are now moving into use of computed tomography. Also in the Western China, they are moving.
Despite that, there have not been big announcements, despite that, actually, the security aviation market that has been very much in standstill so far is now moving ahead, and we have customers asking that, "Can we increase our capacity and so on for those products?" As financial targets, they are the same: annual sales growth at 10% or better than 10%, operating margin at or above 15%. By operating margin now, we are using EBITDA, earnings before interest, taxes, and amortization, as I was explaining. Out of the net proceedings, dividend or return capital is between 30%-60%. Thank you. I'm now very, very pleased to answer to any questions that might arise.
Arto Heikura from Evli. You mentioned that you have taken actions to improve your profitability or cost efficiency. How clear is the plan today, and I mean, from which roles you are planning to cut costs?
We have actually, we have done some, some small items already. Actually, we, we closed down the DT Nanjing office last week. We actually established it due to the fact that China has this strategic Made in China 2025 program, and that was actually, China government was subsidizing a lot of companies doing semiconductor designs and so on, and we had terrible trouble of getting employees. Actually, in Beijing and Shanghai especially, what was, was challenging climate. We decided that we have to do something if this turns, turns worse, and we decided to actually establish Nanjing, and that was the right decision. That time then hit the corona, and we were not able to, let's say, develop it. We didn't have very many, less than five employees there.
Then after the acquisition of Haobo, we have too many sites in Eastern China, and we decided that that needs to be closed. That's one, one item, and it's an, it's a sort of start. We are right now doing planning. We are seeing what we need to be doing. The plan is that we will do the actions during third quarter, and then, then we would and, and should have a clean, clean fourth quarter. Also, many of these actions will also help our fourth quarter and especially help in the 2024. We see these things as, as necessary to be able to get into our 15% EBIT profitability.
Okay. What is your visibility to IBU's and MBU's customer inventory corrections currently?
I think it's MBU is more clear because the lead times are longer and we basically, we see already the third quarter very much. let's say, MBU risks more are relating to, I mean, customer payments and so on. I mean, if somebody's not paying certain things, we might delay the shipment and so on, but those are minor things. MBU visibility is good. IBU is sort of a, let's say, shorter term. We have seen that it is now improving. I think we also communicated this after the first quarter, and it should be now the better than the, for the second half.
Of course, there's the, the global, markets are a little bit, less active, as we all know that the world was thinking after the first quarter, but still the outlook is, is for industrial is there's solid, solid items. There's areas like, for example, the battery inspection, that is very hot. We also are selling our products into the manufacturing of batteries for EVs and, and anything that moves. So there are also clear growth areas in the, in the. This kind of using X-ray in battery manufacturing is very much at its beginning. It's, it's very, very crucial for the safety and quality of the batteries. We are talking high powers, to check actually, during the various stages in manufacturing the quality through X-ray.
Okay. About the new facilities in Oulu, do you expect to arise some extra OpEx, OpEx costs during the ramp up? About the EUR 1 million investment, is it all CapEx?
Yes, the EUR 1 million. I mean, we don't expect any big hits in our sort of fixed cost that. We have been a bit also, I must say, clever and lucky how we, how we do it. The CapEx earlier we announced that we will increase our clean room into the existing facility where we are right now, and that was about EUR 500,000 investment. Now we, we, we are increasing the, the, the clean room space to about double what it we thought, and the investment is total CapEx is EUR 1 million. This is including the previously informed EUR 500,000. Thanks to the fact that the, the, the, the premises are much betterly, much better designed, so actually we, to be precise, we gained 37% more net space.
We, in a way, from that point of view, the, the cost per square meter is going down.
Okay. Thank you.
Okay, thanks, Sami Sarkamies, Danske Bank. I have a couple of questions. Starting from, from recent developments, you hosted a pre-silent call at the end of June. Can you wrap up sort of the changes since that pre-silent?
That, that's a good point. I, I think the two changes, two things: One is that, well, the risks that we thought that in this kind of like, payments, that of course, it's until the last day, you know, if somebody paid and so on. Thanks to managing more, more carefully the accounts receivable, so that risk realized. We thought that maybe a little bit we would have been able to recognize a little more sales, maybe EUR 500,000, less than, a bit less than EUR 1 million. That, that sort of, realized and the we, we actually came down to the lower end of the ballpark, EUR 25.2 million. Then we were not aware of this medical, Medical third quarter and fourth quarter sort of impact.
And, and this is, like I said, this is mainly the Chinese, Chinese customers in the Chinese markets that have been bullish. I mean, and, and what's the reason? We don't know, but probably they've been guesstimating some government subsidies and so on, that, that so far has not come. I think there is not a change in the longer-term picture and, and the investments schedule for healthcare in China or, or in the world. From that point of view, we are quite comfortable. The good... By the way, the, and then the third item is, it doesn't show yet, but the security looks better than what we when we had the call in the, in the, in, in June. That's the, that's the good news.
When I started to do this report, I, I saw only the, the, let's say, the good news on security, and then the, the, medical came, came a bit, bit some days after.
Okay, if we dive deeper into the segments... Okay, you mentioned that you have become more positive regarding security market. How much of that is already related to third quarter? You're talking about starting aviation CT investments, for example, in China. How much of that will already impact the third quarter?
Not very much. Quite, quite little. I mean, the, the, the, as before, I think we've, we've, end of fourth quarter, like the TSA, U.S. airport, and so on, that, that, will be more starting towards the end of the fourth quarter. We might get some little in China for the end of third quarter because they are so fast always. You know, things, when something happens, then it moves fast. Definitely for fourth quarter, and then for, for next year, and also what, what we know from some cases that, they will, you know, it will take, like, 3 or 4 years to, to really, I mean, actually reinstall and rebuild the, the security systems into, to an airport. So it's not just a one-timer like that.
It's big investments, it's huge amount of equipment and so on into, so it takes time.
How should we sort of look at the, the, the aviation CT potentially China relative to the U.S. market that, I mean, are, are those comparable opportunities in size?
Well, China has less airports, and China has not announced any big program. I think the information the market was before that China would be doing the called Class A airports, meaning the biggest airports in, in Guangzhou, Shenzhen, and Shanghai, Beijing, Chongqing, et cetera, first, and there's no such announcement taking place. Now actually some of these big airports like Hong Kong are moving already. Naturally, flying is back in China and airports also everywhere they get money from each flying passenger, and that helps them to also invest, and because they need to do something with the airport capacity and also the security challenges and the productivity of the airport, where the CT is actually, it's a like a no-brainer.
I mean, that's something you need to do.
Okay. Moving into the medical segment, how, how weak is the outlook for the second half of the year? I mean, it seems that there's been quite drastic change in the Chinese outlook. How, how material drop should we be prepared for relative to last year?
Uh-
Is this like inventory correction?
This is more inventory correction. I mean, short term, yes, it's, it's, if you to look, the volumes is, is, is, in a way, drastic, and that's quite natural. If you have, if you have products in stock, and you don't need it right now, of course, you don't want more until you have consumed that stock to the, that's sufficient compared to the outlook for the demand. I mean, it will happen third quarter, fourth quarter, and then, then for DT, if we look the comparable quarters, then it, it especially looks bad for the third quarter because we had this. I mean, the comparable numbers for last year, second quarter were soft, but they were quite hard because of the push-out from second to third quarter last year, 2022.
The comparison for third quarter is, is, is tougher than it's, it's for fourth quarter.
Okay, moving into industrial segment, maybe a technicality first. When you're giving guidance, are you including the Haobo acquisition, or sort of, is the guidance for your own underlying business?
Haobo, Haobo will be included into our finances. Haobo, Haobo will be reported on the base where the products are being sold. If Haobo products are being sold for industrial, it's recognized for industrial business unit sales. If Haobo products are sold for medical, it's recognized for medical business unit sales. Haobo sales are in, we foresee Haobo to be rough, like, EUR 2 million for second half. It is a little bit question mark. It can be also, let's say, positive surprise, we'll see. The business is a little bit different, what we have so far had, because Haobo has not had any large accounts as their customers, like big OEMs, like global OEMs.
The business is more like one-time sales until we develop Haobo and commercialize their products in the big medical OEMs, and that takes some time because approval processes. That's also why we have said that Haobo will start grow faster in from 2025 and beyond. Until 2025, we, we believe that Haobo will be growing faster than DT.
Yeah. I mean, you, you said that the industrial segment has kind of like normalized from demand perspective at the end of Q2. If we exclude Haobo, do you see similar sales to last year or higher in the second half of the year, excluding Haobo?
Haobo now is in, and so I'm, you know, I comment only on the total, total DT group.
Okay. Okay, then, finally, if we think about the full year top-line outlook, do you think your double-digit top-line growth target is reachable during the full year?
I, I think based on this, this guidance and so on, it would not. I mean, it would require very, very super good fourth quarter. I mean, most probably we will be somewhere in between last year and then, then, sort of some single things. Then there is some uncertainty related to that also from, from upside perspective. According to the official guidance, it's, it's now declined third quarter, and, and there will be growth on second, second half.
Okay, then finally, if we look at margin outlook for this year, I think you were still quite optimistic after first quarter. You were expecting to be somewhat below your target level. How does it look now? I mean, first half was quite weak, and you're not sort of guiding for strong growth in the third quarter. What, what, what could be a realistic margin level during the full year?
When after first quarter, I think the, the biggest change really is that, that we, the sales has not realized. Which, which would, of course, I mean, naturally help, help the, the, the, the EBIT or EBITDA margin. As quarters to come, I think the, the, we, we foresee the product mix a little bit turning better. That, that should be helping, and then we need to be seeing that what can we do in, in increasing the productivity in the company on, on both in terms of throughput margin or sales margin, as well as, as leveraging more from our operating, I mean, cost and, and people.
Okay, thanks.
Nikko Ruokangas, SEB. Couple of questions as well. I'll get back to the guidance in your outlook for Q3 and H2. It includes quite nice improvement from Q3 to Q4, and as you said, that there are uncertainties that continue in, for example, medical segment until the end of Q4 at least. What makes you confident on, you know, improvement in Q4 and QoQ?
I, I think one, one is this, this on medical side, the, the, let's say, customer inventory correction. Security, like we talked just a while ago, I mean, TSA is starting to pull also the China security market. Now we see that that is getting more active. Industrial probably, I mean, we see it as it was, was sort of the before. I mean, these stock corrections are out, and then we are getting help from the Haobo sales. That's in nutshell.
All right. You expect that, medical negative impact from, from the customer destocking is, is largest in, in Q3?
Yes, as a, as a sort of a compatible quarter point of view.
All right. Then I'll get back to the, your comments on, on profitability, improvement actions. Could you give some kind of estimate at how, how, for example, that you, you will close down the, Nanjing, in China? How, how big impact do you expect from that? What are the, you know, sizes of the other actions you, you are taking?
I think on annualized basis, the couple things we have done so far represent a bit less than EUR 500,000 in cost. Like I said, that's just the start. We are right now in the planning phase with the management on seeing that what how can we improve the growth prospect of the company and be more like a lean and mean, like I said, more focused. Those items, we have no decisions yet, and we are seeing that what really makes sense. Like I said, I mean, the target is to get to this 15% EBIT profitability.
All right. Then, then last, relating to that, so you say that you see the sa- or was it so that you see the sales mix improving, in H2?
Yes.
All right. All right, that's all for me. Thanks.
We have a couple of questions from the chat. Yohakin Nunan asks about DT's outlook-
Sorry, Vivi, can you just talk? I, I don't hear you well. I think, is the microphone on? At least I don't hear it. Okay. Can you just speak a bit high, louder?
Of course, of course. Sorry.
Thanks.
About DT's outlook, and especially medical in Q3, it was exceptionally strong last year, so no surprise that it is coming down. However, considering this slowdown in demand, are net sales going to decline also from Q2 level?
I mean, what we guide is that there will be a decline as total DT for third quarter. Then there will be growth for the full second half.
Could you comment on the likely reasons behind the softening medical demand? It seems to be soft globally, not only in China. Were there other over-investments during COVID period and now a longer slump? When do you expect the demand to pick up?
I, I think, globally, the thing is that the healthcare is uninvested. I mean, it's, it's. The fact is that what I have heard from the, the, our customer base is that the equipment are even more outdated than they were before corona. The equipment base globally has worn out despite the big investments during COVID times. There's a big need from that point of view. The challenge is that the world is out of money. I mean, this, this requires investments, and then, of course, the governments need to be deciding how to do they prioritize between the needs of, of, of people and, and, and countries. The, the, the, the sort of the market forecast, the market outlook for medical, especially medical CT, is, is, is strong.
How much out of that growth need we'll realize as growth is, is, is, is a big question mark, but, I mean, the 5% is quite realistic actually, from that point of view. If we take separately the China market, is, is the, the, the, the, the, the market believe that the China would have been growing a bit faster. I think the market was counting for some subsidies for Chinese government, based on last. They had a big important meeting last week. There were no sort of decisions, at least yet, for anything like that. It can be that you can only guess what, what has happened, but our guess is that these customers have been a bit too sort of aggressive on, on being ready for the growth.
Because it's, it's, China system also is that, you know, when you get an order, you have to deliver, so you have to be prepared. There's no sort of. The, the, the waiting time is, is, is shorter, and, and, and, everybody expects things to happen when they, when they send an order in. Now this kind of extra preparation needs to be melted, melted, even though the market is growing.
Could you also comment on the opportunities in India? Do you see this as a significant market for DT in the coming years?
The answer short is yes. It's, it's an exciting market. India has been, I think, if you read the international financial papers and so on, it's been a promise for long, but it's, I'm not the only one who now believes that now things will happen. India actually has changed a lot of the legislation just before the COVID times or during the COVID times. I mean, for much, much more favoring business, favoring for logistics between the states and also the corporate taxis, all kinds of. There's a lot of things that have been done to boost also the business. In addition to that, India has now big government programs for investing into, like, healthcare equipment, manufacturing.
India historically has been very strong in software, very, very strong in software, and now they are moving also more towards being a hub for, for making of business-to-business equipment and so on. We look forward of being part of helping them, helping them there.
We have one more question. Could you remind us about historical split of Haobo sales to your business units?
Oh, that's something that I probably don't remember by precise, but Haobo has been a little bit doing dental for medical. Most of it has been industrial. I mean, we must remember that this healthcare, there are approval processes, customers are conservative, and Haobo is fairly young company. They are super good, and we are so admiring so much their capability of yielding out new products. Now we are doing together. That's the reason we wanted to actually hold Haobo fairly independent, that we don't destroy that capability, but we support it through some systems and processes, and especially through our customer interface for larger Western accounts. They would not have had possibility to sell into some Western major players. We already have started.
I have also been personally in these meetings with some of the customers. Also good news is that I'm gonna state that, that even though we also talked today of the spot costs, I mean, that, that are an outcome, because of the material shortages we just faced some time ago, everybody. Companies learn their lesson. Medical customers are conservative. They hated new suppliers, getting in new suppliers because various things, now they must take them in. Before, nobody wanted to have a second supplier or two suppliers because it's a cost. Now, a lot of the companies are interested of getting a new supplier because of risk mitigation, risk purposes, and we believe that we are the one that has a good opportunity to capture many of these accounts.
By the way, we, this Americas business also is an outcome of, very much of getting new accounts, that we stated that we want more new accounts during the corona times than we build our competition. Thank you. I think we are now have used the, the sort of time that we was reserved for us, and I thank you very much for good questions, also from our dear analyst friends here. Look forward to seeing you again after the third quarter and, and, bringing up some, some, good news more in, in, towards on, on, market needs, on, on security, and also some clarity for, for medical business and industrial. Thank you!