Good morning. Welcome to Scanfil's Q1 2022 results webcast. My name is Pasi Hiedanpää, and I'm the Director of IR and External Communications at Scanfil. Here today I have our CEO, Petteri Jokitalo with me as well, and he will go shortly through our results. Petteri, please go ahead.
Thank you, Pasi. Welcome all, also from my side to Scanfil's Q1 results call. Q1 2022, strong demand continued under demanding circumstances. Record high sales, EUR 197 million, a 20.4% increase year-over-year. Pretty much driven by all customer segments.
When it comes to individual products, I could mention some locker solutions, elevator products, reverse vending machines for drinking bottles, control systems for battery solutions, indoor heating, indoor cooling systems and so on, where we saw a very robust demand. Q1 operating profit, EUR 10.3 million or 5.3% operating margin. EUR 8 million net profit and 0.12 euros earnings per share.
Other highlights, or should I say lowlights, during the quarter are, for sure, material constraints continued. We were really suffering from challenges in material market, especially electronics, especially active electronics, meaning semiconductors, was causing higher cost. We needed to use more spot market in order to secure and maximize our customer deliveries.
That was also impacting our inventory so that inventories were growing. Also those continuous material constraints were causing extra work, decreasing productivity and so on. I said strong customer demand was coming from all the customer segments. You see here the whole year-on-year Q1 said more than 20% growth. You see.
You can see here that all segments were growing very extraordinary high level. After, say that, we also had very high spot purchases during the quarter. In order to secure materials and together EUR 17 million. Here you can see the split between different customer segments, how much we used the spot market. Spot market is something that we are able to invoice that from customers.
They are paying that. So that point of view, it's not causing any extra cost, but that invoicing is non-margin or very low margin invoicing. So no remarkable impact to operating profit from that sales to customer. That kind of sales we had like EUR 17 million during the first quarter.
Cleaning that out, you can still see that we had very nice growth rate in different segments. Advanced Consumer Applications, almost 16% year-on-year. Automation & Safety, 17%. Connectivity, even 31%. Energy & Cleantech, 17%. Medtech & Life Science, 9.7%. In total, 10%. Some may wonder why the total is only 10% because all segments are above. The reason is very simple.
One year ago, we had so-called not continued business still in that traditional telecom business, telecom cabinets business we stopped somewhere last year. That's impacting. We don't have that business anymore. That's causing why the total growth rate is only 10%. All existing segments are growing faster except Medtech, which is about 10%.
Some other key numbers we went through, sales and operating profit numbers. Return on equity are pretty much same level, 15.2% we had one year ago and also the whole last year, end of the last year. Equity ratio are pretty much same level as well.
Year-on-year is down by 7, 52%-45%, but we are the same level than where we were at the end of the last year. Net gearing a bit decreased now to 37%, like a negative development there in year-end 28.9%. Last year 5.9% only. Then you can see here the net cash flow from operating operations are negative, minus EUR 13.6 million.
Pretty much, driven by our, of course, our increased working capital and, key drivers there, increased receivables from customers. There we do not see any drama. It's very natural and, reflecting our growing top line and growing sales. Other driver, growing inventories are something we need to pay attention. I'm going to speak about that, a bit more a bit later.
Employees at the end of Q1, almost 3,300. They are an increase year-on-year and very clear reasons. Our top line has been increased quite robustly since that, and our employees are growing in line with that. Going to balance sheet, the total balance sheet now EUR 486 million.
I could say strong equity ratio still sustainable net gearing 37%. I said something to pay attention is inventory growth. Then we see year-on-year we were growing our inventories by EUR 92 million. Of course, drivers very clear. Very strong realized customer demand development, a continuously increased customer outlook. We are preparing us to meet the rising demand by buying more materials in. Same time we are facing material availability challenges and we have used quite a lot for instance spot market.
We have seen components, material prices increase and especially spot material price level is high, and this is impacting our inventory level, and now our total inventory value is EUR 210 million. We have been financing that inventory growth by our cash flow, and on top of that by increasing our loans.
We can clearly see here that our interest-bearing bank loans were increasing year-on-year like EUR 42 million. Pretty much put to inventories and of course, that's clear that even our financial position is still stable. Our cash end of Q1 was EUR 8 million. On top of that, we had still unused credit limit, like EUR 50 million.
That's clear that we need to be able to level off the inventory growth already during the year and already need to start to see some result during Q2. Q2 sales growth you can see nice trend here. Maybe the other message here is that typically the lowest quarter of the year is Q1.
You can see here Q1 2019 was the lowest, Q1 2020 was second lowest. Q1 2021 was the lowest as well. That point of view, this EUR 196 million is of course excellent start of the year and fully in line with our understanding and with our customer forecast that demand for 2022 looks very strong.
Even if taking those PPV or those spot market purchases away, we can see the same trend here that actually I will say if you are reducing the spot market purchases EUR 70 million away, it was like EUR 179.6 million during Q1. Clearly, 10% above our Q1 last year. This is also indicating very good for the year 2022. You can also see the trend that those spot market purchases trend has been growing and then now we see still high PPVs to continue during Q2, maybe even Q3.
As soon as electronics market situation starts to improve, we see those PPV or spot market purchases to start to decrease. Then operating profit trend, I said also in February when we had the last year result call. We have been quite stable now for a while, like a EUR 10 million level when it comes to absolute OP and we have seen declining operating margin.
Now it looks like we are at the same level somehow that decreased level of. We have like 5.3%. If we are comparing our operating profit to our sales without spot market purchases, the operating profit was like a 5.7%. It's that point of view going to right direction, but we have still work to do, and one other focus area beside the inventories this year is to get our operating profit back to growth path.
What is supporting that, we see very good customer demand for rest of the year. We believe that when volumes are increasing, we are able to see our operating profit to improve through the year. Then maybe to mention that yesterday we had the annual AGM and that was decided that we will pay from last year like a EUR 0.19 dividend, and then that is like a ninth year in a row when we are able to grow our dividend.
Policy is so that we plan to pay about one third of earnings per share as a dividend. Payment will happen May 2. Outlook and focus in 2022 mainly driven by a very robust customer demand and also higher than expected spot market purchases and also maybe a bit changed the outlook for spot market purchases continuation.
We needed to change our guidance for 2022 sales last week, Thursday, April 14. Our new guidance is so that we estimate that our sales this year will be somewhere between EUR 750 million and EUR 820 million. Before that, the old estimate was EUR 710 million-EUR 760 million.
The same time we didn't see any reason to change our operating profit estimation then, and it's like unchanged and still like EUR 43 million-EUR 48 million. Also that's clearly indicating that we believe that our profitability will improve and absolute profit will improve through the year. Of course, it's clear that there are a lot of uncertainties, lot of risk around us and this semiconductor availabilities will continue for sure in some level the whole year, maybe also next year.
We have a war in Ukraine, we have COVID-19, especially in China right now, and causing risks and no one of course know exactly how the world and environment will develop from now on. Our focus areas are very clear that we see very robust organic growth possibilities.
Our customer forecast very strong and how to realize that we need to secure our materials. We need to get materials in and we have a excellent possibility to grow. Profitability improvement clearly that we need to be focus more to improve our profitability during the year. There are, of course, some risks related to cost inflation and so on.
On the other hand, our business model is not definitely not the worst one to tackle that. Now, for instance, that very widely used open book pricing model helps us to get all costs in. Very many cases we are even negotiating and changing the prices monthly level, at least quarterly level.
I'm confident that we are able to get those cost increases to customer prices. We have done that and also in future we are able to do that. Then, third focus area definitely is inventory growth. We need to at some point level off then and we are working very hard to see some positive signs already during Q2. Long-term targets unchanged of course.
Annual organic growth 5%-7% Q1 if we are cleaning spot market purchases away. 10% we are quite nicely in that target with about operating profit level at 7%. There we are not yet. We have work to be done. I believe that this realistic target is 7% and we are able to get there. Now 5.7% if cleaning those spot market purchases out 5.3% if spot market purchases in our operating margin in Q1. Dividend level is about one third of...
or was already last year, about one third of annual earnings per share. That kind of great organic growth what we are facing right now, of course, means that we need to make sure that we have decent production space everywhere. We have already published news that we are going to increase, or we have increased, production space both Atlanta and Wutha.
We are still studying our options in Suzhou what to do, and definitely going to do something there as well. Besides this, we had quite many considerations, smaller or a bit bigger expansion consideration related to some other factories. We are hopefully able to come out with our press release about this later spring or summertime. In the long run, as already discussed last time in February, we definitely see North American EMS market as interesting areas where we should extend our factories.
There are quite many macro-level things, trends which are supporting that. Geopolitics, increasing insourcing to continents. Both North America and Asia are definitely growth markets and so for us. That's something coming maybe 3-5 years perspective areas where we would like to see to have a wider factory network. Central Europe definitely still seen as attractive growth driver for Scanfil. Last year we had a tough year there operationally.
We closed Hamburg. We moved a big part of that production to our other German factory, Wutha-Farnroda, and our focus was really much on that technology transfer. Now we are able to somehow start to look for other growth opportunities again in Germany.
Actually the market looks good and the business looks good there. We have seen signs that our Wutha-Farnroda, that Wutha-Farnroda factory acquisition that really starting to fly, seeing a lot of positive there. I think that now we have moved to questions answer session. Pasi, is there any questions so far?
Thank you, Petteri. If you would like to ask some questions from us, please use the chat board and post your questions there, and we will be reading those too and answering the questions. First one came from Pasi Väisänen from Nordea. How much from the reported sales growth was underlying volume growth? What volume growth in Q1?
If 20% the whole Q1 and 10% would say that driven by spot market purchases. We have 10% left, and then how much were driven by price increases? Out of that 10%, it's of course impossible to answer exactly, because price increases are not happening 1st of January, but somewhere depending on what kind of schedule we have with each customer.
But a few percentages I would like to say, only a few. Definitely something maybe to 3%. So the remaining would be like definitely more than 5% would be like a real volume increase. 5%-7%, clean volume increase.
Okay. Thank you. Pasi continued regarding actually the China and the investment in China, what we are currently doing. Have you seen weakening economic growth and weaker end demand for Scanfil in China?
No, we have not seen any. Of course, we understand the risks and following clearly that macro view and real estate market and so on. So far, we have to say that we have not seen any weaker demand in China. But of course, there are some short-term risks, like our factory located in Suzhou, close to Shanghai.
We all have been able to read news about lockdowns in Shanghai area, also other cities. Those are like causing short-term risks, including material availability and so on. So far we have been able to keep our factory open in Suzhou every day.
One more question from Pasi. Is there some components which are now impossible to get from the market? Could it reduce sales volumes? A good question.
Yes, there are all the time components what you are not able to get, for instance, today or next week. Of course, there are no components that you are not able to get with any time scale. The time scale can be after months or something like that. This is exactly environment where we are living, and that exactly why it's causing so much extra work.
To make changes, we have also quite many redesign exercises ongoing with our customers in order to replace some components which are very difficult to find or even impossible to get in near term. There are a lot of activities and ongoing to survive in that kind of circumstances where we are. How much impact to sales?
Yes, we have been living in that kind of environment now about one year, and we have seen our sales to grow very robustly all the time. That it can be very difficult, depending on one individual product or so, but we are high mix, low volume kind of EMS company. That means that we have thousands of products what we are producing. We are not so much depending on one individual product.
Okay. Actually, quite good to continue here with the customer accounts. Jonas, from ABG. You mentioned new customer accounts within Advanced Consumer Applications. Could you elaborate on the type of the products these involve?
Yes. Actually, that new customer, which is growing very quickly in that segment, is quite interesting one. It's like a kitchen machine kind of customer, that point of view, not exactly like industrial customer where we are focusing. The professional kitchens and also consumers. We have been able to ramp up their remarkable volumes, really readily assembling kind of kitchen machines.
Okay. One from Antti Viljakainen regarding the profitability and guidance there. Scanfil is guiding profitability to go up towards the end of this year even though the full impact of the European war is highly uncertain. Can you try to elaborate how much of this high confidence is related to better knowledge and handling of COVID-related problems?
Why we believe that our profitability is growing through the year. It's pretty much first of all related to our customers' outlook, their growing needs. It's also reflecting our growing confidence that even generally we do not see the material market to improve through the year. We have learned a lot how to fight and how to survive in that market through the past year. I believe that we have also developed our skills to find materials and survive in that market.
We have more confidence that we are able to utilize that huge potential what we have this year coming from customer demand to increase our sales. Doing that, increasing volumes in our factories are helping us to improve our profitability. It's not so much to do that we try to understand how the war in Ukraine is going to develop or if there will be more COVID waves in Europe or if COVID-19 is really escalating in China. We don't try to do that. I think that no one knows what's going to happen with this crisis.
Then i f what comes to COVID, what comes to Ukraine war, what comes to component market, if the circumstances remain more or less like we see this to be today, then we believe we are quite confident that we are able to slowly improve our profitability through the year.
Thank you. Quite many questions from Antti Viljakainen from Inderes. First one: Could you describe how Suzhou factory is operating in current COVID-19 situation in China?
Let's take that first. Yes, there are strict rules. For instance, all our personnel is tested every day. We have been maybe also a bit lucky at that point of view that Suzhou we have not seen that kind of amount of new disease cases per day in Suzhou than what we have faced in Shanghai, what has led to wider lockdowns in Shanghai than in Suzhou.
That our operators have been able to come to work and factory every day. White collars, of course, can pretty much work at home. We're able to get our operators to work and after testing this, we didn't face any so far, any bigger issues.
That's the way to do it. Of course, we are facing then, I said some issues with materials nowadays, but what is causing a lot of extra work maybe and that situation will continue for a while. Of course we are following on a daily basis the situation in China, how it continues.
Antti continues regarding the logistics problems and lack of employees. Does the bigger risk for production disturbances come from logistics slash raw material availability or lack of employees?
We didn't have any risk or lack of employees was not realized risk so far when it come to COVID-19. So far, COVID-19 risk in China has been related to materials availability.
Okay. Antti continues. Does the recent COVID outbreak delay your plans with the expansion in Suzhou?
Not so far that we are still evaluating different options, communicating with authorities what could be done, what is not possible to be done also.
Okay. Antti also looks into more detail when it comes to the inventory levels. Do you see any risks that Scanfil's inventory levels have increased structurally?
Of course, it's not positive that inventories are at the level where these are and this continuous growth, of course, is worrying and can also include risks. That's the reason that we need to level off that growth. Risks are like two kinds of.
Our money is now pretty much in inventories and secondly, of course, it can also lead to a situation that if you are not able to consume those inventories during some kind of decent time and if materials are staying in inventory very long times, let's say years, it can also lead kind of excess and obsolete kind of risks.
For this, that kind of situation, of course, we have quite good agreements with our customers, but still, of course, can lead to difficult discussions with customers and then basically it's not win-win. It's not positive from any perspective. Even we believe that we are well-protected by our agreements so that, yes, risks are included in longer term if we are not able to change that development.
Thank you, Petteri. One more question if there are no other questions, popping in. Jyrki Meriviita is asking about our acquisitions. How about acquisitions? It has been quiet for many years now.
That's true, and that's good, definitely good question besides other good questions. Yes, it was summer 2019 we bought Wutha-Farnroda, Germany and no acquisitions since that. I have to say that it's been a bit more quiet period now on how much investment banks have been offering, like, acquisition opportunities.
Maybe this insecurity, what we see, war, COVID-19, material availability, is not the best time to sell business if you somehow believe in that for long term. Maybe that's one reason, if you want to speculate. On the other hand, this year we have, like, a great opportunity to grow organically and our money. The fact is that our money is pretty much in inventories as well.
For sure, acquisitions are definitely our toolbox still, and especially when realizing that, a growth opportunity, longer term growth opportunity in Asia outside of China and United States, definitely I see that this is a very, very strong option to look good companies report.
Okay. Thank you. If there are no further questions, so we could wrap this webcast up. Would you like to say a couple of words still?
No, I think that a lot has been said. Thank you very much for your good questions and interest.
Thank you.
Have a good day. Thank you. Bye.