Good morning, and welcome to Scanfil's Q3 results webcast. My name is Pasi Hiedanpää. I'm the Director of Investor Relations and External Communications at Scanfil. Together with me online, we have our CEO, Petteri Jokitalo, who will be presenting our results in the webcast. Couple of things about practicalities. Questions can be sent via chat window, and we will be answering those at the end of this session. Now to the presentation. Please, Petteri, go ahead.
Thank you, Pasi, and welcome to Scanfil Q3 results call from my side. We got a positive quarter in many ways. First of all, our sales was strong. We got also a strong customer demand, of course, was behind our good sales. Quarter sales EUR 212 million. Was growing, like, 26% year-on-year. Basically all our customer segments were growing strongly, especially Energy & Cleantech, Automation, and MedTech. There we saw especially strong customer demand to continue and even further speed up. Operating profit was EUR 11.5 million. Almost 22% growth year-on-year. Also clearly higher level than what we had Q1 and Q2 this year.
Basically, strong or stronger operating profit was driven by increasing sales volumes and also we were more successfully now hedging and mitigating the risks coming from exchange rate changes. USD continued to appreciate and but we were in better position and able to hedge that risk more successfully now. Net profit, EUR 9.4 million. 84% growth from last year. Earnings per share, EUR 0.15. Other positive things in our Q3 performance was that we were able to further improve our net cash flow from operations. We turned our net cash flow positive already Q2, where we had, like, EUR 2 million positive cash flow and now we improved that to EUR 8 million.
Of course, the key drivers behind that positive development was improved profitability and also the fact that we were able to stop finally our inventory growth. Materials availability, components availability situation was improved a bit, and that was immediately reducing our need to use spot market purchases. We still had quite remarkable amount of spot market purchases in our sales, like, EUR 20 million. In comparison to Q2, where we had EUR 30 million, they are like a reduction of one third. I said customer segments, basically all customer segments were growing and especially all excluding connectivity were growing, if you are, like, cleaning the sales numbers from spot purchases more than 20%, except connectivity.
Energy saving, energy efficiency equipment recycling solution products have a real momentum right now. Customers, they have a great outlook. Basically, the limiting thing has been components availability and same matters also with our automation customers and also quite many of our MedTech life science customers. 23% growth year-on-year without spot purchases. If you think about that, what is the impact of cost inflation? We could say that about 5% of that could be explained and rest is, like, increasing customer demand. Some key KPIs for Q3. We just went through sales and profit numbers. Return on equity 15.4%, slight improvement from last year.
Equity ratio and net gearing some negative development to last year, but situation stabilizing now. Net cash flow from operations. I apologize, we have mistake there. It's +EUR 8 million, Q3 2022. Last year, this -EUR 19.2 million is correct number that there you can see the clear improvement what we have made. That last year -EUR 19.2 million, now +EUR 8 million. Situation has clearly changed and started to improve. Employees average 3,374. It's good to understand on top of that we have third-party operators as well that the total amount of people what we have including third-party is bit above 4,000. If taking bit closer look to balance sheet.
The total value EUR 541 million. Inventory is EUR 229 million level. Of course big growth from last year, but this EUR 229 million level is actually exactly the same value than what we had at the end of Q2. Now the next step, of course, is to start to reduce the inventories, and now the growth has been stopped. Same matters with our interest-bearing bank loans. EUR 19.2 million is quite exactly the same amount of interest-bearing bank loans we had by the end of Q2. Cash situation almost EUR 20 million. On top of that, we have unused credit limit about EUR 50 million. Liquidity situation is quite healthy.
Could say that financial position continued to be stable and definitely ensure so that all needed investments can be done. The sales development. Q3 EUR 212 million. Quite the same level than Q2. On other hand, if you are looking at the history, Q3 used to be a bit lower level than Q2 always. One reason is the summer holidays in July. We also had summer holidays this year. Now Q3 sales has been extraordinary high, same level than we had Q2 sales. Then that's indicating indicating very, very strong customer demand. Especially if you are looking at situation without non-margin spot purchases, we were in level now EUR 192 million. It is actually all-time high. All-time high sales.
Which was then leading to improved operating profit EUR 11.5 million. After Q2, we discussed and I was talking about that about EUR 10 million level where we have been quite long time and not been satisfied with that level and clearly indicated that we are looking forward to see stronger H2 this year and stronger profit development during second half. That's starting to realize as we expected now Q3 and looking forward to further strengthening OP during the last quarter of the year. Few major production investment and decisions or investments which are even implemented in 2022 or decided in 2022. Those investments what are listed here, they all have kind of also strategic angle.
Starting Atlanta, where we rented 6,000 square meters more early this year. New space. Can see picture there as well about our new premises in Atlanta. There we also now have made a decision to invest in a full SMT line, including automated inventories and a THT. Other technologies needed to manufacture electronics starting from PCBA and making PCBA kind of manufacturing possible. The investment total value in Atlanta is about EUR 4 million and these lines are available somewhere Q3 next year. That investment is clearly widening our service offering in United States so that we are vertically integrating our existing assembly integration testing capability to printed circuit board manufacturing. Opening big market in United States.
Our global customers, most of them, they really seeing that North America is one of the key markets, and it has been a disadvantage that we were not able to offer them a full-scale electronics manufacturing in Atlanta so far, but that will be changed next year. After that investment, we are able to serve better our existing customers and also widening our new customer potential in that market. In Wutha-Farnroda, Germany, we have introduced new space mainly to our existing medical customers, where we see great sales development possibilities. Malmö, Sweden, we also have introduced new space for existing and new customers. Suzhou, China, we finally implemented already during the first half the year bit smaller than we talked one year ago.
Expansion, we finally ended up to make like 1,400 square meter investment or new floor space investment. We were pretty much using our existing premises that we used to have big office building in Suzhou as part of our production campus. We didn't need that production space, so during the years, we were renting it out to third parties. Now we somehow moved our existing offices to that building and then it changed our existing office space and into production space. We were able to increase our production floor by that area without building new buildings or walls.
Even in China, that 1,400 square meter expansion is enough to ensure we're seeing business growth potential in China at least during the next one or two years. On top of that, we have invested in Suzhou S&T capacity and warehouse automation. Outlook and focus in this year, guidance remained the same, not changed. Still seeing that our sales will land somewhere between EUR 800 million and EUR 880 million and operating profit between EUR 43 million and EUR 48 million. Of course, there are still risks, component situation, semiconductor availability, even if it's slowly improving. We still have challenges there and most likely will have some level of challenges during the whole next year.
In addition, of course, we still have war in Ukraine and even COVID-19 is still with us and may cause some unexpected issues. Focus areas clearly driving organic growth. We have customer outlook very strong still, and that's like our first focus to make sure that we are able to realize the sales potential what we see. Securing materials is the key. Even our profitability is improving. We still see potential to improve that further. If you are taking into consideration EUR 20 million spot market purchases during Q3, our OP was like a 6% level and target, of course, is still 7%. We believe that this is realistic over some time and definitely we are looking forward to go closer to that. Net working capital and inventory positive development.
What we have seen, we need to continue. We need to maintain our positive cash flow from operations and stop inventory growth. What we have seen, we need to change that to a situation where we see our inventories to reduce. We see potential to reduce our inventories even as sales as we believe continue to grow. Longer term targets no change. Annual organic growth 5%-7%. I think that in our existing inventory situation, we need to add the text that inflation corrected annual organic growth target 5%-7%. Operating profit level at 7%. Dividend approximately one third of the annual earnings per share.
As I already said, we see really great growth potential with many of our customers, and especially our customers under energy and clean tech segments, and med tech and life science. Central Europe still great potential for us for longer term. In long run, we believe that we need wider factory network. Especially we have mentioned that wider factory network is needed in East South of China and North America. Thank you so far. Pasi, do we have questions?
Yes, we do. Pasi approached us actually with a question regarding already the year 2023. Of course, we cannot really comment on that, but I will read it through anyways. "How do you see Scanfil's organic volume growth to develop in H1 2023 in the case we are going to the economic downturn? Is it possible to witness some 5% decline in sales volumes in first half of 2023?" Kind of a tricky question because we cannot provide-
Yeah.
an answer.
Of course, that's clear that we are normally coming out with guidance for the year somewhere February time. Most likely next year February, we will come out with more detailed outlook for 2023 and then also likely giving guidance for that. What I can say, I can. As I said earlier, that our customers are providing monthly basis, like rolling 12 months forecasts for us. As already said, we said that Q4 will be strong this year. Also we do not see any, especially any weakening in customer forecast. So far they are forecasting. Of course, one other topic is our customers are industrial customers, so the order stocks are really strong.
Orders start weakening. As said earlier, our customer base is very versatile and most likely that will happen in different time points for each of them. We do not see that kind of weakening yet.
Okay. Thank you, Petteri. Also regarding the weakening pace has continued regarding China. Could you please comment on China in more detail? Have you seen weakening demand in China in October?
No, I can comment on China at a general level that we have never discussed or got any detailed information about October.
In October, yes. Exactly.
Yeah. As generally speaking, thinking our overall customer base is what we have in Suzhou. We have not seen any general change in our customer forecasts.
Okay. Thank you.
In October.
Thank you. Antti Viljakainen from Inderes. What were reasons that factories in Poland performed very well in the Q3 ?
factories in Poland were.
Yes, performed well. Yeah.
I think that our almost all factories were performing well in Q3. Also the improved material situation, even slightly improved material availability is improving our possibilities to run our factories efficiently and improving productivity. Because there are less unexpected issues with components availability or last-minute changes or last-minute information from component suppliers that they are not able to deliver.
Okay. Thank you, Petteri. Also actually Antti continues. This is kind of, actually you almost already answered these questions. Are there particular reasons what are dragging other factories to reach the same level?
Performing as well as any like fundamental issues that basically all our factories, what we have in our portfolio right now, they have a healthy customer base and they have good strategy. All of them, they have basically same possibilities to make healthy profit. Meaning that even aiming that 7% OP level.
Okay. Thank you. Continuing actually with the geographics, Antti continues. Do you see any differences in customer demand estimates or-
Scandinavia. Still, the situation is like that. We have a few major customers, who has headquarters somewhere else, like United States, but most of our key customers' headquarters are in Europe or even Scandinavia. Basically, they have very healthy demand now. All of the key markets where they are focusing.
Okay. We are getting actually an information from our supplier regarding.
Mä en tiedä mikä tossa on vikana. Miten haluatte toimia? Voin käynnistää uudelleen tän, tai tän striimin ja siinä toivon, että ongelma korjaantuu. No mul näyttää itse asiassa olevan Teamsin jumissa. Mä en pysty tekeen tälle mitään, et en tiedä mistä johtuu, mutta.
Päästiinkö me kuitenkin, niinku, tähän asti?
Joo, tähän asti päästiin ongelmitta. Ehkä me jatketaan vaan loppuun asti ja Joo. Okei. Tehdään sitten, että sillä mennään mitä nyt pystyy tekeen, että jos asiakonteksti tulee selville, niin jatketaan vaan sillä. Okei. Jes. Hypätään takaisin live.
Okei.
How much of Atlanta's new capacity is supposed to be allocated for Scanfil's current customers?
We start with, of course, current customers and offer that to current customers. It's of course the easiest way to get started and we already have some known projects. We are even aim to move some manufacturing from Europe to United States. Then the next step is start to sell that extended service to new customers.
Asking about strong enough to consider acquisitions, or do you want to wait until your inventory levels are lower and economic outlook becomes more certain?
We are expecting that our balance sheet is remarkably stronger position somewhere next year, maybe in the first half of the next year or second half next year at the latest. Knowing that acquisitions timeline, if you want to finish a major acquisition, it's easily like 6-8 months time after. For that
Okay. Thank you, Petteri. There are no more questions actually at the moment. If you would like to ask some questions, please post those on the chat, and we can get back to those. Let's continue with summary. Petteri, please go ahead.
Strong customer demand continued. Strong sales, Q3. Actually, all-time record sales without the non-margin spot purchases. We expected improving profit H2. We got it. We are looking for further turning point what we had during Q2. We continued that development Q3, where we had EUR 8 million positive net cash flow from operations. We were able to stop our inventory growth and now looking forward to start to reduce our inventory levels and make our balance sheet stronger. We are expecting to two years. We are expecting to see strong customer demand, strong positive development. Lot of positive development during Q3, and I'm looking forward to continue that during Q4. Thank you very much, and have a good day.
Thank you, Petteri. One reminder for our investors. You will be approached by the company at the end of November with a questionnaire regarding