Bittium Oyj

Okay, good morning everyone. Welcome to Bithium Corporation first half 22 review meeting. My name is Hannu Huttunen. I'm the Bithium CEO and with me here today I have Mr. Pekka Kunnariti, company CFO. Contents for the meeting today as shown here, so First, I will go through the highlights for the bitium from the second quarter of the year. Then Pekka will discuss about the numbers during the quarter and also the whole first half of 2022. And then I'll get back to take a look about the outlook for the rest of the year and the whole year 2022. So if we start from the defense side of Pythium business portfolio, so tactical communications, generally speaking, the unfortunate Russian invasion to Ukraine has led many, especially European countries and governments, to analyze and think about their capabilities when it comes to defending their countries. And as we have seen from quite a few countries that have already decided that they will increase their budgets for the defense. For us, this will mean that this will enable also several countries to start the modernization programs for the tactical communication systems and devices. We have already seen quite a lot of requests or information requests from the customers and customers. And we will participate to the several RFQ processes for this year and coming year from many countries. Another interesting or important point from our point of view is the Finland's decision to join the NATO alliance. So if and when Finland will reach the full membership of NATO, this will open Finland and also Finnish companies access to also to the parts of technology, namely cryptography, for example, that are available only for the companies operating in the NATO countries. So we see that this will enforce our competitive position in some of these coming RFQ processes, namely in, of course, NATO countries and European NATO countries. So generally speaking, market is clearly speeding up here in the tactical communication side. This does not mean that they... that this will be ordered immediately, but this means that this process is starting from the request for information, RFQs, pilots, trials, and finally the decisions by the production systems are now starting, and we will see the results. these processes to realize as an order from somebody. Of course, we want to win as many as possible of those in the coming, let's say, two to three years. If you take a look about the first half of the year, second quarter of the year, our capability to deliver our products was still quite heavily restricted by our capability to purchase components, namely semiconductor components. So the situation in the semiconductor market remained quite challenging during the first half of the year, and we expect that the challenging situation in that market to continue at least during the rest of the year. Maybe... Some point of time in the next year, there would be a balance in the supply and demand of semiconductors, and the situation would start to normalize from that point of view. But it's expected that this access to the components needed in the production of our products will remain challenging during the whole this year. In the product offering side, we introduced to the market our new field phone, so new, really modern digital field phone for that market segment. In the domestic defense market, we continued our excellent cooperation with the Finnish defense forces. Finnish defense forces continued to work to enable the the operational usage of our new SDR radios, handheld and vehicular radios. They also ordered the narrowband waveform development to complete the waveform portfolio or capabilities of these new products. We also received several orders based on the frame agreements that we have with the Finnish Defence Forces for our TACWIN and Commonwealth products. And also got the order for the development of the next software version to the TACWIN system. Generally, we were able to grow our service business in the defence market, meaning that they are that we were developing features to the specific customer needs, getting, of course, revenue from that and margin from that, but also in the same time utilizing this customer financing to improve the competitiveness of a product. So getting new features to the production systems by using customer funding. So good progress in that area. In the international defense markets, we continue deliveries of our two current biggest outside Finland customers, Austria and Estonia. We also delivered several systems to the EU. weapon system manufacturers or sensor system manufacturers. So big international companies that are providing such solutions to their customers that are using our products as a communication solution in a part of their system. For example, in the air defense systems, you need to have a have an efficient and robust and data-capable way of transferring data from sensor to the weapon itself. Our current technology offering is very competitive for such a solution, but our hardware and our TACWIN waveform, we believe that we are really there in the leading edge, what comes to capabilities of data transfer capabilities in the tactical systems. Now when we reached like a first phase of readiness there with our new SDR radios, handheld and vehicular radios, now we have also been able to start several pilots in the several countries with these new products. And these are important first steps in this process to finally get into volume production and volume sales phase. So that's a good thing. good achievement and implementation of our strategy that we now have been able to start those long processes that finally will lead the decision to purchase the products and systems. Also an important milestone achieved here in the tactical communication area was this ESSOR waveform joint testing happening in June with our ESSOR partners, where this new version of ESSOR waveform, which is really the first one that is truly operational, capable so really can be used there in the battlefield was introduced and tested together with the partners and this test went very well so SR starts to be ready to be taken into real use. Then in the secure communication side This is an unfortunate situation in the world where the situation is quite tense and a lot of hostile activities is happening. It clearly has an impact also for the cybersecurity side. So more and more governments in the different countries are focusing also the cyber security capabilities there in the mobile communications. Typically today you have this highly secure communication fixed lines. But in the same time, more and more communication is happening there in the mobile networks. And as we have seen good examples in the world, for example, different kind of malware like Pegasus, that there are a lot of vulnerabilities in the modern era, smartphone-based communications. So demand for truly secure smartphone-based communication clearly is growing, and during the quarter and the first half, we were able to start quite a few new pilots and trials and first implementations into several countries and with the new customers. Of course, in the first phase, the volumes are not really big in these first implementations, but they They are like a good ground to grow the business in the long run. So more and more users to the secure communication systems means that we will be able to grow our volumes and sales in there. Then what comes to offering there in the in the TAF Mobile Secure Communications side, we introduced this kind of tactical version from our TAF Mobile 2 product to the marketplace, meaning that mechanically this has been hardened by using accessories that is really meant for the battlefield. So really robust mechanical solution and then easy to use for the soldier. And what does this also do with the product is that it's like a user interface and display for the situational awareness and battle management systems that are run there in the phone system or memory. In the same time, the phones in this tactical mode are connected to the tactical radios, meaning that you can use these tactical radios provided by Pythium or some other tactical radio vendor can be then used as a data transfer to deliver the data needed for this battle management or situational awareness systems. Then at the same time, of course, if the mobile networks are available, you can also use the terminal as an additional way to connect to the tactical network by using commercial like LTE, 4G connections, if they are available, utilizing our secure data transfer technologies and softwares in there. Then medical technology side of the business. In the early phases of the COVID pandemic, we saw that there was an impact to the medical technology product market also, so that healthcare organizations were so much focusing for the or taking care about the COVID patients, that even the other critical health problems were not focused too much. But that's clearly over, so at least in the current pandemic situation, let's hope that it will not get any worse. We don't see such restrictions in the market anymore, but the market is proceeding quite well, and demand is again there. We have several products there in the process to get this new European Union medical device regulation-based approval or certificate. We already have been able to verify that our organization and processes are are fulfilling all the requirements caused by this new regulation, and we are expecting that we would get a certificate for our new sleep apnea pitium respiro analysis product and software solution still during this year. So we are not far away anymore from getting this approval and starting the deliveries and business with this new business area for our medical business. In the same time, we have already started to get the approval also, the FDA approval for the U.S. market, and we believe that we would be able to get the FDA approval roughly in the same pace as we expect to get this MDR approval. So also we should be able to start the sales and business development of lithium respirator products in U.S. still during this year. Demand for our Faros ECG devices was good during the first half of the year. but still our delivery volume was somewhat restricted because of the component availability. During the first quarter, we were not able to deliver too much of these far-off products, and the second quarter was clearly better, but not still yet all the needed volumes we were not able to produce. And still there in that business area, the most important biggest customer was this US-based preventive solutions, today owned by Boston Scientific Group. In the offering side there in the medical technology business area, We launched to the market our new Bithium Pharos 180L product, meaning that this product is capable to acquire full hard data for the 14 days without recharging. So this is kind of very difficult to find a product. hard problems that require really long time measurements, special device for that and good feedback from the market. The EEG side of our business was clearly most impacted by the COVID pandemic because the first application area in there is focused to the incentive care units. And incentive care units have been pretty much occupied and focusing to the COVID patients. But now let's say that As we see, the situation starts to be quite normal also in there, and we've been able to proceed with the pilots and trials in there and start to develop that business also. Then R&D services side of the business. Also in there, we had some challenges during the pandemic times to acquire new customers because typically this is a – Trust business. So when you have some really important product that you want to develop and bring to your customer, who do you rely to be your partner to develop such a solution? You want to meet the people, you want to see the capabilities, products, etc. And if that's forbidden, it's very difficult to open new customerships. But now it's okay. Now it's normal. Our sales and business development people have been able to travel and meet the customers, and customers have been able to travel here and see our technical teams and to be convinced by our capabilities in there. So this business starts to be in quite normal mode. We saw growing demand of our R&D services there in the area of open RAN, so open radio network architecture ecosystem, this new low-orbit satellite systems, and basically all the embedded products where wireless connectivity is needed. If you think about 5G, what's that enabling? It's not only having a faster data connectivity to your phone, but it means that it will enable all kinds of things to be connected to the cloud and digitalized that have not been possible with the earlier technologies. And it means that you need to integrate this wireless connectivity to really new product areas. And our strong competence is to develop such embedded devices where wireless connectivity is connected or integrated. I am pretty convinced that there will be a good demand for our R&D services also in the future. To improve our competitiveness there, we introduced our platform cellular IoT solution. So basically technology parts or components that we have developed in our product business area Enabling this kind of IoT, LTM-based connectivity to be integrated to customer products or systems faster and cheaper because we already have ready parts of technology in our portfolio that we can offer, improving our competitiveness in such cases. Well, if the product business side in our business is today restricted by availability of the components, then this R&D business is clearly suffering the availability of the professionals. So the employee market continues to be really, really tight, and competition of the talent continues to be really tight. So this is clearly limiting and will limit our capability to grow in this area that how much talent we can and how many new employees we can get to the company. Right, so I will now hand over to Pekka. Thanks.

Thank you, Hannu. Let's look at our financial numbers for second quarter and first half of this year. Let's start about quarterly development of net sales. Our net sales for second quarter was totaling roughly 23 million euros, and it was quite at the same level as it was one year ago. As we can see here in the graph, first quarter we made 18 million euros this year, and now 23 million euros, so there is a growing trend. Roughly 70% of total net sales was product-based, totaling roughly 60 million euros. Roughly half of that was medical technology-related products and the rest was the defense and security products. Especially that medical technology... Product net sales was strong for second quarter, 7.7 million euros. It roughly doubled since this first quarter this year and it was higher also compared to last year. One reason for this strong second quarter for medical technology net sales was that during first quarter we had shortage of components and we were not able to deliver so much products as we planned. Partially our manufacturing lines were stopped, and during the second quarter we were able to start those lines again, and then we were able to deliver also those products which were originally planned to deliver to customers during the first quarter. Defense and security products declined. It was roughly 8 million during the second quarter, as it was 11 million euros in the last year. One matter is the shortage of components, but also another matter is the timing of the deliveries of the products, which vary between quarters. Service-based net sales was roughly 7 million euros. and roughly less than 4 million euros of that was connectivity solutions, R&D services, which remained at the same level as the last year, and the rest is mainly defense and security related services, as Hannu mentioned earlier, and it grew during this quarter. Let's look then the net sales for first half. The total net sales was roughly 41 million euros and it grew 3.4%. Two-thirds of that was product-based net sales, totaling 27 million euros. There, the medical technology products declined compared to last year, but at the same time, security products increased. Service based net sales was roughly 14 million euros and again they are connected to solutions. Net sales remain at the same level as it was last year. It was 8 million euros for the first half of this year. And again there is a difference in security related services which grew. Operating result for second quarter, we made, the total was operating profit 0.8 million euros, 3.5% of net sales. It was quite at the same level as it was one year ago. This covered, not even, but quite close to the operating loss, which we made during the first quarter this year. So totaling the first half, the operating result was negative. We made the losses side, so operating loss was roughly 0.2 million euros. Anyhow, it was better than it was as it was in the last year when it was minus 0.7 million euros. Okay, the net sales increased and we earned a bit more cross-margin, of course, of that. But at the same time, our costs of R&D activities increased because we capitalized less developed costs during first half as we did last year. During this first half, we capitalized 3 million euros as we made 4.4 million capitalization during last year, so 1.4 million euros were more costs, but taking care, taking that, noticing that amount, it was good progress there that the result was better during the first half as it was one year ago. Okay, this R&D investments, I said about this capitalization, the total R&D investments were roughly 11 million euros, representing 27% of net sales, and both numbers, this ratio and this absolute year amount was at the same level as it was last year. There we have started to change our focus to development from defense and security products more to medical products to end of last years. And that is also impacting for the first half this year. Then the gas flow, the first half total gas flows was zero. Gas flow from operating activities was plus 6 million euros, and there the networking capital remained at the same level as it was at the end of last year. Then we invested 3.7 million euros, and 3 million of that is capitalized development costs, as said earlier. And financing activities was minus 2.3 million euros. It includes dividend contribution made in April, which was 1.4 million euros. So the total in zero, as it was last year, roughly minus 6 million euros. So good progress there also. And then our balance sheet. still strong, still stable over the past times. The total amount of the balance is 165, roughly 165 million euros. And when we lose the assets, roughly 50% of that are non-current and current are roughly 50%. Non-currency assets 85 million euros and major item there is a developed capitalizations totaling 48 million euros. Current assets totaling roughly 81 million euros, and there is, that includes inventory, roughly 22 million euros, trade and other receivables, roughly 37 million euros, and our cash balance at the end of June was 22 million euros. And another side of the balance is equity liabilities. Equity ratio is still very strong, roughly 71%. And liability sides are interest bearing debt about 22 million euros and it has remained stable as well. And net carrying ratio quite close to zero. So balance sheet is stable as I said and is still strong shape. Okay, that's a very brief review for our numbers, and next, Hannu will tell about our outlook for current year. Hannu, please.

Thank you, Pekka. Yeah, as I said already, the component situation remains challenging still during the rest of the year. And that causes really weak visibility to the second half and the whole year. Naturally, there are also other geopolitical risks that have increased, like inflation, problems in the logistic chains, et cetera, caused by the war and other issues. That may have an impact, too. The big team also, but our main challenge clearly for this rest of the year is still the semiconductor market situation. So, as said, not too good visibility for the rest of the year. However, our best forecast for the rest of the year is as such that we believe that our net sales will be roughly in the same level as it was in the previous year, so about this 87 million euro. And our operating profit, although As we see that the third quarter of the year will be negative, we believe that the whole 2022 operating result or profit will be positive. So this is the outlook for the rest of the year. Okay, thank you for participating to the meeting. Have a nice rest of the day. Thanks.