Good morning, good afternoon, ladies and gentlemen, and welcome to BEE Semiconductors Quarterly Conference Call and Audio Webcast to discuss the company's 2016 Second Quarter Results. The audio webcast is available on Besi's website, www.basi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer and Mr. Corte Hennepe, Senior Vice President, Finance.
At this time, all participants are in a listen only mode. And later, we will conduct a question and answer session I would now like to turn the conference over to Mr. Richard Blittmann. Go ahead, please, sir.
Thank you. Thank you
all for joining us today. I will begin by making a few comments in connection with the press release we issued earlier today, and then we'll take your questions. I would like to remind everyone that some of the comments made during this call and some of the answers in response to your questions by management may contain forward looking statements. Such statements may involve uncertainties and risks as described in the earnings release and other reports filed with the AFM. For today's call, we'd like to review the key highlights for our second quarter and first half year and also spend some time updating you on the market, our strategy and the outlook.
First, some overall thoughts on the past quarter. Besi achieved a 38% quarterly sequential revenue increase in Q2. A tripling of the net income to €24,000,000 and peer leading gross and net margins. This strong performance was due to a favorable market environment, increased customer acceptance of Besi's leading edge and mainstream assembly solutions and benefits of operating leverage in our business model. Revenue was above prior guidance, primarily due to earlier than anticipated systems deliveries to Asian customers, which we originally scheduled for Q3.
Net cash of €110,700,000 grew by 21.1 percent over the Q2 last year as we scaled revenue rapidly and improved cycle times to meet increased customer demand. In addition, Besi continues to enhance shareholder value via the payment of cash dividends to shareholders and regular share repurchases under our current buyback authorization. In Q2 2016, sequential revenue growth was broad based across the product portfolio and primarily reflected an expansion of advanced packaging capacity by Asian subcontractors. In addition, we experienced increased demand for die burners and fan out wafer level burners. Revenue growth resulted as well from the favorable influence of a new technology cycle, which we first saw in the Q1 of this year.
An expansion of our customer base in the major supply chains and continued growth in automotive applications. The 200% sequential profit increase also resulted from stable operating expense development despite the revenue ramp and a lower effective tax rate. For the first half year twenty sixteen, Besi's adjusted net income increased by €2,300,000 versus the first half of last year to reach €31,800,000 even despite a 5.6% year over year revenue decrease. First half twenty sixteen operating results benefited from our market position, continued improvement in material and labor efficiencies and reduced European overhead from the transfer of additional organizational functions to Asia. At present, Besi's strategic priorities include the expansion of our Singapore Die Boming Engineering and Chinese production capabilities, further enhancement of our Asian supply chain and implementation of common platform designs.
Such initiatives offer additional opportunities to increase the operating leverage and profitability of Besi's business model. With that, I'll turn the presentation over to Cor Te Hannepper, our Senior Vice President of Finance. Cor?
Okay. Thank you, Richard. Besi's Q2 2016 sequential revenue increase was due primarily to increased demand by Asian subcontractors for our assembly solutions including epoxy dye bonders and fan out wafer level bonders. Revenue rose 4.5% versus the Q2 of 2015 as Asian customers increased demand for mobile and automotive applications. Orders decreased by 3.3% versus the Q1 of 2016 but increased by 9.4% versus Q2 of last year.
Sequential decrease was due primarily to lower demand for die bonus for cloud server and certain mobile applications. For customer type, subcontractor orders decreased sequentially by €8,300,000 or 14.3 percent while IDM orders increased by €4,900,000 or 10.7%. For the first half year, Besi's revenue decreased by 5.6% as sales declined for smartphone and other advanced packaging applications. However, the first half year of twenty sixteen orders grew by 4.2% versus the first half of last year due to a renewed capacity built by Asian subcontractors. Overall, their mix in our order book increased from 45% in the first half of last year to 53% over the first half of this year.
Besi's gross margin in Q2 2016 increased by 1.7 points sequentially to 50.9% and was above prior guidance. We continue to operate at the high end of our gross margin target range. The increase this quarter was primarily the result of our enhanced market position as well as improved labor efficiencies and reduced restructuring costs. Margins were negatively influenced by increased material freight costs mostly from an increase in the Malaysian ringgit and the Swiss franc further to euro. Gross margin also increased by 3% versus the Q2 of 2015 and by 1.8% in comparing the first half of this year to the first half of last year.
Basis Q2 'sixteen operating expenses were roughly flat versus the Q1 'sixteen and better than anticipated. On a reported basis, lower sequential incentive compensation, facilities and restructuring expense was offset by increased Asian personnel and other variable expenses related to higher sales volumes. OpEx decreased by 9% versus the Q2 of last year, due primarily to a 13.1% decline in European and US based personnel and related overhead costs. Excluding variable restructuring and ForEx impacts, you can see that Beige's baseline expenses continue to trend between €22,000,000 25,000,000 per quarter with Q2 'sixteen being at the upper end of the range due to higher sales levels. Besi's net income tripled versus Q1 of 'sixteen due primarily to the strength of Besi's product portfolio combined with stable expense development and the reduction in our effective tax rate to 6.9%.
It also underscores the operating leverage in Besi's business model. Net margins jumped to 22% versus 14.8% in the Q2 of last year and even exceeded peak cyclical net margins of 19.7% in Q2, 2014. Effective tax rate has varied quarterly depending on the profit mix of our legal entities, but typically ranges between 10% 15%. This quarter tax rate was influenced by a €1,000,000 upwards revaluation of net operating loss carry forwards at Besi Switzerland without which the tax rate would have been 10.8%. After adjusting for the €3,500,000 of net restructuring benefits in the first half year of twenty fifteen versus €800,000 of restructuring charges in the first half of 'sixteen and the Q2 'sixteen tax benefit.
Besi's first half year twenty sixteen net income increased by €2,300,000 compared to the previous half year of last year. As a result, adjusted net margins increased to 16.9% versus 14.8% in the first half year of 'fifteen. At the end of Q2 'sixteen Besi's cash and cash equivalents decreased by 37,700,000 dollars compared to Q1 'sixteen to reach 132,100,000 due to the payment of €45,400,000 of dividends. Excluding the dividend payment, net cash actually increased by €7,700,000 sequentially, which is notable given the 38% sequential revenue ramp. As compared to Q2 last year, Besi's net cash increased by €19,300,000 or 21.1 percent even despite a more rapid revenue trajectory this first half year.
This was mostly due to a 16% reduction in inventory levels year over year. Inventory management has benefited from the move to Asia, based on supply chain initiatives and faster cycle times. Net cash levels in the 2nd quarters of 'sixteen also reflect the repurchase of 227 1500 ordinary shares for a total of €5,600,000 Since program inception last fall, Besi has purchased a total of 723,000 shares under its 1,000,000 share repurchase authorization at an average price of €20.44 per share for a total of €14,800,000 And with that, I'll turn the presentation back over to Richard.
Thank you, Cor. Now I'd like to spend a couple of moments updating you on the market and our guidance for the Q3. The market tone in the first half of this year was more positive than analysts originally anticipated. VLSI now forecast assembly equipment market growth of around 1.1% for the whole year 2016 versus an initial estimate of a 3.9% decline. VLSI forecasts a less robust second half twenty sixteen consistent with seasonal patterns in the assembly equipment market followed by strong growth in 20172018.
Key growth drivers include an expansion of Chinese and Taiwanese capacity growth, a new technology cycle, increased spending for below 20 nanometer devices and growth in high end memory and power efficiency applications. Besi continues to experience excellent market acceptance for its products, a broadening of its customer base and increased share of wallet per customer. Our customer profile looks very different now than it did 3 to 5 years ago, with much larger volume orders from all the major players and increased penetration of Chinese, Japanese and Korean accounts. In Q2, we had great success not only with our most advanced fan out wafer level boners, but also with our epoxy and flip chip boners and molding machines for smartphone, handset, automotive and lighting applications in a more mainstream market. This is an important basic market initiative.
In addition, as you can see on this chart, we have continued to gain share of wallet since 2012 at both key subcontractors and IDM customers, sometimes even reaching 100 percent of their estimated assembly equipment needs. Such gains underline the momentum experienced by our product portfolio. One key strategic initiative we wanted to highlight is the expansion of our Asian production capacity. 2 years ago, we decided to increase manufacturing at our Lusun, China facility in order to diversify Besi's Asian production sources and take advantage of local market opportunities. As such, we doubled our footprint to 100,000 square feet and began epoxy and multi modular attached die bonder production in 2016 in China.
The decision was made specifically to capture more local Chinese demand, enhance our local market presence and reduce cycle times and cost. In addition, it gives us greater flexibility to maximize customer responsiveness in market upturns. Besi successfully produced and shipped 50 dive bombers in the Q2 in Lusan for the Chinese market, up from 15 in the Q1. This move has favorably influenced our first half year results. Now a couple of words about the guidance for the Q3.
At present, the industry environment for the second half 'sixteen appears stronger than the second half of last year twenty 15. Key variables affecting Besi's second half outlook include ongoing global macro, economic uncertainties, equipment demand growth rate for below 20 nano devices and level of orders customers. Based on current backlog levels, Q3 'sixteen revenue is anticipated to decline by about 15% to 20% versus the Q2 of this year, reflecting a typical seasonal pattern. However, expected revenue and operating profit are forecast to exceed the Q3 last year, results as our products gain market share, gross margins are maintained at the first half year levels and strategic initiatives favorably influence overhead development. That ends my prepared remarks.
I would like to open the call for some questions. Operator?
The first question, Mr. Phil Schofen, Kempen. Go ahead please.
Yes. Good afternoon. Can you hear me?
Yes. All right. Great. My
first question is on the accelerated order or system deliveries you had in the quarter. What kind of product was that? And why was it actually shipped in Q2 instead of Q3? Is there a specific reason for that? My second question is on your mentioning the fan out weight level packaging.
Can you indicate whether that is related to subcontractors or whether that is related to, let's call it, OEMs or foundry producers? And my third question, maybe a bit more bookkeeping, is the CapEx, which was quite low in the quarter. Is there any seasonal impact on that? Or are you in the country and very little money in this, maybe, the coming years on CapEx?
Okay, great. First, why pull ins? The simple reason, as explained in one of the last comments in this call, is that we are able to ramp faster than we have been in the past. And then you have to consider, for instance, epoxy dye burners. We are able to deliver within 4 weeks.
And in the past, those deliveries would take 6 weeks, and that helped us basically to satisfy customer demand and their preparation for capacity expansion in the Q3. So in the mainstream, the reason for the pull in is basically our capability of delivering faster. Fan out is from several subcontractors, orders driven by several OEMs, one of them fabless, and that is a sign of using fan out technology for logic devices in next generation smartphones. Why is CapEx so low? Simply because we have current our current infrastructure is in place.
We have replacement CapEx, but also in one of the comments we mentioned that we have prepared the footprint in China in the last 2 years and that is fully ready to be operational. So there are no major CapEx programs currently.
Right. And then if I may short follow-up on the first point, it is either faster rent from your side and that is actually in the Diebold side.
Next question, Mr. Edmond Young, NIBC. Go ahead please. Mr. Young, your line is open.
Go ahead please.
Sorry. Maybe you had mute. I had mute, Vincent. Sorry.
Sorry. Good afternoon, gentlemen. Just a few questions. If I was reading through the TSMC earnings call transcript, and they were quite vocal on developments in the fan out wafer level packaging. And that's quite unique for Foundry to talk about the back end.
So any thoughts on that? And is TSMC maybe one of the drivers behind the demand that you see in fan out laser level packaging? And then as another question, looking at the net cash development, that's been excellent, of course. Are you considering additional buyback programs? Or what is your way to cope with that in 2017?
Those were the questions.
Okay. The first, well, there's a variety of customers who have decided to set up assembly for next generation logic devices using fan out wafer level technology. We have been the first already in 2,007 to develop fan out technology at that time in very early stages. Of course, geometries have changed since then, but we have significant success because of already a qualified installed base at several subcontractors. And in the past year, we have been successful in demonstrating further tighter specs in combination with leading market throughput capabilities.
So on a broader base, fan out is doing very well. On the net scheduling development, excuse me, sorry. Sorry, Herna.
On this, so the installed base is increasing. Are there many machines in the highest volume manufacturing? Or is it still earlier stages? Well,
in it's early stages, but still multiple double digit system orders. So one could expect a further rollout, but it's still in early stages. Net cash development. Our share buyback program will end once we have reached the €1,000,000 share buyback that should be somewhere in September. And based on ongoing positive cash generation, one could expect a continuation of that program.
Once we have reached the €1,000,000, we will take a decision on continuation of the program. Of course, based on the current cash generation and our dividend policy. It should not change if this continues to develop in the second half of this year. And the outlook next year is as expected by VLSI, which we have also shared. But that decision will be taken in February.
But you're right, the current cash position is nearly €20,000,000 higher than at the same time last year despite €45,000,000 dividend payout and a close to €15,000,000 share buyback. So a significant cash generation. That's clear. It's very clear. Thank you.
The next question, Mr. Peter Olofsen, Kepler Cheuvreux.
Good afternoon. I had two questions. First of all, on the reduction of the European headcount related to the transfer of certain operations to Asia. I think the original plan was to complete that in Q2 and well, the full benefits being visible in Q3. Could you confirm that is on track?
And then my second question relates to the solar business. I think in the Q1 call, you said that this year will be about customer qualification. And if they're progressing well, we could see follow-up orders in H2. How is that progressing?
Excellent. Well, the move to Asia, the plan is and was that we hire additional headcount in the first half of this year, which we have done in Singapore, slightly over 40 persons have been hired. They are currently trained in Austria or in Switzerland. And after successful learning curve by year end and first quarter, a similar number of persons will become redundant in Austria mainly, and that, of course, also depends on the development of the business. So maybe we've not explained it well enough to you that in the course of this year.
So we have double cost at this moment. So very interesting in Q2, we have roughly €1,000,000 double cost in our OpEx due to setting up further support functions in Singapore. But that will disappear in the Q4 and the Q1 of next year. That's the status on further move to Asia.
And maybe to give a little more explanation, maybe the completion of the Q2 one is the first part of the moving to Singapore that's from Switzerland. And that one is in the meantime finalized. And we're now looking at further plans to reduce overhead in or headcount in Europe and that's what we are talking about now. So there's 2 stages or 2 plans involved. The first one, which started in 'fifteen, is now fully finalized.
Okay.
That's the Swiss part. We're now talking mainly about the Austrian part.
Exactly.
Okay. That's fair. On the second question, solar, yes, it will be very important and interesting to see whether orders materialize for solar in Q3, Q4. There are several irons in the fire. So far so good.
So we will report further on those developments with the 3rd quarter. Okay. Thank you.
Next question, Mr. Johannes Rees, Hapus Capital.
Great results again. Maybe on the forecast for 2017 'eighteen of VLSI you shared, what areas of the back end market will be most maybe affected or maybe the strongest growers in this year? And how much maybe could benefit basically from this? Is it likely given maybe your position is that you can outgrow the whole market? And maybe second and short update on the TCP development.
Maybe I missed it in the presentation.
Excellent. Well, you're very sharp. Thank you, Mr. Ries, for your questions. First, 2017, 2018, it will be a mix of a further expansion of current mainstream assembly technologies, so using substrates and a rollout of several wafer level assembly technologies, and one of them being fan out.
And Besi is well positioned to benefit in both areas as we have seen this last quarter. So there are no, let's say, dramatic changes expected. This industry is always pretty conservative. But the bottom line is Besi should benefit well and maybe even more with our operations in Asia becoming more and more experienced. And we have demonstrated that with the ramp in the last quarter also.
So yes, we are ready to benefit as much as we can from a next step swing. Okay. On TCB, the developments are ongoing. No big orders in the Q2, smaller in terms of numbers of machines. Continued progress in more, let's say, cost effective ECB production.
Also here, it's early days, but we are continuing our success in the mainstream of the TCB in the memory market, the memory cube in particular, mounting that on logic devices for high end server applications. But it's fair to say that the second quarter, the big success was in the fan out bonus and to a lesser extent in the TCB bonus.
But in this upswing, we discussed in the question before in 'seventeen and 'eighteen, TCB could be also a trial
Yes. Strong driver? Yes. But still, both fan out and TCB are significantly more expensive than a further development pushing the envelope on the substrate flip chip applications for those devices. So the battle between what is still possible for lowest cost as opposed to what is a must to change for the next generation.
But we are prepared for both.
Okay. Super. Thank you, Mr.
Blickman, there seems to be no further questions.
Then thank you all for listening to the call and for your questions. And if there are any more questions, you know where to reach us. Thank you very much. Bye bye.
Ladies and gentlemen, this concludes the BE Semiconductor's 2nd Quarter 2016 Results Conference Call and Audio Webcast. You may now disconnect your line. Thank you.
The conference is no longer being recorded.