Website, www.besi.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.
Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without written permission from the company. I would now like to hand over to turn over the call to Mr. Richard Bleichmann. Go ahead.
Thank you very much. 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 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 of our Q2 and first half year ended June 30, 2015, and also spend some time updating you on the market, our strategy and outlook. First, some overall thoughts on the past quarter. Besi recorded solid Q2 'fifteen results with sequential quarterly revenue and earnings growth of 9.9% and 9.2% respectively ex restructuring benefits realized in the Q1 from our Swiss headcount reduction program. Quarterly sequential profit growth was limited by higher operating expenses, some of which were variable with higher sales levels and some of which were related to higher TCB development costs as we develop enhancements for additional end user applications. We believe that our operating expense levels peaked in the Q2 and will reduce gradually over the coming quarters as our Swiss headcount reduction program is completed and other operating initiatives are realized.
Besi had strong cash flow generation in the 2nd quarter as net cash increased by €28,900,000 or 46.2 percent year over year even after payment of 56,900,000 euros of cash dividends due to strong profit generation and improved working capital management. We saw a general softening of customer order trends in the latter half of the second quarter as compared to last year's large capacity build, which masked growth in a number of our end market applications. For the first half year twenty fifteen, Besi generated revenue growth in a variety of promising areas such as high end memory and cloud service and automotive, China handsets and solar plating. However, such growth could not compensate for reduced orders for high end smartphones from the major supply chain networks as compared to exceptionally high levels last year. Despite such headwinds, the first half year twenty fifteen revenue grew by 7 strong first half levels.
With that, I'll turn the presentation over to Kare, our Senior VP, Finance. Kare? Okay.
Thank you, Richard. TASI's 9.9% revenue growth for Q1 2015 was due primarily to increased die attach and packaging system sales for automotive, high end server and Chinese handset applications as well as increased plating system shipments for solar applications. Sequential revenue growth was at the low end of guidance primarily due to push outs of deliveries for certain die cuts and molding systems in advanced packaging applications. The 10.2% revenue decline versus the Q2 of last year was due to decreased sales of die attach systems for high end smartphone applications. Orders decreased by 11.8% sequentially versus the Q1 2015, due primarily to lower bookings for memory and smartphone applications and by customer push outs into the second half of twenty fifteen as a result of less favorable industry conditions in the latter half of the quarter.
Per customer, IDM orders decreased by €8,800,000 or 15.1 percent, while subcontractor orders decreased sequentially by €3,500,000 or 7.6%. Orders declined by 26% versus exceptionally strong Q2 twenty fourteen levels, which reflected a large first half year twenty fourteen high end smartphone capacity build. Besi's 7% revenue increase in the first half year of twenty 15 was due to growth in TCB die attach shipments for memory applications, die sorting systems for high end server applications, thermoforming epoxy die test system for automotive applications and plating systems primarily for solar applications. 16.7% order decrease versus the first half year of twenty fourteen reflected similar trends. For the next analysis of gross margins, OpEx and net income trends, I plan to refer primarily to adjusted figures for all sequential comparisons as we booked a €3,300,000 net restructuring benefit in the Q1 of 2015, which makes our trends more difficult to compare without such adjustment.
As such, you see that base is 47.9% gross margin in the second quarter of 2015 decreased by 0.3% points versus Q1 2015 as adjusted and increased by 4.7 points versus the Q2 of last year. There was no material foreign exchange variance in comparing Q2 and Q1 2015 figures. As compared to the Q2 of 2014, gross margin improvement resulted primarily from net foreign exchange benefits from the decrease in the value of the euro versus the U. S. Dollar and increased materials and labor cost efficiencies.
Similarly, adjusted gross margins increased by 5.2% points between the comparable first half periods. Besi's Q2 2015 adjusted operating expenses increased by €3,700,000 7,400,000 compared to the Q1 of this year and the 2nd quarter of last year respectively. Sequential growth was due to a variety of factors including €900,000 of higher TCB R and D related development costs €1,000,000 of higher warranty costs mainly ForEx and TCB €900,000 of higher personnel expenses and travel, mainly restructuring for Switzerland. They were higher than prior guidance due to a large number of small items, which developed during the period including lower R and D subsidies, higher warranty and TCB material costs. Expense growth versus the Q2 of 2014 was due primarily to $4,400,000 of increased development costs primarily related to TCB activities.
€1,500,000 of incremental expenses from the increase of the Swiss franc first euro and €600,000 related to increased incentive compensation expense. Such factors were principally responsible for the €14,200,000 increase in adjusted OpEx between the first half of twenty fourteen and first half of twenty fifteen. Given the influence of OpEx in our recent results, we thought it helpful to illustrate the development in our baseline operating expenses over the past 6 quarters separate from other factors influencing the development on a quarterly sequential basis. The chart indicates that baseline operating expenses have ranged between roughly €21,000,000 23,000,000 over the past 5 quarters is a June to €26,100,000 in the Q2 of 2015. The largest factor in our Q2 2015 expense growth from R and D, most of which is from higher TCB development costs, both on a cash and non cash basis.
Cash costs relate to higher personnel and material costs to support existing customers and develop enhancements for new applications. You'll also notice in other OpEx the influence of R and D capitalization and amortization according to IFRS. As such, we have amortized more capitalized development costs and capitalized less spending than last year given volume shipments of TCB and new epoxy die bonding systems in 2015. The variance in this item between Q2 'fourteen and Q2 of this year was €2,000,000 We expect net R and D amortization trends to continue for the balance of 2015 as TCB and epoxy diagonally sales growth continues. The other important influence in other operating expenses is the increase in Swiss franc versus the euro, which has increased expenses by 3,400,000 in the first half year of twenty fifteen as compared to the first half year of twenty fourteen.
We expect this influence to reduce significantly in Q1, twenty sixteen as we complete our Swiss headcount reduction program. You can see on this next chart that Besi's adjusted net income has been increasing on a sequential basis since Q4 2014 and grew by 9.2% in Q2 versus Q1 2015. The trajectory of our net income development is different in 2015 than 2014, given the significant spike we experienced last year from the first half high end smartphone capacity build. The first half of twenty fifteen net income was adversely affected by a slight of tax rate versus the first half of twenty fourteen due to the absence of deferred tax benefit recorded in Q2 'fourteen. Absent this benefit, the 2015 rate is just slightly higher than last year.
Our liquidity has developed nicely this quarter and this year with strong cash flow generation from operations. As such, net cash increased by €28,900,000 at June 30, 2015, 1st June 30, 20 14, even after large Q2 dividend payments. Total net cash ended up at $91,400,000 at the end of Q2. Strong cash flow was principally due to our continued high level of profit generation and improved working capital management including a reduction of DSOs and inventories this quarter. We have a substantial cash base to finance our development programs and strategic initiatives and return to shareholders.
With that, I'll turn the
presentation back to Richard.
Now I'd like to spend a couple of moments updating you on the market and our strategic priorities. In general, the near term market tone has softened since last quarter. VLSI now forecasts relatively flat assembly equipment market growth in 2015 'sixteen. However, followed by a large upturn in 2017 2018 of approximately 24%. As in recent years, we anticipate quarterly and annual order fluctuations based on customer purchasing patterns and seasonal influences from retail oriented applications such as smartphones, tablets and automotive.
We anticipate that assembly equipment spending over the next 3 to 5 years will be primarily focused on advanced packaging applications such as smartphones, the Internet of Things, wearable devices, high end memory and cloud servers and streaming video. Customer roadmaps are particularly focused on shrinking device geometries below 25 nanometers as is evident in this next chart courtesy of semi. This trend plays to the sweet spot of Besi's product strategy and technological strength. As you know we participate in a highly volatile industry with significant quarterly ebbs and flows. We think we're in a transitional period now after substantial growth in 2014 and have a variety of drivers which should power future revenue growth above current levels.
Some are process oriented such as device rings, increased functionality and new product introductions which will increase the need for new equipment and the conversion from wirebond to flip chip die attach usage. Others are more Besi specific such as increased market share and penetration of Asian electronics and smartphone supply chain networks and the expansion of TCB sales and customer applications. Combined they point to significant Besi revenue opportunities over the next couple of years. As you've heard in this presentation today, we're investing significantly in our future particularly in TCB, but also in next generation packaging and die attach systems and redesign efforts to make our platforms more cost efficient and scalable. In addition, we are highly engaged in operating initiatives designed to move operations closer to customers to further drive down cycle times and capture incremental revenue opportunities such as transferring plating production to Malaysia and transferring certain die bonding production from Malaysia to China.
We are also keenly focused on further reducing European based cost and currency exposure via such initiatives as our supply chain transfer to Asia, our reduction of Swiss based overhead and additional European facility and personnel cost decreases. Some of these initiatives are just underway and will be bearing fruit in 2016. Now a couple of words about our guidance for the next quarter. Looking forward, we see Q3 this year sequential revenue decreasing by 15% to 20% consistent with historical seasonal trends and reflecting less favorable industry conditions which began at the end of the Q2. Based on customer feedback, potential Q3 order trends are difficult to estimate currently and could be either up or down sequentially versus the Q2.
We anticipate that gross margins will range between 45% 47% as revenue declines and we operate in a more stable currency environment. We think that OpEx peaked in the 2nd quarter and will start declining gradually in the coming quarters as we complete our Swiss headcount reduction program by year end and other operating initiatives are realized. A 10% reduction is anticipated in the Q3. Based on our outlook, we anticipate generating strong levels of profit and cash flow in the second half of this year in an environment less favorable than 2,040. Longer term, we are certainly excited about Besi's growth prospects and market share potential.
A new technology cycle has started wherein customers increasingly demand under 25 nanometer device geometries with increased chip complexity, functionality and density for which new assembly equipment and solutions will be required. This trend plays to our strength as a technology leader in advanced packaging systems. We are also working to maintain high levels of through cycle profitability and cash flow generation via operating initiatives to further reduce European structural and supply chain costs, move our operations closer to customers and improve cycle times and inventory management. We anticipate generating significant excess cash flow again this year which is available to enhance shareholder value. That ends my prepared remarks.
I would like to open the call for some questions. Operator?
Ladies and gentlemen, we will now start the question and answer session. The first question is from Mr. Peter Olofsen, Kepler Cheuvreux. Please go ahead.
Good afternoon, gentlemen. A couple of questions. Maybe starting with Automotive, which has been quite strong in the first half. Do you expect that to continue going into the second half? Reason for asking is that recent end market data has been somewhat mixed.
China seems to be slowing a bit, but car sales in Europe in June were actually pretty strong. So could you shed some light on what you see in automotive? And then my second question relates to the balance sheet and cash flow. You anticipate strong cash flow generation in the second half. You have a strong balance sheet with significant amount of cash.
In the past, you bought back shares, would you consider buying back shares at current share price levels?
Okay. Well, first question first. Automotive is certainly in direct link to the economies in the world and we've seen a very strong pickup last year, continued strong automotive power device especially environment in the first half of this year, also a solid outlook for the second half of this year. So automotive looks pretty good. On the balance sheet, we have in the past bought back shares at times when the industry was in a significant downturn and that we still were generating significant cash.
What we would do at this point in time, we are still in very good industry environment. There is no reason for us to start to buy back shares to be competing with investors in our stock. So at this moment, there are no plans to buy back shares.
Okay. Could I maybe ask a follow-up question on TCB and the opportunities in that particular area? I think you mentioned memory cubes during the meeting in June. In terms of other potential opportunities that you may or are already addressing, Are FPGAs an application that you are addressing with TCB?
Well, the interesting thing with TCB is that it is of course heavily competing with further shrink capabilities of Flip Chip and Flip Chip is moving down the accuracy path from 5 micron to 4 micron and we now have even delivered production equipment for 3 micron. And that should certainly hold off TCB developing more into logic applications. So single dies simply because the cost of flip chip is significantly lower than the cost of TCB. For stack applications like memory, it's a different story because it is a direct interconnect and that is not possible with flip chip and that is made possible through TCB. So that's the current landscape.
And in terms of applications where you already see a decent amount of volumes, so that includes the memory cubes but other applications or products?
No, no. It's fair to say that it is still early days and some very high end applications, but simply because of cost and in low volumes, it is not yet ramping in any volumes.
The next question is from Mr. Phillips Holter, Kempen and Co. Please go ahead.
Yes. Good afternoon, everybody. Following up on those TCB questions, because in the press release, you are actually saying and we are developing additional end user applications. But from your remarks just now, I don't have the feeling that you are targeting real other applications beyond memory stacking. Is that the right way to look at it?
No, no, no, no. Of course, there are more applications. And to develop reliable processes with high yields in production environment that always takes a long time. So yes, the industry is preparing forever tighter geometries where TCB could be the only interconnect solution. However, clearly customers are developing those solutions also using flip chip.
So you have to work on both fronts. And successfully removed the flip chip specs down to 3 micron. We successfully installed over 25 TCB machines for memory cube application. We also installed several TCB systems for single die applications. And that development continues, which is an ever greater effort on more applications.
And at a certain point in time, that will become volume. In a similar trend as we saw the introduction of flip chip in the late 90s being the successor of wirebond in certain applications where the dimensions force the industry to move away from wirebond to flip chip.
Right, right. Thank you for that. And a second question on market shares. Do you have you seen any changes in that in the last 1 or 2 quarters? Or do you still believe you are gaining share?
Well, I think if you look at the revenue development year over year, also quarter over quarter, there is no reason to expect that we will not have gained market share. Also if you look at our gross margins, our gross margins are now consistently at 48%. In the last quarters, that is a clear indication of a very strong market position.
Sure. Sure. And my third question is on the cost savings related to the Swiss restructuring. Are there already some savings in maybe the Q2 number or in your guidance for the Q3 number? Or is the majority of that think it was €6,500,000 is the majority of that still to come?
Some is in Q3, a larger part in Q4 and a final part in Q1.
Right. And can you maybe quantify the amount already in the Q3 guidance?
In the Q3 guidance of the 10% reduction, about half of that is savings resulting from the Swiss move. Right, great.
Thank you very much.
Okay. The next question is from Mr. Hans Slop, Zebra Bank. Go ahead.
Yes. Good afternoon. Yes, first, you're guiding for somewhat lower gross margins in the Q3, while the U. S. Dollar is still quite, I think, favorable for the margin development.
Is that due to the, let's say, seasonal downturn? Or is there a bit of a mix change that drives the lower margins for Q3? That's my first question. 2nd question is on the working capital. How much room is there to improve further on DSO and inventories?
And third is for core on the tax rate, what are you guiding for the full year tax rate as H1 was up
a little bit? Thanks. Okay. Gross margins with lower revenue, there's always an impact of adjustment to the lower revenue in operations. And that typically leads to some under applied in your gross margins.
But still the guidance is above 45%, which is in this environment, very strong gross margin. But the reason for the lower gross margins is because of lower revenue. On the DSO and also inventory, DSO has come down, could come down some more. However, also in times when the industry is hesitant, customers are also hesitant with payments. So usually in downturns, there's not a significant improvement.
If you look at the inventory, inventory has come down already. That also shows that managing our supply chain, we do that very direct. On a weekly basis, we adjust our forecast going forward. And that should imply that going forward at somewhat lower revenue, also our inventory should show that. So, no big changes are to be expected there.
On the tax rate, Kare? Tax rate for the 3rd quarter is expected to be in line
But for the Q3, we don't expect a significant change. The operational tax rate for the whole year is expected to be more or less in line with that. There's one topic we, let's say, value every year at the end of the year. So we don't know yet how that will go. Last year in Q4, we had a significant revaluation of tax laws carry forward.
And if you look in our annual report, you can see that in some jurisdictions, there is still some of it not valued. However, the assessment of that we do at year end and we don't guide or don't exactly know yet what the effect would be, if any. So an operational income tax rate will be around the 12% we've seen in Q2. Okay,
very clear.
Thank you. The The first question is from Mr. Ed Winter Jueng, S&S. Please go ahead.
Hello, gentlemen. A couple of questions from my side. Regarding the dividend and the cash position that you have, is the €18,000,000 still a sort of threshold that you have for cash that you want to have in the corporation? And secondly, in the press release, you stated cash generation in H2 was strong. Should we then think will be strong?
Should we think of comparable to the H2 'fourteen of maybe H1 this year? In TCB, you're investing somewhat more. Could you maybe explain a little bit more about what the direction is that you are looking for in the TCB market? I think those are my main questions.
Excellent. Well, the €80,000,000 you could say baseline is still intact. And the second question, how strong the cash generation will be in the second half also depends on how the first half next year will look like. But in general, or let's say the trend we indicated, it should be at least the cash generation of the first half of this year. On TCB, the direction is twofold.
1 is more applications, but the second is we have developed a twin system. And the first systems are running with a single bond head, but they will be upgraded to a dual bond head. And that will nearly double the capacity of these systems, which will reduce the cost for the customers significantly in order to make TCB more attractive in terms of cost. So the development efforts for both areas is causing the increase in the development cost for
TCB. And if you look at the bonding bit, you say you are at around 3 now for flip chip. What are we now at for TCB?
2.
2. There's I guess like with flip chip, there's also room for improvement there to go below 1.
No, no. But if you reach consistently 3,
that
definitely will answer a very large part of that market for the next cycle.
And that will not be reached with the usual flip chip machines?
With the 5, you will face some difficulties. With the 3, you will be able to accomplish that. And that would be for us an excellent coverage of the total next generation requirements. So for stack dies and in memory, the specifications as mentioned using TCB and a tighter tolerance flip chip for many of the logic devices, single devices.
And the bonding force, is that still a factor?
Well, with the current process used, it is not an issue. But in the future, it could very well be, but that is the next generation that we would need higher bond forces. But of course, every customer is interested to have a simple as possible process. And that means the lower bond force, the more reliable process. But those are technical issues, but they are quite easy to understand.
The 15 TCB systems that you mentioned that you had in order book at Q2, have they been delivered now? Or are they recognized in the revenues for the Q2? Or how
are The large 8 of are shipped and others are still to come.
And shipped is also built, right?
Yes, that's right.
Yes, yes, yes. And in production.
And maybe a last one. I think I read somewhere in the media that in the high end mobile phones, there's some sort of a 2 year cadence and that 2016 and with 2014, the first half being very strong that could be a force in 2016 a positive force in 2016. Is that the right assumption or Well,
if you look historically, then there's a typical 2 years pattern. And that is if you have that same pattern, that would mean based on that an upturn in 2016. However, today, VLSI expects equipment spending to be flat this year, next year with a major upturn in 2017. But we've seen many of these models pass in mind. And we are ready for every model.
All right. Thank you very much.
Thanks, Ed.
The next question is from Mr. Phillips Scholte, Kempenco. Please go ahead.
Yes. Sorry to come back on the OpEx levels. But if you say that about half of the OpEx reduction in Q3 relates to the Swiss restructuring, so let's assume the decline is about €3,000,000 so half is €1,500,000,000 on an annualized basis that would be already €6,000,000 which is the total saving you are targeting for Switzerland. So that seems to imply that there will be no sequential additional savings after Q3. Or am I wrong there?
Now looking at the reduction we mentioned, we say if plans are already done, we have on an annual basis at the level of $6,500,000 It will be Q3, Q4, partly Q1. So probably Q3, it's not $1,500,000 It's somewhat less. However, if everything is behind us and we are in the next Q3, then it will be in total on an annual basis 6.5 percent. So it will be somewhat more than 1,500,000. But in Q3, 1,500,000 it's actually somewhat lower.
That is correct. But it's not a straight line. No. The biggest portion will be in Q4. So and then last smaller portion in Q1 that has also to do with ending of a lease.
And so the cost is not simply a straight line. It means also that the 10% decrease we are guiding for, that's not it. There's Multicom in Q4 and also in Q1.
Yes. Okay. Because you're also guiding for the total OpEx to go down sequentially beyond Q3?
Yes, that's right. Based on the current plans we have and we have announced, you may expect that OpEx will further reduce in Q4 and Q1.
Right. Right. Okay. Thank you.
The next question is from Mr. Peter Olofsen, Kempe, Kepler Cheuvreux. Please go ahead.
Yes, thanks for the follow-up. Coming back on the flip chip PCB discussion, You mentioned 3 Micron, which you are currently able to do in flip chip. Is the company is the competition also capable of doing this? Or are you ahead of competition here?
We are ahead of competition.
Okay. And then on TCB, I think in June, at the end of the session, you mentioned that your throughput is about double of the competition. What's the comparison there? Do you compare your dual bond head with competitors single bond head? Or how do you get to this claim?
Well, definitely with 2 bond heads, but also our heating up ramp capability and cooling down through our patented bond head is much faster than what the competitors use. And it depends on the application by how much that is. So on a single basis, we are faster. And in some instances, that could be 2 times. So in essence, our concept has more than 2 times the output advantage.
But again, we would have to go in more detail. There's also a nice matrix where you see where the specific speed advantage is between a single and a multiple and a stacked, there's a variety.
Okay. And then maybe final question on your outlook. In the press release, I think also in your introduction, you mentioned that there have been some push outs in the Q2. If I look at the guidance for Q3, the implicit sales guidance is above your backlog at the start of the quarter. So can I assume that the orders that were pushed out in Q2 will be booked in Q3 and will also contribute to the sales in Q3?
Is that a way to read it?
No, they are already in the books. I mean, let's say, but they are ready those who are already in backlog and have been pushed out are in the backlog and hopefully they will be shipped in Q3, those of which have been pushed out to Q3. There are other not yet orders projects which should have been ordered in Q2, but have been pushed out to Q3. So a typical pattern, as we said, the slowdown occurred in the last, you could say, 2 weeks of June, because the start of June was very positive. And then all of a sudden, we had some delays.
And yes, the question is, as we put it in the press release, but also in these comments, Will that be temporary? And will that pick up in August, September? Or will that stay more or less flat. But that's not unusual. That is a typical pattern at this time in a cycle.
One of them is very interesting is, of course, the wearables. The wearables, you can be sure, will do an enormous advertising effort for end of year sales. And if those numbers pick up, more systems will be required. If it doesn't pick up, not more systems will be required.
Okay. But just to clarify what's in your Q3 guidance then, the orders that were pushed out from Q2 into the second half, you need some of them to come in, in Q3 to meet your sales guidance? Yes. Okay. Just to understand.
Okay, that's clear then.
And some have come in, in July.
Okay, okay. That's good. Thank you.
Okay.
There are no further questions. Please continue.
Well, thank you everyone for joining us today in the call. And if you have any further questions, don't hesitate to contact us. Goodbye.
Ladies and gentlemen, this concludes the conference call. You may now disconnect your lines. Thank you. The conference is no longer being recorded.