Earnings Call: Q1 2021

Apr 29, 2021

Ladies and gentlemen, welcome to Exteron's Q1 2021 Results Conference Call. Please note that today's call is being recorded. Let me now hand you over to Mr. Peter Peces, VP of IR and Process Communications at I'd like to welcome the members of our executive board, Felix Gavard and Doctor. Felix Dravet and Doctor. Jorg Link as well as our VP of Finance and Administration, Charles Brasseff. As the operator indicated, this Call is being recorded for Exane and is considered copyright material. Please take note of our Safe Harbor statement, which can be found on Page 2 Our results presentation slide deck as it applies throughout the conference call. This call is not being immediately presented via webcast or any other medium. However, we will face an audio file of a recording or transcript on our website at some point after the call. I would now like to hand you over to Doctor. Petri Kravert for opening remarks. Kelly? Thank you, Guido. Let me all welcome Q1 2021 results presentation. And I will start with an overview of the highlights in the quarter Before handing over to Charles for more details on our Q1, Q1 figures, before I will give you an update on the development of our business and guidance for the year. Let me start by giving you an overview of the key developments in Q1 on Slide 3. At Q1 'twenty one, We noticed a continued strong order momentum to all our businesses, but in particular And helium nitride power and 5G wireless. The overall semiconductor market is seeing very strong chip demand across the board, Also incentivizing our customers to invest in their manufacturing capacity. Hence, Order in Q1 came in at €124,000,000 surpassing the high level of orders seen in Q4 2020. As expected, we started year 'twenty one with the revenue figure well below the previous quarter. This is due to the fact that many customers have requested their systems to be shipped still in 2020, Largely due to imminent production. For the coming quarters of 2021, we expect that revenues We'll increase each consecutive quarter. This is a pattern that we have seen in quite some over the last year. The strong momentum in Q1, the current level of customer inquiries gives us confidence To further our guidance for orders and revenues, we expect orders and revenues to come out around the upper end of the respective ranges. This high expected level of revenue leads to a higher expectation of EBIT margin of 18% Compared with 16% before. With regards to OLED, we have decided together with our joint venture partner Eruja with our key customers. And in the coming years, we expect a much bigger share of new investments in the OLED production facilities To happen in China and in Korea. As a consequence of this change in target market, we focus Ativa on being a supplier of differentiating key components rather than offering fully integrated system solutions. Discussions with customers in China are ongoing. Nevertheless, we do not expect expected conclusion before 20 And 22. Therefore, we will keep the running cost of Aqibar on the lowest possible level until then. This move results in a reduction of OpEx from the OLED unit at Exelixent as follows. In 2021, we expect to keep the overall cost for OLED within the high single digit range As we had previously communicated for our OLED activities, this figure includes All expenses costs are 2021 also one time expenses. In 2022, OpEx will be reduced to a low single digit amount until a customer purchase starts. At the same time, we can preserve the potential and upside from this technology. Let me give you also an update to the corona situation at Excor. Our strong internal safety measures continue to prove In mitigating the risk of infections within our premises, we are offering regular testing of our employees at our headquarters twice a week and we continue to not have recorded any significant effect related to COVID-nineteen on our operations and business. Also, our supply chain continues to be stable. However, we will continue to watch the development of global pandemic Very carefully, and we remain to be ready to take further measures, which necessary. Before handing over to Charles for the financials, let me tell you that I'm glad to announce that Doctor. Christian Damninger will take his position as CFO are ready at the beginning of May. With that, I'm handing over to Charles. Thanks, Felix, and hello to everyone. Starting on Slide 4, our income statement. As Total revenue for the quarter was €60,000,000 compared with €41,000,000 in Q1 2020. Gross margin of 35% this quarter was 1% lower than the 36% in the same quarter last year. The difference is mainly attributable to the U. S. Dollar euro exchange rate effect between the two periods and some additional costs we incurred also during Q1 2021 to prepare our production capacities for the increase in output planned for the second half of the year. Operating expenses in the quarter increased from €16,000,000 in Q1 2020 to €18,000,000 in Q1 2021. G and A expense increased to €6,000,000 in Q1 2021 from €5,000,000 in Q1 2020, Influenced by higher variable compensation. R and D expense of €12,000,000 in Q1 £3,000,000 lower than the comparable period in 2020. This is in line with the regular fluctuations we have in R and D And partly due to lower running costs of our OLED activities. Net other operating income was €2,000,000 in the quarter Compared to €6,000,000 in the same quarter in 2020, Q1 2020 included a one off benefit of €3,000,000 We recorded an EBIT of minus €1,000,000 for the quarter similar to the results in Q1 2020. The improved outlook has led us to recognize a further €4,500,000 in deferred tax assets, which leaves us with a net profit for Q1 twenty twenty one €4,000,000 compared to the loss of €1,000,000 in Q1 2020. Turning to the balance sheet on the next slide. In line with the increased order intake, inventories have risen to €97,000,000 from €79,000,000 at the end of 2020. Advance payments received from customers increased to €101,000,000 from €51,000,000 at the end of 2020. This relatively large increase is because some deposits have been received before the finalization of all the criteria needed to recognize the orders. Our cash balance increased to €341,000,000 at the end of the quarter, increasing €60,000,000 shown in other noncurrent assets on the slide. Moving to Slide 6, which shows our cash flow statement. Cash and investments increased by €51,000,000 in the quarter from €310,000,000 €341,000,000 The chief movements for the increase in customer deposits of €6,000,000 The increased inventories for future shipments of €18,000,000 With that, let me hand you back over to Felix. Thank you, Charles. I would like to give you an update on the key developments in our addressed markets before concluding with the outlook for the rest of the year. As mentioned in the beginning, we are seeing strong momentum from all our end markets. The Q1 order intake was largely driven by system for the production of Allium Nitride Power Electronics. In 2020, we have seen the tipping point for adoption in this market. Our customer, ChipMakers has achieved the reliability needed in target application. Now We see GaN based power electronics in the sale of rapid market adoption, displacing silicon power electronics in selected applications. Consumer electronic devices with compact fast charger for smartphones, tablets and laptops marked the starting point. This is what drives the big 2021 volume in van power. In the coming years, We expect adoption also in industrial end markets, for example, power supplies for energy efficient data centers And telecom base station. Other applications on top will follow. Please bear in mind that According to OMDIA, this pre silicon MOSFET alone are projected to have a market volume of US7 $1,000,000,000 In 2020, BERND and Semiconductor only represented about 7% of this market. We believe that the substitution of fixed and power electronics, argan and fixed power electronics Create a multiyear growth opportunity for us. Furthermore, in Q1 2021, we recorded Strong orders from the 5 gs telecom and optical datacom markets. Both areas are driven by the worldwide 5 gs rollout And the rising need for fast data availability and increasing data volume, for example, through cloud computing and video streams. Finally, in Q1 'twenty one, we have seen some order intake in the area of red LEDs, which are used in LED displays And in indoor farming. For the upcoming quarters, we see a return of laser demand from 3 d sensing As well as further progress we made in the area of microLED. In summary, we are in a very pleasing environment And the sentiment is positive. With that, let me move to our guidance on Slide 7. As mentioned at the beginning, we expect order to be around the upper end of the range of 3 €40,000,000 to €380,000,000 shows us a strong momentum. Revenues are expected to come in Around the upper end of the range of €320,000,000 to €360,000,000 as well. Out of our backlog, we expect to shift at a turn about €180,000,000 into 2021 revenue. 18Q1 revenues and the assumed half of your business into account, we still need to be need out another further €90,000,000 of orders We converted into revenues to reach the expected revenue level. Our gross margin, we continue to expect Around to be around 40%. Mainly due to the higher anticipated revenue levels, the EBIT margin is now expectations are based on the budget rate of 1.25 dollars to the euro. In summary, Even though the year started slow in terms of revenues and EBIT, we are looking forward to significant growth of revenues and EBIT in 2021 compared to the previous year and with an increase in each consecutive quarter. With that, I'll pass back to Hugo before we take questions. Thank you very much, Felix and Charles. Operator, for Bona, we will now take questions, please. So we'll start with the first questioner. And the First questioner is Shneur Rahman Memon from Liberum. Over to you. Hi, good afternoon and thanks for taking the questions. My first question is a little bit on your capacity. So you started the year quite low on revenues in Q1, which means that you have quite I have a bit of room to cover to reach the high end of your revenue guidance for the full year. So I was just wondering, based on your current capacity and your supply chain capacity, What is the maximum level of quarterly revenue that you can recognize given your current capacity? And can you also tell us how your current capacity increase plans? And based on that, how will your Revenue generating ability per quarter of a year increase in 3 to 3 years? Yes, thank you very much for the question. This is a very good question because as we mentioned, we expect The revenue in each quarter of this year will be larger than the revenue in the previous quarter to result as a peak revenue in the 4th quarter. As far as our capacity is concerned, out of our production facilities at Excon, We have previously even shipped 450 EV tools this month in the year of 2010. Nevertheless, of course, Our supply chain and our manufacturing always need some time to ramp up and to prepare for such an output. And with respect to the guided revenue levels, we have secured the production capacity And we also have secured the supply chain that the parts are coming in. So the guided revenue is well secured. And are you increasing capacity at all, either at your own or at your suppliers right now? We are increasing our capacity in form of some production slots in order to manage the balance, Which is the low revenue in the Q1, the high revenue in the Q4. This is not evenly balanced, but as mentioned Within the year 2021, at 2Q4, we prepare to have that Q4 piece secured. Yes, absolutely. Understood. And then just on the margin side, the increase from 16% to 18% is coming through entirely from the higher revenue expectation, and it doesn't have Any impact on OpEx from the particular situation? Exactly. You truly figure the situation. This is a fixed Cost digression, the block of fixed cost is exactly as the core or as expected before. However, it's now spreading over a larger base of revenue and of gross profit. And to the second part of your question, The OpEx expenses for Upheaval will stay exactly in line with the level that we have instituted before, Which is a high single digit €1,000,000 amount in the year, now also including the one off effects in 2020, Which then, of course, in the second half of the year, lead to some savings. So we stay flat on the OpEx level to the level we had provided to the market before. And the last question I have is Just on your gross margin, you have achieved higher levels of gross margin in the past than 40%. And I agree you're starting from a legal level. But I'm just wondering, is there any conservatism on that 40% Or is it are there any sort of headwinds that you see over the next year or 4 quarters which could have a declining effect on the margin? The previously higher gross margin that you mentioned was a big part also driven by different exchange rates. If you remember in the previous year, we were at a level of 1.07 to 1.10. And now for the upcoming three quarters, We are expecting an exchange rate of 1.25. So out of our revenue guidance, we have only secured or realized now €50,000,000 on the current exchange rate and all the remaining is based on the €1,250,000,000 which of course compared to the previous year is a headwind. We now have to see how the U. S. Dollar to euro exchange were developed. That's it. Thank you very much. And now we're coming to the next question. And next up is Oliver Schott from Deutsche Bank. The floor is yours. Yes. Thank you. Hi, guys. Good afternoon, everyone. Two questions, firstly on OLED and secondly on the order guidance. And Felix, can you shed some light on your thinking regarding the OLED project overall? Because I was wondering, Wouldn't this have been almost the ideal time to say, okay, we have PCC, long time customer basically didn't pursue the project and So now we are thinking it's following up on a smaller scale. And if there are some revenue coming next year, then great. And if not, then not, in other words, why not make a finish here and kind of Lower the expectation level somewhat because right now you're saying, the 80% revenue will be coming in 22% and we expect you to get the benefit of And then I have a follow-up on bullet as well. Yes, thank you. It's very good question. So let me clarify on the running costs. So the running costs, now with the move we are taking is being reduced to a minimum. As I mentioned, for 2021, the cost for the Q1, the one off effect for the 2nd quarter And then the savings we are realizing in the 3rd Q4 together sum up to the high single digit million amount. However, Starting 2022 and following, then we are reducing the run rate of cost to a low or very low single digit €1,000,000 I think that is also what your question implied would be wise to do. We are doing that exactly. And only in the moment when we a customer order, follow on customer order, then the project continues and then there is customer specific R and D topics associated with that. Nevertheless, we do not expect that before 2022 simply because it's now about talking to a new customer, opening a new market, And we all know that currently travel to China is not possible to be closed country and to COVID an extreme travel restrictions. This is also the reason why we clearly say we do not expect that before 2022. Okay. In terms of the one time costs that you are seeing for the 2nd quarter, would those be in the 3 4,000,000 area? Sorry, if you're interested on the call, I was slightly late. That's the motion correct. That's the right number. So that probably means and it's a relatively high number, so it means you are laying off a fair amount of The first name of the people are correct. Okay. And so going forward, you're saying on a quarterly run rate, The cost ratio should be more in the area of $2,000,000 to $3,000,000 per year. Yes. Okay. Got it. Okay. And then just secondly on the order guidance, you obviously had $125,000,000 almost in Q1. The high end of your guidance is $380,000,000 if I'm not mistaken. So That is right, obviously, a slowdown in the second half. Are you just cautious here? Or is that what you're trying to fulfil the market? In fact, our order momentum in the market continues to be strong, yes, and that's what we reflect in our guidance, which is about 25% Higher than the previous year, yes. However, we do not have the full visibility yet at this point in time How much will actually translate into order? And as you would suggest with your question, we should get more clarity throughout the second quarter. Next up is Stephan Gouri from Zohr. Over to you. Yes, hello. I have two questions actually. The first one is on the Ateza. So to know and clarify if you have anything in your forecast for quality value share, I think the answer is no, but I And if you are talking to more than one potential customer And also if you think that Samsung has decided not to do OLED because they We have to go to Michael Kennedy, which would benefit to you in the longer term, but at least it could be beneficial for you to That's the first question. And looking at the rest of the year and your order pattern, you basically The momentum is great in terms of order. Will it continue in GaN Only or do you see orders in more domain and notably do you see the start of pricing orders in the system Thank you. I clearly got the second question, but I didn't fully understand the beginning of your first question. Could you help me with the beginning of your first question? Yes, yes. Sorry, maybe you couldn't But the question was to know if there was something in your forecast before for Ateva and you had to Just something, but I guess that the answer is no, but I have to ask the question. Revenues, you mean whether there was revenues for For Apeema? Yes, sorry. Okay, I get the point. We have Always included Apeba in our full guidance. That was always a part of the guidance that we have given both in terms of order intake And the guidance or the firm up of our guidance that we have taken now, again, reflects, of course, Based on the measures that we are taking and based on the point that we say we do not expect an order before 2022, Of course, this year there would be no order intake for Achieva and no revenues for Achieva. So the firm's guidance for revenue and orders What you refer to a certain customer in Korea, Very clearly everybody or all customers or players who put their full attention now to the micro energy market Yes, in fact, Nexon is very well positioned in order to capture the momentum from this market. I think in this case, we have mentioned That we are currently working with all the players in the market who is exploring micro LNGs. And yes, we very much look forward That we make our way into the business. In fact, this is a good momentum for us. With that, I come to your second question, which I read whether we expect the momentum for gallium nitride power electronics to continue throughout the year. Janssen, clearly, we do not expect that this is just a one point effect in the 1st quarter. In fact, also in the Q2, we expect a strong contribution from Gallium Nitride Power Electronics. Also in the 3rd and 4th quarter, some good momentum from Granpower, and frankly because many customers, not only 1 or 2, Many customers globally, I mean, the U. S, I mean, Europe, I mean, China and I mean, Taiwan, literally very broad are expanding their facilities in And the other markets where we see strong momentum throughout 'twenty one is, Again, also throughout the year, the market telecom datacom, the communications market, as well as the market for Specialty LED, we have many LED as my clients. It's a quite diverse mix, The broad mix across all our end markets, clearly led by the strongest peak also, this is the strongest one on the Ganttaur. And silicon carbide, will it be already this year or this is the next phase of this year? I would say we will see stronger momentum in silicon And sorry, last point. So given all the things you have said, This statement means that you may reach your orders, the orders needed, the €90,000,000 you've just quoted In Q2 already, so you will have secured your full year guidance, right, for revenue? This is the shippable order. And I mentioned in particular that each quarter successively will be stronger in shipments than the previous quarter. And especially, we have to really see what we can ship in the year. Remember, whatever we receive on the last day of the second If we still ship it in September, there's a 6 months time from order intake until the shipment. Bear in mind that very often we talk about a time of 7 to 7 to 8 months. That explains why we mostly Say orders received in Q2 are still shippable. However, Q3 order intake then for the largest Hello. Thank you very much. The first question would be if you can give us a little bit more of an idea of the Thank you for the intake. I think you've already alluded that it was mostly gallium nitride power, but Can you talk a little bit about how exactly this looks like and how you expect this to be held up over the year? Very happy to do so. So in the Q3, the split was just slightly below 50% for gallium nitride power What we mentioned, followed by TelecomDatacom, in this particular case For the radio frequency portion of telecom and datacom. And lastly, followed by a mix Order intake from the different segments of specialty LEDs, mostly microLEDs, yes? So those We were the main contributors for the order intake in the Q1 of the year. And if we look at the total year 'twenty one, We expect again, of course, with 3 quarters still to come. The contrast is not as precise as the actuals, But we still expect that done and silicon carbide power electronics together will make roughly a little less than half of the order intake, Followed again by TelecomDatacom, in this case both the RF portion as well as the optical communications portion, that will take the number 2 place. And again, the specialty LED, both micro LED, but also mini LEDs will take the 1st place. You can take a look at the total year, 1st quarter is probably a good representative for the total year. Okay. I understand. And I'm not sure if I heard it correctly at the beginning of your presentation. You said that this is actually a business that is no longer Looking to do entire production lines but rather focusing on smaller components, can you elaborate a little bit on that? Very well so. So we have focused our EpiPen business with the formation of the joint venture in Korea On both the differentiated components, which are the key of what was produced in Germany, as well as The automation and handling systems and the big bullet chambers that have been contributed by our partner Eureka. What I mean with this big chamber, imagine a conference room which is large enough to hold 10 or 15 people, yes, what time is it, And that's about the size of such a system. And you can imagine the biggest profit potential or profit parts And the differentiated key components and the steel and vector resistance is a lower margin part. However, they need to be produced very close to the customer. Now with us moving from Korea and addressing the China market, Very clearly in China, over the next years, analysts expect some €6,000,000,000 or dollars, sorry, of In the whole system, we see that customers expect a certain degree of localization. And furthermore, we expect we see also precise expectations of customers. And for that reason, we are now focusing on the differentiated components, which is the core of the COVID-nineteen technology, which is a differentiated element. And we go out of the parts for All the other systems components, which are large and heavy, however, carry less of a margin. In numbers, We speak about the revenue, potentially roughly half of the revenue that we have expected before. However, in terms of absolute profit that can be realized, we only see or expect a minor decrease Compared to the absolute profit that we had expected before. And with this split And with the cost reductions, OpEx cost reductions that come along with this move, you can very well follow the strategic rationale for this. Great. Good afternoon and thanks for asking the question. Maybe if I can go back on OLED again. Can you give us a bit more detail on what was the exact reason your Peruvian customer didn't adopt your technology? Was it a performance, something in the technology that didn't work or integration or down to a cost issue? If you can give us a bit more color there. And then related to that, I mean, if your Korean customer didn't adopt Oledger, what gives you the confidence Excuse me, Chinese customers will now adopt the technology. I have a follow-up. Thanks. Thank you very much. Our Korean customer has decided strategically to switch from OLED to microLED Because our Korean customer is focusing on the high end markets within the display arena, And they see that the OLED technology, all new investments are moving to China because the Chinese display makers We are mastering OLED, roughly as well as the Korean display makers are doing and they see no further potential to seek differentiation through OLED. So they are giving up their OLED program and at the strategic corporate level of the OLED program they move away also from our system. So very clearly, it has nothing to do with the failure of our technology. We completed the qualification successfully in December, What was the strategy of our customer who is moving away from OLED and now into microLED. At the same time, that explains also why we move or we focus on the China market, The Chinese on their end, they are still expanding in OLED. I mentioned a number earlier on. And they are That's very helpful. Thank you. And then maybe separately on silicon carbide. You mentioned that We expect stronger momentum in 2022 on season cover in this year. Can you give us a bit more color on what you're seeing We see across the automotive industry a wide adoption now of Battery electric vehicles, we all hear the announcement of carmakers about new models. Many of those models are Ramping in 'twenty three, 'twenty four and backwards calculating the component makers or the chip makers We'll significantly back in the factories in 'twenty two to prepare for that ramp of the car models just 1 year ahead. That's the reason why we expect a strong momentum in 'twenty two and rather here and there Smaller or single digit or to hear to their extensions in 'twenty one, but really strong momentum to come in 'twenty two. Okay, understood. And what's your customers indicating to you, correct? Correct. Thank you. Our next question comes from Lee Myer Hamlot, over to you. Yes. Hi. Thanks for taking my question. It appears as though the conversion of your order book and of your orders into revenue Is a little bit low, and you talked about lead times. Are your lead times pending. And have you been affected by the shortage of semiconductors in any way, Thank Now let me come to the second part of your question first. We are not seeing any limits or shortages in supply We are not, so to say, shifting revenue from 1 quarter to another because there is a component shortage Or anything like that. The second part of your question is in reporting. In fact, we can shift to the base as our customers desire, Yes. And this is very much in line with the guidance about the The split of revenues or distribution of revenues throughout the 4th quarters of 2021, This is driven by the desire of customers when to receive their system. And as you point out to the ship shortage, What we rather have seen is customers placing orders maybe a little earlier in advance to secure a spot in our factory. However, the customer only, for example, doing a building a new factory or extending a facility or the customer only having their Because some customers may have thought well there is an overall shortage in the market, while maybe at Exxon it also comes at some point. So we have seen some customers placing the orders earlier than usual, but this is not due to limitations on our side. Okay. So lead times in general that have not And you mentioned that there are 6 months or did you say 7 to 8 months? 7 to 8 months is a standard difference. Okay. Thank you very much. And the next question comes from Jon Erik Schmut from Laurence Heine. Over to you. Alex, just have a quick question on the CapEx. You mentioned that there are Still some investments in capacity to kind of like cover up the Q4 peak revenue. Just wondering on the CapEx guidance then what kind of number is expected for 2021 and In the previous years, our CapEx expenditure was typically on a level of €10,000,000 to €12,000,000 And in 2021, we expect a CapEx expenditure around €25,000,000 And the increase is partly driven by some moderate Investments into our facilities, we mentioned that in this call. And also it's driven by some investments into our prototype And building up and enhancing our laboratory in order to complement the renewal of our On the R and D side, both assets that are very well mentioned and communicated to the market. All right. And so after 2021, it's going to be down to €10,000,000 to €12,000,000 again? I wouldn't air a forecast. I would rather hope that our revenue keeps increasing and we further need some expenses in the production side. But we are now in the Q1 of '21, and I would not want to give an outlook for 'twenty two already. That's clearly too early. Okay. All right. And then just on the Net Capital, You mentioned that you had a larger chunk of prepayments. So the effect is going to normalize over the course of the You're going back to normal levels or is there some sort of structural trend we might see? Or is that just kind of a timing effect? It's actually a timing effect, and I think that normally we would expect to see somewhere around 40% customer deposits Relative to the order backlog, and this is just a one off event, I expect. Last one is on OpEx, just a clarification. Last year, you had kind of €90,000,000 related to OpEx, It's not expected to be or regarded to be less than €10,000,000 So is it tempered to assume owing to the fact that R and D should be significantly higher owing to the qualification That's in general, we should be relatively flat and here and that there's a chance that we can launch here and then Well, that's confusion and maybe lower qualifications have an effect. Just follow-up. In 'twenty one, we expect roughly R and D expense around €55,000,000 and the CapEx level around €80,000,000 And in 'twenty two, in next year, we expect these numbers to go down. R and D expense around €45,000,000 And OpEx level €70,000,000 €75,000,000 Okay, good. And then on 3 d sensing, I mean, you mentioned all the other areas are pretty active, Let's talk on the expanding mechanism because of strength of the other areas, but what's your take on the opportunities you see in your pipeline In 2019 2020, we have seen customers absorbing the overcapacity that was built up 2018, so that segment, as everybody knows, was very slow for us. And in 2020, we see this segment Gradually coming back, we see some first customer inquiries here and there. However, we do not expect 3 d sensing could be a major part of our 2021 order intake or revenue. It's still a system here, a system there. It's a smaller amount. Nevertheless, in 'twenty two and following years, we expect the next wave of 3 d sensing to come And then new applications opening up both on the world side and then gradually also in the contextual awareness of robots and autonomous driving. Okay. Maybe a quick one on service revenues. I mean, you see significant funds in opportunities in this year and then going forward. I would expect that 'twenty two, 'twenty three and the 2 coming years to Thank you very much. With this, I would like to conclude today's call. Thank you to all of you for attending. Please note that our next earnings call will be on July 29, 2021, for our Q2 'twenty one quarterly results. Thank you and goodbye.