Earnings Call: Q4 2019

Feb 27, 2020

Good morning and good afternoon, ladies and gentlemen, and welcome to Exteron's Full Year and 4th Quarter 2019 Results Conference Call. Please note that today's call is being recorded. Let me now hand the floor over to Mr. Dietz. Dietz. Dietz, Vice President of IRN Corporate Communications and Exelon, for opening remarks and introductions. Thank you, operator. Let me start by welcoming you all to Exelon's Finance and Administration, Charles Robertson. As the operator indicated, this call is being recorded by Exane and is considered copyright material. As such, it cannot be recorded or rebroadcast without permission. The participation in this call implies a content to these recordings. As with previously rolled conference calls, I trust that all participants have our results presentation slide deck, Page 2 of which contains the usual safe harbor statement. I would like to point out that this applies throughout the conference call. You may also wish to have a look at our latest IR master presentation with additional information on exon's markets and technologies, also available on our website. This call is not being immediately presented via webcast or any other medium. However, we will take an audio file of the recording or a transcript on our website at some point after the call. I would now like to hand you over to Gerd Sohse for opening remarks. Gerd? Hey, thanks, Guido, and a warm welcome to our 2019 results presentation. Let me start by giving you an overview of the key developments in last year. In Q4 2019, orders came in at €81,000,000 which is more than 50% above same figure in Q3 2019. Revenues in Q4 of 2019 were €75,000,000 which was more than 40% higher than fiscal 2019. This is to emphasize that we have seen a continuing improvement of the business after the challenging Q2 last year caused by the geopolitical environment. In fiscal year 2019, we hit our full year guidance with an order intake of €232,000,000 and revenues of €250,000,000 Gross margin was at 42% and EBIT margin at 15%. The cash flow was higher than guided due to the substantially higher cash inflows towards the very end of the year. We are progressing well with our next generation product initiatives. These programs encompass all of our MOCVD products to be renewed during 202021. Our target is to strengthen our leadership position and competitiveness. We will be offering improved cost of ownership for our customers to enable them to better address their targeted end markets. Our offerings will include improved material efficiency, lower maintenance requirements and full automation just to name a few of the new features. Our new silicon carbide tool, which we already launched in 2019 is doing good progress at our customers. Let me quickly give you an update of the potential impact of the spread of the COVID-nineteen disease. We believe that we have not yet seen the maximum extent of infections worldwide. So we will have to remain very cautious especially when it comes to traveling into activities. We have implemented strict travel policies for our employees and we will monitor the development in order to protect our employees' health. So far, the impact to our business has been quite limited. However, at this point in time, it is difficult to judge how this might develop as the regional situation in Asia and Europe are changing on daily basis. At this point, let me now hand you over to Charles for a more detailed overview on the full year 2019 numbers. Charles? Thanks, Blaen, and hello to everyone. Starting on Slide 4, our income statement. Total revenue for the year was €260,000,000 compared with €269,000,000 in 2018. Gross margin was 42% in 2019 against 44% in 2018. We shipped the same number of systems in each year and the cost of sales is flat year on year at €151,000,000 The lower sales and margin is mainly attributable to the different sales mix with more sales into display market in the Q1 of 2019, partially offset by a favorable dollar exchange rate. Overall, operating expense in the year fell from €76,000,000 in 2018 to €70,000,000 in 2019. SG and A expense fell by €2,000,000 to 16 €500,000 in 2019. This is mainly the result of lower project related costs and lower variable pay. R and D expense was €55,000,000 was €3,000,000 higher than 2018. Product development for MOCVD systems, including power electronics and neutral LED and mini LED increased significantly over 2018. Related to the saving of the development work, spending on the OLED developments was substantially less than in 2018. Total operating income of €12,000,000 in 2019 compared to €4,000,000 in 2018 was mainly R and D grant income of €8,000,000 currency gains and contract settlements. We generated an EBIT of €39,000,000 for the year compared with €41,500,000 in 2018. The effective tax rate was just over 18% in 2019 and 2018, actual the credit from the recognition of deferred tax assets. The net profit for 2019 was €2,000,000 compared to €46,000,000 in 2018. Turning to the balance sheet on the next slide. Inventories of €79,000,000 included around €5,000,000 of prototype systems. We had very good cash collections in December bringing receivables down to 30 days sales outstanding at the end of the year. This is 6 days better than at the end of 2019. Advice payments received from customers of €61,000,000 was similar to the end of 2018, but increased by €7,000,000 in the quarter, reflecting the good order intake. And bank payments of 44% of the order backlog. Because of the lower receivables and increased customer advance payments, our cash balance increased to €298,000,000 at the end of the year. Moving to Slide 6, which shows our cash flow statements. Here you can see the improved operating cash flow in 2019 of €42,000,000 compared with €12,000,000 in 20 18. The relative improvement of €21,000,000 is because 2018 Ash Grove included both €12,000,000 of open tenants indexed in the sale of ARB CBD in 2017 as well as increases in inventories and receivables. With that, let me hand you over to Felix. Thank you, Charles. I would like to give you some perspective on our development projects before concluding with the outlook for the rest of the year. Turning to the update of our development projects on Slide 7. In silicon carbide, we continue to gain more traction with our new fully automated testing software. We have obtained multiple orders for this platform from customers and are making performance administration to additional customers. In gallium nitride power electronics, we continue to receive orders from customers addressing the trend towards more efficient power management devices, consumer electronics and IT infrastructure. Continued momentum in the area of gallium nitride RF is driven by the 5 gs buildup. In optoelectronics, there is an ongoing momentum from the demand for lasers used in optical radar communication. We observed increased customer interest for lasers and 3 d sensing, both for the display side of the smartphone, which will cause face style, as well as for 3 d sensing on the back side, the so called earth side. In the area of mini and micro LED, we see progress towards the commercialization of LED displays, those in either very large ones for TVs or very small displays or wearable. At the Consumer Electronics Show 2020 Las Vegas, our customers showed very large and brilliant micro image displays defining a new ultra high end home entertainment segment. These very expensive displays are already being sold in low quantity. In our perspective, the transformation of the industry from pure R and D to the manufacturing capability mode is happening as we speak, resulting in demand for some mini and micro LED production tools. With regards to OLED, our Gen 2 tool is currently being operated by a team of engineers, our customers and our subsidiary, Arteza. Together, we are optimizing OLED produced with our OECD technology as well as the deposition tools. As this procedure is still ongoing, we expect our customer to give us a follow on commitment for a larger tool at a later point. Despite the hyper perception of this project, the income of our customized OECD technology as an alternative for VCD remains unchanged. We continue to follow our mutual target of solid mass production qualification. Let me now come to the outlook for 2020 on Slide 8. We expect order levels in 2020 to increase year on year to a range between €260,000,000 €300,000,000 This expectation is based on healthy level of customer inquiries and broad customer interest in our technology offerings across all applications. We expect revenue for 2020 in the range between €260,000,000 to €300,000,000 starting with a backlog of €117,000,000 at the beginning of the year. We expect our gross margin to be around 40%, which leads to an EBIT expectation of between 10% 15%. Important to note is that both orders and order backlog as well as all our other guidance figures are based on our budget exchange rate of $1.20 per euro. Revenues and profit margins will then be reported based on actual exchange rates in the quarter to come. Please also note that we estimate fully increased the result of Arpiva from the top to bottom line. Another important point to mention is that as planned explained before, we are not yet in a position to quantify the effect of the coronavirus spreading further. Therefore, we have made our guidance based on the assumption that the current COVID-nineteen outbreak will not have a significant impact on our business. Our focus in 202021 is a complete renewal of our product portfolio. We have excellent technology already today and our new products will support our customers to further enhance productivity and address high volume markets more efficiently. Finally, I would like to mention that the Exstrum Supervisory Board and I agreed to renew my contract until 2025. I'm happy to be with ExOne in the next year. With that, Perpar, best to Gilead with all of the questions. Thank you very much, Felix, Charles, Ernst. Operator, we will now take questions, please. The first question comes from Andrew Gaden with Goldman Sachs. Please go ahead with your question. Good afternoon, gentlemen. Thanks for taking the question. 2, if I could. One on the COVID-nineteen situation. Can you tell us any indication as to whether you've had sort of pushback in terms of deliveries from any of your customers? Are you seeing any change yet in terms of their ability to pick tools depending on where they're located with their appetite? Just sort of any change on the margin there? And also on the guidance for 2020, Felix, you just sort of highlighted that again it's based on $1.20 budget rate. I'm just wondering why Exxon continue to use such a conservative rate. We haven't seen the exchange rate at this level for 2 years. And it seems to make some sense overly conservative when we look at it in euro terms relative to what the underlying is. So why are you sticking with that? Why not a more realistic rate? Thank you. Hi, Andrew, this is Berenza. Thank you for your question. Well, basically on the corona situation, I can tell you that we're not seeing anything like cancellations. It is mainly to do currently with the logistics, meaning that customers, particular in China, they have basically not worked, they have extended holidays during February time. And they're quoting certainly that we cannot execute installations and bringing our tools to operations. Certainly, we can expect that some new facilities in the course of the year, which are typically built, get some delays. But so far, we do not expect this to create an issue for the entire course of the year. But this is maybe in between quarters. And so far, we do not expect this really affecting the entire year. Let me come to your second question, which was why we made our items at $1.20 rate rather than I think today we are just below $1.10 The reason is very simple. We see a lot of analysts estimate for the quarter points a dollar actually even higher than $1.20 come on the range between $1.20 $1.30 In the end, nobody really knows where it develops and how it goes. But I think you all out there know that we have now somewhere between 50% and 70% of our revenues based on U. S. Dollars. I think everybody can make in a very simple calculation and actually the adjustment to whatever you believe is the, whatever your assumptions for the X-ray for the year. Yes. Also Andrew, I mean, it is always difficult to exactly forecast what the donor is going to be. At least staying consistently at one rate and it's just 120 historically. At least give us the advantages and make this comparable year on year. Okay. Fine. Just perhaps related question is, you give us a sense as to how you expect the product mix to phase through the year? Last year in the first half, we had a lot of LED in the first half, which kept margin down and then mix improved as we come through the year. Can you give us any sense as to how you're currently thinking about it for 2020? Yes, what we're currently seeing is that in the first half, we're going to see definitely more impact by systems from datacom, telecom and power electronics. And we might see some bounce back from systems LED applications in the latter half of the month of revenue and therefore margin impact. Okay. Thank you, guys. The next question comes from Obershop Berndberg. Two questions for me, please. Firstly, you mentioned the stronger expected cash flow, obviously, in Q4. But I remember that you actually guided the figure down in November. Hence, I would be interested if, very simply, the business turned out stronger than Q4 with higher prepayments or what was really working against your base assumptions when you took down the cash flow guidance in November? And then secondly, on the guidance, should we understand this pretty much like last year, I. E, the low end basically includes a certain amount of OLED revenue, while the low end basically includes 0 revenue or what is the math behind? Thank you. Okay. On the cash flow guidance, what improved was the receivables were a lot lower. So the 30 days sales outstanding and that's accounted for about half of the increase in the cash flow between the guidance and what it actually turned out to be. And you're right, the other part of it is that the order intake and the percentage of advanced payments that we received is higher than we expected. So Mr. Schupp, let me answer on the guidance. I think the range is a result of certain assumptions and different scenarios. So it's unfortunate not to straightforward, to say, the uppercase that included or not included. It is basically a good judgment of the various scenarios we have looked into. And this is, it is not a linear formula, let me say. And if I could just follow-up on the guidance and basically the OLED effect that you have calculated there, meaning how much, if anything, weighted revenue in there? Don't expect the number really to get. And maybe more on the R and D side really, how much R and D burden did you put into that margin guidance of should we assume that OLED will have a full €20,000,000 or €25,000,000 R and D burden for the full year as well as pretty much like last year? I think on the top line for the OLED, as we mentioned last year for the follow on order, we expect that to be somewhere on the order of 2,000,000,000. And depending on when exactly timing the order comes to recognize a fraction of that in revenue. As for the R and D expenses, we expect to stay roughly flat year over year on the OLED side and then the overall EBIT impact to be a resulting number out of both fuel price. The next question comes from General Allen Mammoth, The Contractor. Please go ahead with your question. Hi, thanks for taking my question. Just a couple of follow ups on some of the previous questions. One is on the OLED, would you get to recognize a few tens of 1,000,000, would you need the order to come through in the first half of the year? Or would you be able to evaluate it again, say, for the Q3 or something like that? I mean, the order intake is recorded when the order comes, right? So that doesn't depend on whether we should recognize it, right? And I think the fraction of that to recognize in revenue, that really depends on the exact situation that come along with that and what part, what conceptual work is to be done, what implementation is work to be done. That's not only a question as you are indicating of the timing of it, but it's also a topic of the exact R and D scope and the scope of work that comes along with that. Understood. And overall, you said flat effects on the SEDAR side sorry, the SEDAR side. Overall, OpEx for 2020, how should we think about it? It's 15, 15, 17, I think, around that number. Has R and D I mean OpEx? OpEx. Just sales, sorry. Yeah. Yes. R15-sixteen. Which is the majority, the vast majority of our peers. Okay. And your commentary is sounding increasingly positive on GaN and on MicroLED. So what how do you how would you see the trajectory of those businesses specifically going through over the next 3 years? Is it a possibility that the current rate of development, both of these, especially micro leads, could be quite a material part of your revenue in 2021? Or is it that it's too early and these are still at early stage development kind of things. And the same sort of on the GaN side, I mean, is it I mean, we've been focusing quite a bit on the silicon carbide side of the business, But is it possible that GaN could be even bigger than silicon carbide, say, in the 2021 time frame? So let me get started with a question on the gallium nitride power and RF. So as mentioned in our introduction, we do see a very nice momentum for both the Power segment in value and the RF segment, RF is embedded by a 5 gs build up, which apparently is just starting. There is much, much more to come. And in the same course, the Power Electronics. So today in these two segments combined, we are at a small percentage of our revenue, But throughout 'twenty one and 'twenty two, we really expect a nice momentum in the double digit production of our number. You may have seen some announcement of some players in the industry with microelectronics, with Navitas, which are now really moving from the R and D stage into a product or productization stage. So the mass and volume ramp ahead of us. And I think it's very difficult to predict the exact trend and the exact timing, but we clearly see the tipping point from R and D to volume production stage. And then, yes, let me comment on my comment. So the situation has been moved on from formally there was a lot of work of customers to show the visibility, the technical visibility of a micro LED display and you're seeing the results in shows like in CES in January. And where we see now the change is that now the question is always towards more the feasibility of high volume manufacturing. So that's the next level. And in order to prove feasibility of high volume manufacturing, you need need to not only want to, you need a few tools just to show the visibility and show the system to system performance, etcetera. And that's so we will see orders and we're seeing orders for mini and microLED and we distinctly say mini and microLED because the tool can do both. And there are applications for both. And we've seen orders this year and revenue this year for both and increasing over the past simply because the move from R and D now to feasibility of high volume manufacturing. The next question comes from Adithama, Robert Research. The first one is on OLED. Are you permitted to take a decision later in the year, potentially maybe in the first quarter or later in case your customer decides to further postpone the decision? Yes. Okay. And aside from that, any indication provided to maybe that you did take 3 months ago, 4 months ago, has anything changed from your side as expected to the potential success from the technical activity? So I get your question whether there's any changes on our side with the evaluation or the acceptance of technical targets, did I get the question right? Yes, but No, there is no change for that one. So as I mentioned before in the introduction, we see very strong interest from the customers into the value proposition of our products. And now it's about to sort out all the topics coming along with developing such a new technology, which is both fine tuning the process, the process window, but also doing tweaks on the tool to really get it to the maturity level that has been established as a benchmark by the incumbent VCD technology. Okay. And then on the competitive situation, it's kind of a more specific competitive situation as one of your competitors launch new optimized supply platform? Well, I mean it has to be seen so far. We have not really faced a direct competition. It is to be seen. As I said so far, the situation remains that we have a very, very strong position in the market. And with that, I hand the call to you, Ralfour, MainFirst Bank. Please go ahead with your question. Yes, thank you. A follow-up to the previous OLED question. And how should we look at the procedure also or maybe asking another way, if there is a break or if you would then decide to this, you have to break your OLED operations, what would happen to your strategy? I'm not sure that I fully understand your question. Could you rephrase it? Yes. Well, what would happen to your OLED operations in case you decide in the previous question, you said, yes, we will do a make or break decision on OLED at some point this year. And what would happen to your OLED operations? And would that change the overall strategy for Exane if you decide not to continue those operations? Well, first of all, as we mentioned that we are confident to get this in up and running, right? Nothing is wrong connotation, but this is now into questions asking about the what if question. And we are also currently at Medi before confident about the high customer interest now about getting things up and running. I mean, for some reasons, just to say a hypothetical question at this point in time, things don't work out as planned. Then I think at the moment of decision, it remains to be seen what exactly is the situation, what exactly are the reasons and then to take the best course of action in the interest of our shareholders. And I think we can't say anymore what exactly that is. And coming back to your related question to our strategy, this is exactly our strategy, which we have started in 2017, If we're looking in our product portfolio and looking what is the path and the duration to getting a product portfolio to market and to return on investment. And whatever we decide with OLED will fit exactly this strategy. And from a timing, like second half potential, so what is your I think that really depends on the technical progress. I wouldn't want now a point. So it was in fact half, as the project is running and we continue to make progress. I wouldn't want to give any timing around that. Okay. And the potential order could be first half or second half as well, right? Exactly. Okay. Thank you. The next question comes from Haar Schafer, BWI Bank. Please go ahead with your question. Yes. Good afternoon. The share of your service revenue seems to be improvable. Do you see any starting points for increasing the shares? And I'm wondering, because this share is even lower than in 2017, is 2019 revenue the lowest threshold? And how do you see these service revenues? Is it Okay. So let me first comment on your question about improve the amount and then let's comment on the ratio. So we do have a very high share of consumable parts and of an aftermarket business with our current product portfolio, while some of the negative parts are legacy tools that have been shipped in the earlier years. This means that customers have decommissioned those tools and taking them out of operation. We do see that on our current product, we have a very nice share. And therefore, we expect the ratio and the total number over the years to be once again increasing. And we do see that trend. In 2017, it was €42,000,000 in 'eighteen, €47,000,000 in 2019, €52,000,000 If you look at the absolute number, those numbers are increasing. And we continue that absolute increase to be continued. And in fact, the ratio is also increasing. In 2018, we had 17.5% and in 2019, we had 20% by revenue from sales and service. Okay. But I mean the take on the service revenues and the share has declined? 18%, 17.5% a year before. So I think it's increased. Well, the service revenue is in your report, it's about $3,900,000 in 2017, it was €4,300,000 and in 2017 it was €4,000,000 Okay. We're talking about different things. So I'm talking about service and service, you're talking about service. Service revenue depends on typically customers asking us to relocate machines, for example, and that depends on whether they've changed the configuration of that fabs. And so this fluctuates up and down according to what the customer's demand is. But actually in terms of spares and service, we've increased our percentage year on year. Exactly. The answers I gave you was relating to our proxy as we call it after sales cycle, which includes consumables, aircraft and service as a product. Now it all fits together again. Okay. Thank you. And the And the next question comes from Ulf Schulzberg. Please go ahead with your question. Yes. Thank you. Thanks again. Two questions, please. First, also Grant on the digital side and 24th, 2020, and Oleg's follow-up. Bank, what are you seeing on the digital side of things these days? There are a few announcements of maybe smaller volume phones coming in the later part of the year with fixed site and time of flight laser. I was just wondering which is the utilization levels of your major customers currently and at which level this might be triggering orders again? And then secondly, I guess the reason you're getting so many questions on OLED obviously is, A, the situation seems become a never ending story. And b, also, I guess, we noticed that your mid time head of OLED has left the company somewhat surprisingly at the end of last year. What if anything should we read into that assuming that you are getting your order from your lead customer later in the year, the timing of that departure seems to be somewhat or basically just summarize your earlier comments, you are as sensitive as ever that the situation will be leading to a successful finish. Is that correct? Yes. Well, let me comment on your questions for Vifor. That was in the moment we're seeing that most of the VITCO tools are heading at good utilization rates. And there are some discussions, I'm not saying that we are at the point where we renegotiate in contracts, but we're starting to have customers asking about, potentially about what would be lead times, etcetera. So this is a, this makes me more positive that some return for vehicle business might happen in the course of the year. And let me answer your second question about the OLED issue, the change in leadership team with an implementation of our long term strategy. And our strategy is that our Ateca business will completely over time become a change from a pure Germany driven business given that the customers are in Korea into a Korean company or Korean German company. And therefore, we have won a very strong leader for our Arpiva Kurina, which is another company of our German operation. And then is Dio Kim, joined us from Applied Materials, who he is a Korean guy, spent over a decade in the U. S, last part of the battery that applied very long experience in the hot film and display industry. And we have given now the leadership of the Achiza company group of companies, either Korea, either Germany in his hand. And it was just a natural consequence that now given that the leader of the group of companies is included in Korea and in the Germany we do not have a dealer anymore, so to say, of that caliber. And as part of our strategy, gradually build up also more headcount in Korea and become closer to the customer both in geographic location as well as in culture and language. Paribas. Please start with your question. Great. Thanks for taking my question. Maybe just a quick one on my side about new products coming in 2020. Bert, can you give us an idea of where you're kind of investing in what kind of new products you can expect in 2020? Thank you. Yes, David, thank you for your question. As we mentioned in our presentation, we're basically working basically on the entire suite of products to get renewed in the core, say, from mid of 2019 to mid of 2021. So within the 24 months, we are planning to renew on our entire MOCVD suite of products that includes a new platform, the gallium nitrate based high quality deposition, which is fully automated, which in the 1st place targets gallium arsenide power market, but also the gallium arsenide micro LED market. A new platform based for diagonyl arsenide layers for laser applications as well. Then in the second step also for microcredit applications. Firstly, we're working on a new tool for higher volume, maybe slightly lower performance red LEDs and were just launching a new version of our ID platform based on our shower technology. And I think we mentioned earlier in the call our silicon carbide cell phone, which is already came out end of last year. So basically, when you look in our markets and applications within from now, say within the next 18 months, we're going to renew the entire portfolio. That's helpful. Thank you. The last question comes from Ulf Gudelholme with Credit Suisse. Please go ahead with your question. Yes. Thank you. We see some gallium nitride on sapphire power products in devices out there. So as I was wondering, do you think this technology can accelerate the penetration of Carium Nitride be a large potential market for you? Excellent question, yes very much I believe so. So gallium Nitride as a material for Power Electronics has 2 distinct properties. The one property is that it has very low flushing losses, which we use either for driving more efficiency between the IT infrastructure to reduce energy consumption to data centers or to go to very fast switching, especially frequencies on a very compact fast charger for mobile devices, for example. The other big property of gallium nitride as a material is that if you can make lateral it's a lateral device possible, You can put several pitches next to each other on one chip. That allows Guggenheim to do integrated power service as we are used from like the integrated circuits and the silicon industry for the last 40 years. Meaning you can put several transistors or several switches next to each other on one chip, like the IC integrated circuit. The challenge we will have with Power Electronics is that we need to isolate these switches because we work at 600 volts, not like in the inter processor at 1 volt but at 600. And you have to make sure that the voltage from 1 chip doesn't go from 1 switch doesn't go into the other switch. And if you use sapphire as a substrate, you have perfect isolation. And therefore, yes, that can really help. We are very happy that now customers start exploring on the second key value proposition of gallium nitride as a material. And I personally believe that we will see 2 groups of products coming out of that. The one is integrated switches, the half bridges, the switches for the driver or alternatively with topics like motor drive, where in the motor drive controller you need 6 switches each for the driver, not a very nitride you can do that all in 1 single die or 1 single switch rather than 6 switches. So this is a technical explanation. In short, yes, we believe that can very much accelerate the market demand for our tools in the very light imaging. And you see more than one customer working on this technology at the moment or? So this is a topic, this is a trend which is currently just starting and yet we do several customer exploring the opportunities in that space. Thank you all. With this, I would like to conclude today's call. Thanks all of you for attending and listening. I assume to see some of you soon. We're also happy to do follow-up calls as you know. Please note that our next earnings call will be on April 30, Q1, Q1, Q2 quarterly results. Thank you and bye bye.