Earnings Call: Q2 2019

Jul 25, 2019

Afternoon, ladies and gentlemen, and welcome to Xtron's First Half and Second Quarter 2019 Results Conference Call. Please note that today's call is being recorded. Let me now hand over to Mr. Guido Picotte, VP of IR and Corporate Communications at Xtrem, for opening remarks and introductions. Thank you, operator. Let me start by welcoming you all to Xtrem's presentation of our H1 Q2 2019 results. I'd like to welcome our executive board represented by Doctor. Felix Carlett and Doctor. Dan Schulter as well as our VP of Finance and Administration, Charles Reuter. As the operator indicated, this call is being recorded by Exxion and is considered copyright material. As such, it cannot be recorded or re broadcast without expressed permission. Your participation in this call implies your consent to this recording. As the previous results conference call, I trust that all participants have our results presentation slides, Page 2, of which contains the usual Safe Harbor statement. I would like to point out that this applies during the conference call. You may also wish to have a look at our latest IR market presentation, which includes additional information on Exelon's market and its technologies and is available on our website as well. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or transcript on our website at some point after the call. I would now like to hand you over to Mr. Brand Schulze for opening remarks. Bernd? Many thanks to you and a warm welcome from my side as well. As usual, I will give you an overview of Exteron's key developments in the first half of twenty nineteen. Charles Russell will then go into more detail on the financials. This will then be followed by Hedi Gerhard, who will give you an update on orders and power electronics as well as the network. In Q2, revenues came in at €63,300,000 which meant that we generated €132,000,000 in the first half of the year, which was substantially better than the EUR 118,000,000 we generated in the same period last year. We also generated solid gross margins of 40% in the first half of the year with an EBIT totaling to roughly €19,000,000 and the net income of roughly €60,000,000 This result in our €100 and 10,000,000 backlog gives us a good basis for the rest of the year. And as a result, you can confirm our full year guidance, which we gave you earlier in the year. With our ongoing cost reduction measures, we expect the product mix going forward and the positive U. S. Dollar exchange rate. We now expect to be at the end of the year at the upper end of our margin guidance. We also had a second quarter, which was a reflection of the expected reluctance by some of our customers, particularly in the area of optoelectronics, to invest in new production capacities. On top, this was influenced by geopolitical economics such as U. S. Bend towards Huawei, a major global player in telecommunication hardware, including network devices or mobile phones. With that, Q2 order intake was comparatively low at just under €45,000,000 with a major contribution by Powerless Products. However, we see acquiring measures suggesting an order pickup in the second half of the year, in particular from Asia. Despite the weak market environment in the first half, which has been caused by the situation mentioned earlier, we still see 3 strong growth drivers in the areas of lasers, power electronics and specialty LEDs. It is important to note that our equipment enables the development and production of key and products and components for major global megatrends such as the next generation 5 gs mobile network, 3 d sensing for mobile phones and power electronics for electrical vehicles and removers as well as next generation microSD displays. At this point, let me now hand over to Charles for a more detailed overview of the first half twenty nineteen numbers. Thanks, Bernd, and hello to everyone. Starting on Slide 4, our income statement. Total revenues for Q2 2019 were EUR 63,000,000 compared with EUR 69,000,000 in the previous quarter. Gross margin was 41% in the quarter compared with 39% in Q1. The continuing strong dollar added just under 1 percentage point to the improved margin, with the remainder coming from a better sales mix, which included a lower proportion of shipments for LED compared to with Q1. Operating expenses in the quarter were €16,600,000 slightly below Q1's €17,000,000 G and A expense in the quarter returned to more normal levels. Q1 included reduced project related costs. R and D expense of €12,500,000 was similar to the previous quarter, with small reduction stemming from lower project materials spend. Other income is mainly R and D grant income and exchange gains. Overall, EBIT for Q2 was 9 point €3,000,000 compared with €9,700,000 in Q1. Net profit for Q2 was €7,300,000 compared with €8,500,000 in Q1. The tax expense for the quarter includes a routine tax adjustment of €700,000 We continue to expect the effective tax rate for 2019 to be in the range of 15% to 20% for the group. Turning to the balance sheet on the next slide. Inventories of EUR 82,000,000 include around EUR 10,000,000 of prototype systems, which include systems at customer sites. Receivable spend at €28,000,000 which is 32 days sales outstanding. Advanced payments from customers was €39,000,000 down from €53,000,000 at the end of 2018. The change reflects the low order intake in the first half of the year. Advanced payments of 35% of the order backlog. Moving to Slide 6, which shows our cash flow statement. We had a healthy free cash flow of €13,000,000 in the quarter, and we expect this to continue into second half to meet our guidance of a positive free cash flow between €15,000,000 25,000,000 We ended the quarter with €259,000,000 in cash. With that, let me hand you over to Felix. Thank you, Charles. I would like to give you some perspective on recent developments in OLED and Power Electronics before concluding the outlook for the rest of the year. Turning to the update on our development projects on Slide 7. With regards to OLED, our Gen 2 has been installed in a customer's facility earlier this year. The tool is jointly operated by a team of engineers of our customer and of our subsidiary, Apeba. The tool is running stable and its process performance is currently being found due. It is undergoing an in-depth evaluation with respect to OBPD technology and the performance of OLED produced on that tool. As a result, we are making good progress in the qualification of our technology. In the power electronics area, we continue to gain momentum. In gallium nitride power electronics, we have solid and growing customer base. We have been able to win new customers with orders, both driven by the 5 gs buildup in GaN RF and from capacity at premium in GaN power markets. In silicon carbide, we made good progress with our free automated high throughput system. We have obtained orders for this tool from several customers already and performance demonstrations to additional customers have been scheduled. Market feedback is very positive, which gives us confidence that we are on track to success who will address the most severe market opportunity in power electronics. Let me now come to our outlook for 2019 on Slide 8. We have had a slow start to 2019 in terms of order, but we have seen a broad customer interest in our technology offerings and especially our solutions with labor, our telecoms and switching sensors as well as for power electronics. Despite the weak market backlog, we can reconfirm our guidance for 2019 that we initially issued in February and confirmed in April. We remain confident that we can achieve our goal of between €220,000,000 €250,000,000 in new orders for 2019 with an expected increase in demand, particularly from Asia. However, we do have to recognize that there remains an element of risk among those anticipated orders given the current environment. We expect revenues to be between 2 €260,000,000 €290,000,000 We now expect gross margin to be around 40% of revenue and EBIT margin to be around 13% of revenue, both being at the top of the originally guided ranges. Additionally, we expect to generate between €15,000,000 25,000,000 of free cash flow this year. Finally, let me assure you that although there is weakness in some of our markets, we have an excellent product portfolio with growing interest from a broad range of customers, all of which give us confidence around our strategy, business model and the growth opportunities at Frandar. With that, I'll pass it back to Guido before we take questions. Thank you very much, Felix, and partner and Charles for your speech. We will now take questions. Operator, please open the Q and A. Thank And the first question comes from Andrew Gardiner calling from Barclays. Over to you. Good afternoon, gentlemen. Thanks for taking the question. I just had one on the points you were making there in terms of the order outlook, Felix. You mentioned the you're sticking with the guidance for €220,000,000 to €260,000,000 in new orders for 2019. And just the increase in demand that you're seeing from Asia, can you give us any sense as to what segments that's coming in, LED, optronics? And then just sort of the I can sort of customer interest in the technology, but what's giving you the conviction that they're going to come through and indeed place the orders given the backdrop that you've talked about? Are they particular are those discussions particularly advanced and you're close to closing them? Just trying to sort of gauge the level of conviction around that. Yes, Andrew, this is Bernd. Let me give you an answer to your question. What gives us the confidence is indeed the discussions we're having with customers with quotations and basically ongoing negotiations about contracts. That gives us confidence. And what is the driver? I mean, we have said clearly that the reason for the reduced order intake in the second quarter has been really the backdrop of the optoelectronics, mainly in 3 d sensing, but also some telecommunications related. This seems to be now coming back, in particular, some countries in Asia, mainly China, Taiwan. And the next question for today comes from Vazor Teva calling from Bankhaus Lampe. Yes, hi. Thank you for taking my questions. First one would be on the VCSEL business you mentioned in Asia. But as far as I see in Q2, your fixed shipments have increased Q on Q. So the question is how much capacity is really needed there still for the H2 ramp up or higher penetration of 3 d sensing in smartphones? Or are there any other points which needs to be considered here? Pedro, it's Bjorn speaking. I think the main driver for basically return moderate return demand for Victors who really funds still from the cellphone markets. I think it's expected that we will see the Android can't really now in 2020 coming in the use of 3 d sensing devices, either for face ID, but also maybe on the world side. And also it's speculated there will be a new model from Apple, which is also has more 3 d sensing applications. And I think the supply chain is starting to preparing for this potential additional demand. Okay. Would you say that the overcapacities in VCSEL are now fully digested? This is hard to say on a global base. I think it is really depending from customer to customer. There might be customers still having some overcapacity and others who have a different ramp strategy, maybe still need additional capacity. Okay. And then on a follow-up on the power business. The shipments in Q2 were still maybe 1 tool more than in Q1. But I guess it's more in the backlog, right, the Power business. Any chance to get a split for the backlog in terms of the different applications and products like you do that for the sales? Well, I don't have the number for the backlog for you, but in Q2, the power order intake was very strong. It was close to 50% of the order intake. So we clearly see that there's a rising and a growing demand in the power side. And then a brief update on your tool. It's supposed to be in the market end of this year, right? So is it still on track? You mean the silicon carbide tool, correct? Yes, yes, yes. Yes. The silicon carbide activities are fully on track. We have tools for beta testing at the ground at several customers. We're making good progress. We have received additional term orders from further customers beyond the beta. And our lab is very busy in doing demos for even additional customers. We are still on track. Okay. And then I don't know if you can give any color around the recovery you expect in the orders for the second half of the year. I mean, what type of recovery would that be? Is it more the 70 plus quarterly run rate we have seen in 2017? Or is it rather 60 plus range in 2017? Any insights there would be really very helpful. Rachel, I mean, certainly, the numbers have to support our guidance figure, which is to 20 the 60. And I think much more detail, I think we are not prepared here now to give. Okay. And then final one on the other operating income. So it's FX and plus the subsidies you receive. H1 was already above the level what we have seen for the full year of 2017. Any split there, what drives exactly that between FX and subsidies? No, not really. I think it's an increase in both. Okay. Good. Thank you very much. Thank you. Next, we have Uwe Schupp calling from Deutsche Bank. Over to you. Yes. Thank you and very good afternoon to you all. Just two questions for me. First on the trade war and really rephrasing a question from Andrew earlier. The potential implications for you here, if I remember back at the conferences and also roadshows that you did in May June timeframe, you were actually pretty cautious back then on the business development because you saw some nervousness on the back of the Huawei ban. And today, you come out and say basically that business should be picking up materially from here, whether it will be 60 or 80, I mean, that remains to be seen. But is it correct to say that the nervousness has vanished mostly and you are still or you are by now a net beneficiary maybe even from this whole trade conflict because China is building up a known supply chain? And then secondly, just for Felix, on the did I get you correctly, power was 50%, that's 5 0 of the mix in Q2. Would be interested if that is not related to the new silicon carbide tool, it must be related to gallium nitride. And then the follow-up would be whether that is for some initial fast charging business that one of the U. S. Semiconductor companies has been talking about apparently potentially supplying to a major smartphone launch in this coming autumn? Thank you. Yes. Uwe, this is Brian speaking. I mean, definitely, what is potentially happening is that due to the political stress which is going on, that there are more interest inside of China to develop a local supply chain. Certainly, this doesn't come overnight. This takes time. But I think it's quite it's not unlikely that this is going to happen. And the other side, we see definitely increasing demand for telecom laser tools as well as digital tools from that region, let's say, from Greater China. And but whether this has a one to one relation, we certainly don't know. But everybody can draw its own conclusion. But we're seeing definitely an increase in quotation activities and customer discussion and contract negotiations from that area. And with that, let me come to the second part of your question relating to the power electronics. So that 50% of the other intake on power electronics was a mixture of different factors. First of all, it is a combination of orders relating to the established gallium nitride tool, but also orders for the new silicon carbide automated tool. And within gallium nitride, once again, a diverse mix, part of that related to the 5 gs build out, again, very diverse from multiple regions around the world. And the other part with Megan related to power electronics and also their diverse picture, some repeat customers, some new customers, some on high voltage, some on low voltage. I would put it as a relatively broad diversified takeout take up or pickup of the order intake rather than a one particular one specific segment driver here. Just a brief follow-up, Felix, if I may. On the gallium nitride low power, Is in your pipeline, do you see a bigger order potentially bigger orders coming from the fast charging opportunity? Not from a particular single opportunity. It's rather a broad trend across the entire market. The next question comes from Harald Schnitzer calling from DZ Bank. Over to you. Yes, hello. I've got a question on the OLED project. How has it developed since Q1 in terms of likelihood that you will receive the order in the second half maybe? And secondly, on the silicon carbide, you mentioned, Doctor. Covered that you would have some new orders from customers. Are there completely new customers for Exxon? Thank you. Yes. Thank you for the question. So on the OLED side first, our tool is currently being operated by our engineers and the engineers of our customer. They have together executed test run. They are producing OLEDs in a small laboratory format on the tool to complete OLED devices, which are then being rigorously tested for specifications like brightness, lifetime, color saturation, all kinds of technical parameters. We expect that evaluation to be lasting throughout summer, early fall. And once those tests have been fully completed and all the technical and engineering results of those tests are available, Because testing always means also some fine tuning and some optimization of finding the right set point of such a brand new tool. Then when that is completed, we will really know about the technology potential, and then we can talk about the custom order. So in a nutshell, at this point in time, it would be too early to comment or to give any directional input. But I think we are well on track with respect to executing the testing phase. Maybe that gives you an idea what the status of that project is. And with that being said, I would like to turn over to the silicon carbide topic. Net effect, some of the new orders that I was mentioning come from completely new customers, yes, for Extron and, of course, also for silicon carbide. So we have been able to broaden our customer base here, which is a very positive result. Thank you. The next question comes from Janardan Menon calling from Liberum. Over to you. Hi, good afternoon. Thanks for taking the question. I just want a clarification on the silicon carbide. These you said you've recorded some orders for customers beyond the beta tools. Are these also for additional data tools? Or have you taken orders for a production tool at this stage already? So some orders could be on beta tools, where but a strong order about the tools and the automation capability is then later to be proven once the betas are completed. Okay. So I mean, just to know how we can sort of figure out how your progression of silicon carbide orders will go through. I mean, is it that you're getting 1 or 2 orders now, but once your the larger silicon carbide chip companies out there finish their qualification, you will see a substantial pickup in orders and that could be by around Q4. Is that the way we should think about this? I would not want to give an exact timing on this. It's clear that all the customers are first getting one tool on their shop floor, be it in form of a data, be it in form of a firm order. The tool is then being brought into all the food specifications being tested. Then the tool is being run for a certain period of time by the customer, where the customer is gaining full experience what the tool can deliver, not only in the laboratory test environment, but really in a regular high volume production environment. And once that sales within our customers is completed, then we are targeting to expect larger and volume orders from the customer. And I think if you add these steps, I think some maybe there Q4, others maybe in 2020. It really depends on the high volume qualification process of the customer. Understood. And just going to 3 d sensing. AMS, in their results, talked about a strong momentum that they're seeing from the Android side on 3 d sensing, both front and world facing they were talking about. I was just wondering, I mean, so far, your the customer base of 3 d sensing, especially at Apple, has been quite consolidated. IQE has been a major customer of yours as well. Are you seeing a fragmentation of that in the Android side? Are you seeing many Chinese, Taiwanese companies get into that market? Or is it being fairly is it remaining quite consolidated even as the Android momentum picks up? And I have a last follow-up, if I may. I don't think we can call this fragmented. I think the players here providing epi for the 3 d sensing applications are the known prospects. And you can imagine that most of them are external customers. So I think the customer base has not changed significantly, in particular for the boselmone supply chain over the last 12 months. However, we've seen certainly new players we still see new players starting with developing digital products in terms of epi, particular in Asia, in particular in China. But I would say for the time being and when we about potential product lines of next year, I think it's very likely to be the main success. Got it. And my last question is on the OLED side. The date for when we might see an order for a larger Gen X system has slipped a little over the last year or so. There was an expectation that, that could have come in earlier. You're now saying before the end of the year. Can you give us some feel for where you are in that process? Is there an ongoing negotiation on the size of the machine and the price which we paid, etcetera, that has already started? Or is that something that is yet to start at this point in time and will depend on the ongoing testing that the customer is indulging in? The latter is correct. As I mentioned, it's first about evaluating and completion completing the technical performance evaluation and fully understanding the capabilities of the tool. And if that is possible, then after that, it comes to the discussion about the customer, yes? It's true. And our overall program, as you know, has been 58, yes? But now we are well on track. Nevertheless, what exactly the dates for that is, that would be it's not clear. It's really the steps mentioned and after that, the next phase of customer discussion and negotiation will start. Understood. Thank you very much. Thank you. The next question comes from Charlotte Friedrich calling from Berenberg. Over to you. Hello. Just one follow-up. I think we've covered most of my questions by now. Could you tell us how much in R and D expenditure you had in the second quarter towards Apeeva and how you see this going forward? Also, as you said, you're going through the testing phase, you may receive the order. How should we think about that? Thank you. Yes. Thank you, As we commented earlier in 2019, we expect the bottom line impact of the OLEX activity to be less. We would not comment exactly how much that breaks down by individual P and L items, but it will be a very softer of an impact on the P and L. And the exact numbers, of course, determine or depend largely on the discussed timing sequence of the technical evaluation, the starting point of the project for the Gen X. And therefore, it would be too early now to give us exact numbers, but the overall trend in big line is intact. Okay. And then one more question. You said 50% of the order intake in Q2 was power related. Could you give us a split very roughly of how much of that was done and how much of that was the beta silicon carbide tools? I don't have the numbers exactly in front. Just by reference, maybe twothree, onethree, fiftyfifty, something between that something in that range. So that would be 2 thirds gun, 1 third silicon carbide, right? Somewhere between 2 thirds gun, 1 third big and fifty-fifty, somewhere in between. Okay. Don't have the numbers in front of me. Thank you. Thank you. The next question comes from Marta Schalmann calling from Warburg Research. Over to you. Good afternoon. The first one is on carbide again. How long does it take for your customers to tune or qualify their process on your tools? So how many months are required and before then customers new customers could place more volume like orders? That's very, very significant, yes. We have some customers and we would have take on a very diligent, very rigorous qualification and quality control approach where you can say it can be in process of 5, 6, 7 months, yes, very, very diligent. We also do have some customers which follow a much more aggressive risk taking approach running some stress test within literally a single digit number of weeks and then starting to come to 2 decisions in order to be and aggressively grab market share, yes? That's a very better pattern, yes? So therefore, if you think about potential orders, follow-up orders, it will be a mixed picture, varies by type of customer. You can imagine some of the established German automotive supply chain lean much more towards the one side, other customers then, of course, on the other end of the spectrum. Okay. And then do you see other customers new customers your company to be close to also place orders within the next month? So would you expect to maybe have kind of relations to all the major players within the few quarters? So we are in discussion. We are currently in discussion with all the big players of the market. And we are in demonstrations in our laboratory. And it's clearly our target, our objective to win a major share of this customer base. At this point, we cannot comment yet now because the demos have been outstanding with many of them, which share of them will eventually win over for our tool. Okay. And do any of your customers provide some kind of indications for potential ramp schedules? Or do you have some kind of idea how potential ramp in 2020 might look like? Will it be 1 by 1? Or is there the potential for multiple orders or multiple orders? Sure. But it would be too early to discuss here at this stage. The technical mass production series of our customers comes first, and then we enter the ramp phase. This is a little bit too early to discuss. Yes, sure. Okay. Thanks. Well, thank you. Thank you, everyone. This would conclude today's call. Thanks for your interest and your participation in this call. You know where to find us and me in case you still have any questions. For that, thank you all, and bye bye.