Earnings Call: Q1 2019

Apr 30, 2019

Good afternoon, ladies and gentlemen, and welcome to Alstom's Q1 2019 Results Conference Call. Please note that today's call is being recorded. I will now hand you over to Mr. Guido Figgert, VP of Investor Relations and Corporate Communications at Eichstrom for opening remarks and introductions. Thank you, operator. Let me start by welcoming you all to Eichstrom's presentation of our Q1 2019 results. I'd like to welcome our Executive Board represented by Doctor. Felix Klaer and Doctor. Bernd Sulte as well as our VP of Finance and Administration, Charles Russell. As the operator indicated, this call is being recorded by Exxon and is considered copyright material. As such, it cannot be recorded or rebroadcast without expressed permission. Your participation in this call implies your confidence with this recording. At the previous results conference call, that all participants have our results presentation slides, Phase 2 of which contains the usual face of the 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, which includes additional information on Exxon'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 transcripts on our website at some point after the call. I would now like to hand you over to Doctor. Van Schrodtke opening remarks. Bernd? Many thanks to you and a warm welcome from my side as well. To you, I will give you an overview Exelon's key developments in Q1 2019 before handing over to Charles Russell, who will go through the financials in more detail. This will then be followed by Felix Baher for an update on some of our important development projects in the record. Q1 2019 beat our expectations for margins and earnings with a gross margin of 39% and an EBIT margin of 14%. The strong U. S. Dollar and the lower product costs as a result of cost saving measures have supported these figures. Orders at €54,000,000 have been in line with that what we said during our full year 2019 conference call SA which makes the expected reluctance of customers to invest in the expansions of their production capacities before next generation end product launches have been cleared. Taking this into account, we confirm our full year guidance to total orders to be received in a range between €220,000,000 216,000,000 In the short to mid term, we expect a growing demand for lasers due to the increasing demand from 3 d sensing, security infrastructure or optical data transmission. In the longer term, we also see increasing use of LEDs, microLEDs and facial LEDs in display and other applications. In addition, we expect an increased use of gallium nitride or silicon carbide based devices for wireless communication and efficient energy management in automobiles, consumer electronics and mobile devices. With that, let me now hand you over to Charles for a more detailed overview of the Q1 2019 financials. Claus? Thanks, Bernd, and hello to everyone. Starting on Slide 4, our income statement. Total revenues for Q1 2019 were €69,000,000 compared with €62,000,000 in the same quarter of the previous year. Gross margin was 39% in the quarter compared to 43% in Q1 of 2018. This expected reduction in margin was caused by an increased share of sales for NEE applications. The continuing strong dollar had a beneficial effect during the quarter, at least compared with our guidance, which is based on $1.20 to the euro. Approximately 70% of our sales during U. S. Dollars. Heavily reducing product costs have also had a sustainable beneficial effect on our margins. Specifically, we have achieved some significant product cost reductions by sourcing components from different suppliers and also reduced warranty expense by improvements in reliability. Operating expenses in the quarter were €17,000,000 slightly below previous quarters because of lower project related expenses. Turning expenses of €2,000,000 in Q1 2019 were in line with last year on a quarterly basis. SG and A expense and R and D costs were less than previous quarters because of lower project related expenses. G and A was €4,000,000 in Q1 and R and D €13,000,000 in the same period. The R and D expenses for the OLED activities in Q1 was a total €4,000,000 R and D costs fluctuate at the time depending on the different activities being performed. This is a normal feature of R and D and is not a cost cutting exercise. Overall, EBIT for Q1 was €9,700,000 and net income €8,500,000 Turning to the balance sheet on the next slide. Inventories of €80,000,000 include some prototype power electronic systems, some of which are at customer sites as well as safety stockings objectives. PP and E increased the capitalization of €3,900,000 of leased assets under IFRS 6.2. Payables have reduced because of paid supplies to the increased inventories and customer deposits lower reflecting the order intake in the quarter. Moving to Slide 6, which shows our cash flow statement. The CapEx is €5,600,000 includes €3,900,000 of leased assets. The changes in working capital is what I have already described and the free cash flow was minus €18,000,000 in Q1 and we ended the quarter with €248,000,000 in cash. With that, let me hand you over to Felix. Thank you, Charles. Before getting to our outlook, let me quickly give you an update on where we stand in our OLED qualification process and in our development process of the new silicon carb power electronics tool. We completed the installation of our Gen2 pilot production OLED tool within our customers' facilities as we told you in February. Currently, the tool is being put into operation jointly by the customer in our October unit. This represents another step forward on the way to the qualification of the OVTV technology. In the coming months, the joint operation of the system shall perform the performance of the technology and the result of data will be the case of the customer's decision to order production size chambers during 2019. In Power Electronics, we have installed multiple data streams of our new fully automated high throughput silicon coverage with customers in order to perform data sets to the cloud point of our field car device manufacturing. For the coming, we are seeing strong interest from all relevant power players in the market for our technology. This makes us very confident that we are on the right path to address major market opportunity in Hawaii that comes with line ahead of us. Now looking at Slide 8, we can confirm our 2019 guidance that we have issued in February. We expect to receive total order in the range of €250,000,000 €260,000,000 which means we need to report additional orders of €162,000,000 to €206,000,000 on top of what we reported in Q1 during the remaining 3 quarters of 2019. This range considers both the geopolitical and the customer specific uncertainties as well as the still unclear magnitude of a possible order in the OLED segment. Revenues are expected to be between €260,000,000 €290,000,000 Gross margin and EBIT margin are expected to be between 35% to 40% and 8% to 52% respectively. Free cash flow for 2019 is expected to be between €50,000,000 to €25,000,000 We are fully on track to reach the guided levels in all damage also in terms of free cash flow despite the negative free cash flow value reported in Q1. Please note that if we estimate, we include the results and CapEx of Apergyba that are based on our budget rate of $1.20 of $1.20 per euro. With that, I'll pass it back to Giro before we take a look. The question. Thank you, I have a few questions. One is on your order trends and what you're seeing in the market. Today, Internet reported results in the morning, and they sounded much more upbeat about how the adoption of 3 d sensing is going on in the Android side, and there's been increasing number of models coming out. We have 3 d printing for the front and back of the phone. I was just wondering, given that commentary, how would you prepare what you're seeing in the market today versus 3 months ago when you gave guidance for the full year of $220,000,000 to $250,000,000 of orders? Are you feeling, I mean, is it is it a slightly better environment or would you say that it may not be the same and you have not seen any of the, all the sort of improvement that comes in again asking about to affect in your discussions with customers as yet. My first question is on So you said you're in qualification at a number of customers unless there's an interest in equipment from them. When can we expect the qualification to be completed? And therefore, when will we be able to take orders to be placed for new customers for you on your machine? And and lastly, in your in your current order guidance, 220 to 260, have you not given any orders from the different sites at all? And if they could comment, what would be the impact on your order book? Thank you, Jordan, for your questions. Let me try to answer your first question. The current order level and activities in quotation, at the moment is quite diversified in applications and regions. And this is why it's not really fully clear yet how the second half developed. And we always mention that the earliest area we see a potential comeback of orders for the 3 d sensing markets would be in the second half. So with the current view we have on this very diversified view, as I said, in applications and regions, which is difficult to pay where the second half will develop in order to pay whether we are more at the lower or the higher end of our guidance. So it's pretty early. Okay. And you have not seen any increase in inquiries or anything that are coming through over the last 3 months from the sensing side? No, it's still too diversified to see really a real movement. Understood. On the 2nd carbide? Yes. So on the 2nd carbide, I think there are 2 questions, right? The first I understood is when the qualification will complete, you expect the customers to complete the qualification or first customer to complete the qualification throughout 2019. And that means when we can expect follow on orders from customers who have a tool currently in the qualification process. I think this will be towards before 2019, 2020, probably around the later time. And yet for sure, we do have a number of silicon carbide orders already included in our guidance. Thank you very much. Yes. Welcome gentlemen. Two questions please. Let me take the question from the first question from Jonathan. Basically looking at Q1 orders and for your guidance for the year's spend, obviously, you are guiding for improvement in coming quarters just in order to survive at the low end. Is there any indication that would support that? Or is it actually purely based on paid support? And then secondly, Charles, just on the higher inventories you alluded to inventory were up 30% or if not more year over year. How much of that is related and what other effects may be included that we may not be noticing? Yes. Thank you, Mr. Schuld, for the question. Speaking about your order intake. I mean, first of all, if you multiply order intake first quarter funds, are you very close to our lower end of the guidance? So it means you're right, we need an increase to achieve the upper end or somewhere in the green of the guidance. And as we mentioned in the previous call and as I mentioned before, we still see the potential that we see increase in second half when the TCL 3 d sensing typically has congested the current capacity and needs further increase in output and preparation, say, for the year 2020 growth in the year 2020 and so on. So but as I said, it's very difficult to be more precise right now. And we're seeing a good security implications in the moment. As I've mentioned, the application in particular also the regions are very diversified in order to see really a clear pattern here. And my question is about inventory. We have, as this is, mid single digit million figure of inventory related to Brexit. We have a little bit more than that related to prototype. And we are actually just our inventory is there to be built against customer orders, not building to unspeculation as that was the end of your question. And also keep in mind, if you look in our guidance and what the Q1 revenue has been, it's clearly a refinement of an increase in revenues in the coming quarters. And you heard from Felix very clear, is confidence in achieving our guidance, which means that our production prepared its output, which in the end will end in an increased work in progress. And also, we'll be doing increased activities with customers on the qualification of our power electronics tools. We also need to have tools at customers, which are still in our with reporting our list. The next question comes from Charlotte of Berenberg. The first one would be around your expectations for LED orders. You have the largest share of revenues coming from LED in the Q1. And my question would be what your expectations are for Q2? Is there much more to come or is it pretty much done now obviously larger orders? Then the second question would be around order intake in the Q1. If you can tell us maybe a little bit what the peak here is between end markets. And then finally, on the cost side for 2019, do you expect any meaningful changes in your OpEx or is Q1 pretty much run right now? Thank you. Yes. Let me talk about our expectations in the KV sector. As I mentioned in the in our annual call that for 2019, we do not expect significant orders in the field of red on yellow LEDs. This is because we got significant orders in 2018, which shipments you're seeing in this quarter and next quarter. Yes, you probably, if you look in the relationship of our revenue, you see the strong portion of the LED card. And with that capacity getting installed right now, we do not see a continuation of the capacity requirement before the medium term. So the view is pretty much unchanged to what we said 3 months ago or 2 months ago when we gave our full year figures. So for 2019, we do not expect significant orders from that application. The split in orders, you mentioned orders about Q1 was fairly evenly split between laser device application as well as power electronics and MP Solar panels. So this was basically mainly the split not really culminating from one of the expectations. And it really echoes what I mentioned about the short term outlook for orders. It's pretty much diversified. In terms of the OpEx, I think I mentioned that the OpEx fluctuated and that was about low for some of the spend in Q1. So we do expect it to be a little bit higher in the rest of the year. The next question is from Maisel Hauser of SunTrust Lampert. Yes. Hi. Several questions left. One would be regarding your power business. You mentioned some better tools. Can you just give a color if you go back like 6 months? Have you added new customers in this space? And can you give a color around SiC and gallium nitride, how these both areas during Q1 and how do you expect them to shape up throughout 2019? Thank you. So let me first comment on the silicon carbide and later on the gaming right side. On silicon carbide, as mentioned before, we are in the process of bringing out our automated high throughput system to the bigger tool for order for this high throughput system. And it is multiple customers where we have placed the tools. It is existing customers, which we've been serving in the past and also additional new customers to have a place where we've been able to expand our customer. And now all these customers on all these 2 qualification programs are running, as mentioned before, throughout the year 2019. And as mentioned before, then we see broad interest from even further group of customers in the market. Of course, our expectation or target is to even sort of broaden our customer base. So this is anything covered. Now let me comment on the LME side, the second part of your question. So as you know, as we have mentioned previously, we have a strong customer base on the gallium nitride power electronics. Most recently, we've seen increased activity, increased demand from customers in the gallium nitrate RS, especially preparing for the 5 gs buildup. And also here, we have seen a number of orders, also broadening the customer base. And we expect that trend to continue throughout the year 2019 or 2020. However, of course, as always mentioned, carolinite it increased coming from a relatively small base if we talk about the number and the revenue. Okay. And then on your order entry level in Q1, would you say that the $54,000,000 you had priced that it was above $50,000,000 so there is some positive impact of prices. And do you expect Q1 to be, so to say, I mean, your guidance is like that, but would you say Q1 order entry marks low point for the year and we should see gradual recovery each quarter so to say for the rest of the year? Well, as I mentioned, it's really quite diversified in applications and that we see ongoing also currently. So it's not like that all application dominates really the demand in schools right now. And I wouldn't say that there was big surprises in order intake in Q1. It always also depends when we can book orders, when we, for specific customers in areas where you need export licenses, when you get those cleared by the authorities and that sometimes shift orders from 1 quarter to the next. That sometimes can be a surprise, particularly in the timing because authorities are not always simple to forecast when you get the application of lead. But within customers and in markets, there were no surprises. And as I mentioned, the development in second half This is still quite difficult because we do not see, let's say, one application really pushing forward to a significant order trend, which we can see as we plan here today. Okay. So on seasonality, so do you think I will be on change to improvements or what is your assumption there? So any color on the seasonality would be really very appreciated. Well, I think in our business, there's no seasonality. It's really driven by the investment into rent, into certain applications. And I think, Jonathan mentioned it, I can only read what you also read regarding the positive outlook of some players in the 3 d sensing market. And we are convinced that eventually we'll also turn into orders from new equipment. When that timing is, it strongly depends on the demand, on the yield, on the output of the requirements, etcetera. So that's a very complex formula, which is very difficult for right now to answer. But in general, and that's what we keep saying, we are convinced that the 3 d sensing market hits the demand is intact. But I cannot tell you whether this will be in Q3, Q4, Q1, Q2 in the time forward. That's very hard to say and depends on many factors. Fair enough. And just one final, if I may. Josh, you mentioned some comments regarding the R and D cost. I don't I'm not sure if I catch one correct with the how should we suggest your key term on the R and D costs? So it's just that some R and D costs fluctuates over time and that the lower level of R and D spend in Q1 is not indicative of a cost cutting program. Let me add to this. The R and D cost, which is usually composed of 2 key elements, right? 1 is seasonal cost, which is the salaries of the people on board are paid out in a month. However, the material cost, which also goes through there, depends on how privatized are being built and how material spend is going through. And that is a variable, which is fluctuating. It just happens by chance that Q3, the number was even lower because it was less material with The next question is from Marthush Chalmun from Novel Research. Good afternoon. I just wanted to take off, Marthush, and I have to turn in the first has not changed in terms of what you can say, hey, would we share this Q1 with your gross margin or a bit of a different guidance range? So as you know, our guidance has been modeled based on the €1.20 for €1. If you want to plot out what affects the U. S. Dollars, I think you can relatively easily calculate that if you assume that about 70% of our revenues is based on U. S. Dollar. And you can make your own assumptions, as you just said, on what a potential U. S. Dollar rate is likely. And to be very clear, I think before we confirm our guidance, in the percentage range based on the U. S. Dollar rate that we have given and the rest to, I think, is just in the calculations which you can make. Okay. Then on Ola, has the communication process been more or less pretty much on track with a substantial kind of hurdles, technical hurdles upcoming that might have delayed something or do you see general quantification progressing? Yes. The qualification progress is on track. The tool that has been installed, as we mentioned before, has now happening is a number of functional tests of the tools, not the very complex tools with a huge and complex functionality, type of all the different countries are being tested and elements blocks of the tool are being put into operation. And when that is completed, then OLEDs actually be run by the customer, as we have already explained before. And then the customer out of running and producing these R and D type OLEDs, have the customer get their data, their measurements and make their decisions. So within this complex process things are on track. Are you willing for what is the time when the R and D sort of tax should be ready to be 50 pieces? No, we wouldn't comment about details of that, but everything has happened throughout 2019. Yes, sure. Okay. The next question is from Andrew Gardiner from Barclays. Thanks for taking the question. I had another one on gross margin. To the prior question, mix at least relative to last year was weaker in the Q1 and you've already seen how you expect LED to remain at a relatively high level in the second quarter. Just can you give us an idea of how you're planning for a mix to progress through the year? Is the 1st quarter the weakest level of profit and therefore gross margin we can expect? Yes, Andrew. The point is it's definitely, I think, for Q2, it's fair to assume it will be the similar range because also this product mix might be quite similar to the Q3. But as we mentioned that the, but the second quarter has quite a number of LED tools. Now the, what's not clear is what will be the dollar month to month. But I mean, I need it to your own judgment what the dollar in short term may do. In the second half, you see a shipment and therefore, the mix of applications and products due in the second half is not really clear because that's pretty much defined the orders we're taking now, particularly in the last quarter. So I personally do not expect a significant reduction in margins for Q3 and depending, of course, Q4 depends on the mix of oil. Okay. Understood. And perhaps one for Charles. Again, on gross margin point, you highlighted some of the savings you had in the Q1 around product cost and warranty cost. I presume those are sustainable, but can you help sort of quantify that? Is there is that a material element of gross margin in the Q4 that you can expect to continue? Thank you. What we've done is over the last 12 months, there's no rules probably reduce the product costs and we expect that to be sustainable into the future. And we have an activity which is, takes place here in Germany to continually reduce those costs. And that's what we expect to do in the future. I mean to be clear, of course, the larger portion of the, let's say, increase in expected cost margin came by the dollar. This is, I think this is not unfair to say. And these cost reduction measures, as Charles said, they are continuous improvement measures. And they add a few tens of percent per month quarter and add up over time over year to a range of 1% or maybe more than 1% or so. Thanks very much. That's helpful. Thank you very much, everybody who was listening. With that, we are closing our Q1 2019 earnings call as a pleasure for joining and bye bye. See you