Earnings Call: Q4 2018

Feb 26, 2019

Good morning, ladies and gentlemen, and welcome to Xtram's 2018 Annual Results Conference Call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickett, VP of IR and Corporate Communications at Xtram for opening remarks and introductions. Thank you, operator. Good afternoon and good morning to all of you listening to our call. Let me start by welcoming you all to our presentation of the 2018 results. I'd also like to welcome our Executive Board, represented by Doctor. Felix Krawas and Doctor. Dan Stoecker as well as our VP of Finance and Administration, Charlesworth. 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 express permission. We publish the patient with call and slide if you're content with this recording. As the previous results conference call, I thought that all participants have our results presentation slides, Page 2 of which contains the usual Safe Harbor statement. It applies throughout this 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 meeting. However, we will place 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 Doctor. Dan Schulte for opening the lines. Many thanks, Guido, and a warm welcome from my side as well. As usual, I will give you an overview of Exon's key developments in 2018 before handing over to Charles Russell, who will go through the financials in more detail. This then will be followed by Felix Krasner for market development. I will then come back to you to wrap up and give you our 2019 guidance. 2018 has been a very successful year for Exxon in many aspects. Not only did we beat the original target we set ourselves last year, but we also see that the business is in a much stronger position than it has been for many years. We ended this year with a strong order book, and we have an exciting diversified technology portfolio, which provides us with a solid medium to long term outlook. Let me remind us that in 2017, we decided to realign our company to focus on our core MOSPD as well as OVBT technology. This led us to cancel or freeze certain product lines and the corresponding R and D expenses. We sold the product line that we considered outside of this core focus. This realignment is now completed We're achieving the important milestone in October of last year when our OLED deposition business, Arpivar, signed a joint venture with a South Korean display industry supplier, Inucha. As a result, Apeva will become a full OLEPA physician system provider, and we are hopeful that we will see an order for production such as chamber later this year for this business. The success of this strategy is already reflected in our 2018 revenue and earnings numbers, which were largely driven by the sale of MOCVD equipment into operator electronics, mainly for lasers and LEDs. In these areas, customers use our systems to manufacture lasers for optical data transmission and 3 d sensor technology, be that for facial recognition and smartphones or for the upcoming functionality of LiDAR. In the area of LEDs, there are applications including the manufacture of special LED such as red, orange and yellow LEDs for display applications, high performance LEDs for automotive lighting or UV LEDs for the environmental and environmentally friendly disinfection of water. We see a strong growth potential in microLEDs displays for which we hear about progress in their manufacturability. Let me now give you an overview of our key financial highlights for 2018 on Slide 4. In 2018, revenue reached €269,000,000 which was 40% higher than the comparable revenue in 2017. We also managed to increase our EBIT from €5,000,000 in 2017 to €41,000,000 in 2018, driven by strong gross margins of 44%, which are up from 32% the year before. This was a result of a better product mix, product cost reduction measures and the stronger U. S. Dollar. Order intake was also the strongest in many years. At €302,000,000 it was 34% ahead of the comparable figure of the previous year and leaves us with an order book of €138,000,000 20% 7% higher than the same time last year, giving us good visibility into revenues for the Q1 of 2019. In summary, not only have we achieved our guidance in all metrics, we have reached the latter end of all our 2018 guidance items provided. With that, let me now hand you over to Charles for a more detailed overview of the 2018 financials. Thanks, Bernd, and hello to everyone. Starting on Slide 5. We had a good 4th quarter with an order intake of €72,000,000 similar to the levels in previous quarters and ended with an equipment backlog of €138,000,000 Revenues in 2018 were 17% ahead of 2017, which is 40% ahead on a like for like basis for the continuing business. The improved product mix as well as the strong U. S. Dollar, particularly in the second half of twenty eighteen, produced a gross margin of 44%, 12 percentage points ahead of 2017's 32%. 2018 EBIT was €41,000,000 and net income €46,000,000 Net income was higher than EBIT because of deferred tax assets, which we recognized in 20 18. Moving on to Slide 6. Let me go into more depth on the income statement. Total revenues for 2018 were €269,000,000 compared with €230,000,000 in the previous year. In the quarter, the revenues were €88,000,000 Gross margin was 45% in the final quarter and 44% over the full year. The strong dollar added €3,300,000 to sales and margins in the quarter compared with our Q4 guidance, which was based on €1.22 The margins also benefited from increased sales volumes and better cost efficiencies. Gross margins in the same period last year were considerably lower at 32%. Operating expense in the quarter was just under €19,000,000 more or less in line with the average. Selling expenses of €9,000,000 in 2018 was slightly lower than the previous year and remained below 4% of revenues. G and A expense was €5,000,000 in Q4, in line with the previous quarters and was €18,000,000 for the full year, 8% above 2017. Q4 R and D costs were more or less in line with previous quarters. On an annual basis, R and D expenses were €52,000,000 24% lower than the previous year. However, 2017 increased discontinued product lines and restructuring expense. The R and D expenses for the OLED activities in 2018 were €24,000,000 compared to €23,000,000 in 2017. Overall, EBIT for 2018 was €41,000,000 and net income of €46,000,000 both for substantial improvements over 2017. Excluding the Q4 was €18,000,000 which is well ahead of the previous quarter and was a reflection of the product mix, high level of sales and strong dollar in that quarter. Turning to the balance sheet on the next slide. The main changes compared to a year ago are a reflection of the increased business volume. Inventories of advanced payments from customers increased because of increased backlog. We think that this increase because of the higher sales, although they still represent only 36 sales sales outstanding. Moving to Slide 8, which shows our cash flow statement. Free cash flow was €4,000,000 for the year compared with €91,000,000 in 2017, with free cash flow in 2018 a fixed repayment of €12,000,000 related to the previous year's disposal of ALD CBD. Telstra cash flow includes €10,400,000 for shares issued on Aperiva to Eluja, of which €5,400,000 was paid in 2018 and €5,000,000 is not payable until 2019. We finished the year with €264,000,000 in cash, up from €246,000,000 With that, let me hand you over to Felix. Thank you, Charles. Most important for 2018 were lasers for 3 d printers, which were integrated for the first time in 2017 in the smartphone of the leading provider Apple and the iPhone X. The view from market research trends such as redevelopment is that this market is likely to grow from US2.1 billion dollars to US18.5 billion dollars in 2023, and we believe we are well positioned to provide the manufacturing solution for that market. We all read that the adoption of this functionality is currently accelerating to other cell phone products, which is the prerequisite for further growth in this space. Beyond 3 d sensing, lasers are also core components for optical data transmission. With the move to 5 gs mobile network and massive increases in the data being transmitted by fiber optic cables, we see increasing demand for our leading manufacturing solution. And we see this market growing in size, driven by end user demand for Internet services, cloud computing, especially video on demand and data communication of connected devices via the Internet. Another focus area of ours are specialty LED, of which we are concentrated on red, orange and yellow LED and the upcoming potential for microLEDs. ROI LEDs are used in applications such as large format displays for sports stadiums, airports and shopping centers, but also increasingly, premium LED backlighting units, high performance LCD screens. According to LED Insights, this market is expected to grow to US5.4 billion dollars in size by 2023, up from US2.9 billion dollars in 2018. And again, our positioning in this market is very strong. Another exciting technology, which is at an early stage of development, are microLEDs, which are already used in small applications such as head mounted displays for automated and virtual reality. However, microLED could have wider applications in areas such as large TVs and smartwatches. According to LED Incent, the market for microLEDs in 2018 was $600,000 in size, and they expect it to grow to $3,200,000,000 by 2022. The specification for MOCVD performance to manufacture microLEDs are expected to be extremely challenging in terms of yield and also throughput at the same time. We believe that we are well suited to address these challenges with our planetary reactor concepts delivering the combined high uniformity with large batch size in the industry. Starting with the second half of twenty eighteen, we have seen increasing customer demand in the area of power semiconductors based on the white bag of materials gallium nitride and silicon carbide. These materials allow for a significant reduction of energy conversion losses, contributing to improved energy efficiency in applications ranging from smartphone to electric vehicles and solar power plants. According to a study by the market research company, IHS, the market for semiconductor based silicon carbide and gallium nitride power devices was US600 $1,000,000 in 2018 and is expected to reach $2,100,000,000 by 2023. These white anti material, such as gallium nitride and silicon carbide, are complex to produce and call for a good value between yield and throughput. In gallium nitride, we are well positioned with our G5 plus tool, which is the tool of record for the 3 tier system today. Our new fully automated silicon carbide tool is with selected customers for beta testing at the moment, and we remain confident that we will secure additional silicon carbide power customers and thus additional revenue within the next 1 to 2 years. Another focus area for Xtron is OLED, for which our subsidiary, Arkeva, is in the process of qualifying the OLEDB technology for OLED acquisition with a major display producer. To date, OLED has been mainly used in high end mobile phones and high end TVs. Going forward, we expect OLEDs to be used much more widely as production cost is reduced. According to research from the investment bank UBS, the market for OLED for TV for its global could grow from approximately US1.9 billion dollars in 20.18 to US20.5 billion dollars in 2025. This is a substantial opportunity and thanks to the formation of our OLED JV with Elujah, we believe that Acheva is well positioned to become the deposition equipment provider of choice in this market. CEVA has made significant progress in recent months. Approval of the joint venture has been obtained from the authorities. The integration of the team of pharma EXTRON and the ROUZA people in Goldenberg and joint processes and adhesive sites are being established. The Gen 2 OLED test system has achieved positive results such that our customer has agreed to the installation of the test system in his production facility. This installation has been completed. In the next step, the system will produce layers of OLED stacks, which will be thoroughly investigated by the customer. When these tests are successfully concluded, we expect to receive a customer order for a large parallel deposition chamber and production format later in 2019. In addition to the MOCVD and OBDD production product line, We also developed, for example, technology to produce graphene, carbon nanotubes and carbon nanowires. This material provides very interesting potential in a variety of applications, be it a battery or a display application and give us a solid long term growth opportunity. With this, I will pass it back to Bernd, who will discuss our guidance for 2019. Bernd? Thank you, Felix. Looking at the shorter term to 2019 on Slide 10, we have good visibility on revenues, in particular, for the first half of the year, thanks to our strong backlog. However, on orders, we have limited visibility, noting that there are headwinds around the general development of the global economy. We are sensing some reluctance to invest by some of our customers. Consequently, we expect orders for 2019 to be below the 2018 order levels and in a range between EUR 220,000,000 EUR 260,000,000 We expect revenues to be in between €260,000,000 €290,000,000 in 2019, which would be similar to or above 2018 levels. These ranges consider both the geopolitical and customer specific uncertainties as well as the still unclear magnitude of a possible order in the older segments. We also expect to achieve gross margins for 2019 in between 35% 40% with lower margins in the first half of twenty nineteen due to shipments of lower margin NLEEP products to China. We expect to achieve an EBIT of between 8% and 13%. This is mainly due to a different product mix and the fact that this guidance is based on the U. S. Dollar euro exchange rate of USD 1.20 to the euro versus a stronger actual U. S. Dollar since second half of twenty eighteen. In addition, we expect to generate free cash flow of between €15,000,000 25,000,000 in 2019. Please note that these estimates also fully include the results and CapEx of Aplea and is based on the previously mentioned budget rate of the U. S. Dollar versus the euro. Let me say that after a successful 2018 and with a strong pipeline and good technology roadmap, we are very much looking forward to gaining from the growth opportunities we see in front of us. Finally, we would like to thank you, our shareholders, for your trust in our company. We are convinced that Xtron has the necessary operational strength and the innovation power to remain a technology leader in the compounds semiconductor industry in the future. With that, I'll pass it back to Guido before we take your questions. Thank you, Berns, Billy and Charles. Operator, we'll now take the questions, please. Thank The first question comes from Charlotte Friedrichs calling from Berenberg. Over to you. Hello. Thank you for taking my question. My first one would be around your margin guidance. If you could maybe walk us through the different components here that made you end up with the ranges that you gave here. So how much is, do you think, FX? How much is mix? And how much do you expect on the operational costs? And the second question would be around the order intake and if you can give us a little bit of an insight how that is split by end market, please? Yes. Let me speak first about the order intake. I think it's quite obvious and we said this in the past that in 2019, we do not expect a lot of orders coming from the LED field for the red orange yellow because 2018 was an extremely strong year in terms of order intake, and we will see a lot of this capacity going into this market by shipments in 2019. We also expect that for the optoelectronic, mainly systems for 3 d sensing. And we see that this market in the short term will not pull so much demand due to the fact that also last year, we have installed a lot of capacity with the key customers in this area for the key products. However, we expect a growth definitely in the range of the power electronics compared to 2019. So overall, we will see the reduced bandwidth coming maybe out of the LED field and somewhat the laser part. I should also say that the number that we're guiding here is also expecting some uptake of the laser order intake in the second half of the year. Coming your question to the margins. I guess, in 2019, 75% to 40%. And when you compare this with the number we achieved in 2018, which has been 44%. You can consider that about 2% has been was a benefit from the U. S. Dollars. And the difference basically comes slightly below 40%, comes from the higher percentage of the LED tools we carry in our backlog. And where we which we will ship in the dominant part in the first half of twenty nineteen. And basically, the difference is pretty much the lack of visibility in terms of exact order and product mix in the second half. Okay. Maybe one follow-up on APEVA. I think you mentioned it in your prepared remarks, but I didn't quite catch the number. How much was your how much in cost did you have for APEVA in 2018? And what do you roughly expect for 2019? What I said was that the R and D expense was around €24,000,000 And in 2019, we expect the overall effect of AVEVA on the EBIT to be significantly less than in 2018. Thank you. The next question comes from Uwe Schop calling from Deutsche Bank. Over to you. Yes. Good afternoon, gentlemen. Two questions, please. First on OLED and second one on the guidance. Yes, just on OLED, just to clarify that About a year ago, you basically were pretty vocal and said, yes, we're expecting an OLED tool order later in the year. And as such, OLED revenue would be coming down or OLED R and D would be coming down starting this year, which obviously is the case. But where do you stand exactly? What is the amount of visibility you can give us that we'll be getting an OLED order by your lead customer? In other words, are you more or less confident compared to Q3? Any clarity additionally would be obviously quite helpful. And then secondly on the outlook, your backlog stands at just roughly €140,000,000 at the end of 'eighteen. If I revalue that at spot, I obviously come to something more in the area of above €150,000,000 You have €50,000,000 of service business, obviously, roughly speaking. So in order to come to the low end of the revenue guidance, it means you are guiding for €13,000,000 or so of Q1 and Q2 orders. And I wonder if that is something that you wanted to imply? Or are you just again very cautious at this time of the year? Thank you. Yes. So let me comment first on your question regarding OLED. Yes. The status is, as mentioned before, that our tools have been installed in the factory and that we are now preparing process runs. And based on the outcome of those process runs, then at some point in the year 2019, we expect an order for the tool to be placed. With respect to the probability or the likelihood of that order coming, there's no change to what we said previously. So we are confident that this is coming, But we need to remain patient until the project reaches the necessary maturity. Yes, Alvaro, on the guidance, certainly, please keep in mind and bear with us that the entire guidance is made on 120. So we cannot revalue different components of it at different rates. So when you make this math, which is straightforward, you have to use 138,000,000 for the backlog in order to achieve the guidance for and I think we have this nice slide in the back of our presentation, which would mean that in the first half, we need to achieve something like €77,000,000 to achieve the lower parts and then of course, 1 100% for the higher part. And I think this is what it is. Okay. Very helpful. Thank you. Thank you. The next question comes from Malte Schalmann calling from Warburg Research. Yes, good afternoon. My first question is regarding the gross margin again. To what extent might that be negatively impacted by maybe initial shipments of tools for carbides or even OLED? To what extent do they potentially contribute to the lower margin? Well, on silicon carbide, we do not see an effect on the gross margin. And what was the other question? Whether potential initial OLED contributions might also weigh margin? Was that purely related to the LED products? This relates to the LED products, which were just earlier this time. And I think the margin depends on what we actually do to the customer if we get an order, and that's totally up in the air at the moment from them now. Yes. Okay. And with respect to the lower costs for OLED, does that refer to a reduction of the R and D expenses? Or is that also costs offset by revenue contributions, which might then depend on the point of time when you receive the order? Exactly, as you say. We expect a significant contribution from the revenue coming in on the segment in order to achieve the reduction of impact on our bottom line. Okay. So you would leave the order, let's say, by September, October, the latest to book sales? I think the order comes when it comes. I think we can start the book sales using the percentage of completions once we start once we have the order and we can book the corresponding work against this order, against this project. Yes. Okay. And on the U. S. Dollar sensitivity, I mean, you might have indicated that, but assuming that maybe the dollar stays where it is close to $1.15 would that then imply that you would also again see kind of a 2 percentage point tailwind from the currency development this year on the margin level? We have about 65% to 75% of our sales denominated in dollars, and the increase in revenue generally falls mainly through to the bottom line. We don't have that much in terms of dollar cost anymore since we've had the ALD CBD product line. Okay. So the percentage points not be too long? Correct. Yes. Okay. Then my last question would be on the tax rates. For cash taxes, we would probably assume kind of the minimum taxation in Germany based on the tax loss carry forwards. And then towards the end of the year, you could benefit again from new capitalization of taxes, deferred taxes? You're right. We could expect to see a tax rate of somewhere around 15% overall across the world. And I don't think we will be capitalizing any more deferred taxes at the end of the year unless we see a difference between the 2020 outlook compared with the 2019 outlook. Okay, good. Thanks. Thank you. And we have a follow-up question from Uozu Schupp calling from Deutsche Bank. Yes. Clarify again a follow-up on OLED, please. Is the in the OLED guidance, is the or in the order guidance, is an OLED order included and or in the revenue? And if so, by how much would that be the case? Thank you. The OLED revenue is included in our range, yes, of course. And any potential range? I mean, are we talking €10,000,000 are we talking €20,000,000 or is it higher than that? It's certainly a certain lack of visibility of the exact size of the order. And that's why we see our range is a bit wider than in the previous years. And this is also reflecting the net of visibility of exact size of the order. Right. But we should read a fair amount of confidence that you indeed expect the order if you already put it into numbers given your usual conservatism around giving guidance? I think our probability, as mentioned earlier, has not changed. There's no new information, yes? So but we have, of course, an idea what a potential order size could be, yes? And this order size has been included in our in the range. With this, we conclude our full year 'eighteen results conference call. Thank you very much to all participants who will see or hear you later. Bye bye.