Earnings Call: Q1 2018

Apr 26, 2018

And gentlemen, welcome to Xtron's Q1 2018 Results Conference Call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, VP of IR and Corporate Communications at Extron for opening remarks and introductions. Thank you, operator. Let me start by welcoming you all to Xtron's Q1 2018 results conference call. I'd like to welcome our Executive Board represented by Doctor. Felix Gravert and Doctor. Bernd Schulter as well as our VP of Finance and Administration, Charles Russell. As the operator indicated, this call is being recorded by Extron and is considered copyright material. As such, it cannot be recorded or rebroadcast without expressed permission. Your participation in this call implies your consent to this recording. Please note that our Safe Harbor statement on Page 2 of our results presentation applies throughout this conference call. You may also wish to have a look at our latest IR presentation, which includes additional information on Exelon's markets and its technologies and is available on our website. 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. Bernd Schulte for opening remarks. Bernd? Many thanks, Guido, and welcome from my side as well. Let me start by giving you an overview of the key developments in Q1 before handing over to Charles, who will lead you through the financials. This will then be followed by Felix, who will discuss how we manage the operational challenge today and ahead of us. I will then do a wrap up before handing over to you all for Q and A. Let me start by saying that we had a strong Q1. As a result, we can certainly confirm the 2018 full year guidance we gave at the end of February. And I will give you more details to this guidance at the end of the call. We have a strong foundation with a robust line of products as well as a resilient, cost effective and flexible business model, which enable us to benefit from the current strong market environment that Felix will explain to you later. Secondly, we have gone through a successful reorientation of our technology portfolio and now have a durable and focused product portfolio in growth areas such as specialty LEDs, lasers and power electronics. Thirdly, we have a comprehensive technology and product development roadmap in which we continue to improve the performance of our optoelectronics MRCD systems. And secondly, we are currently enhancing our silicon carbide power offering to make the most productive solution in the market for volume manufacturing. And finally, we are developing disruptive technologies in the OLED area as well as next generation carbon materials such as propene, all of which have significant end market opportunities and will support our growth in the medium and longer term. Let's now return to Q1, which was our strongest start to the year since 2011. Our business enjoyed the positive momentum with strong interest for our full range of products, but in particular for our manufacturing solutions for the production of lasers, such as vertical cavity serving imaging lasers for 3 d sensing and optical datacom applications. This is reflected in the higher than originally expected order intake in Q1, which at €79,000,000 was 27% ahead of the same quarter last year and 20% ahead of the previous quarter. The quarter was strong in terms of revenues, which came in at roughly EUR 62,000,000 which was 16% ahead of the same quarter last year. In terms of profitability, we were both EBIT and net income positive in the Q1 with EBIT of close to €8,000,000 and a net profit of slightly above €12,000,000 Both were, of course, ahead of the same quarter last year when Exxon was loss making. This earnings increase is largely a reflection of an improved product mix and a very strong gross margin performance, which reached 43% in the quarter, supported to a certain degree by lower U. S. Dollar dominated revenues. This was above the 39% we achieved in the previous quarter and the 25% we achieved in Q1 2017. As the product mix varies quarter to quarter and order behavior can be lumpy, this gross margin profile will also fluctuate going forward. At this point, let me now hand you over to Charles for a more detailed overview of the Q1 2018 numbers. Thanks, Doug, and hello to everyone. Turning to Slide 4. Q1 represented a very good start to the year with an order intake of €79,000,000 up 20 percent on the previous quarter and 27% on the €62,000,000 we generated in the Q1 last year. Consequently, we ended the quarter with an equipment backlog of €115,000,000 up 6% on the year end backlog and 31% ahead of the year ago figure. This gives us good visibility for the remainder of the year. We were profitable in both the Q1 at a new bit in net income level. This was largely driven by the increased sales and good product mix producing a 42% gross margin. EBIT for the quarter was €8,000,000 compared with a loss of €13,000,000 in the comparable period in 2017. Net income for the Q1 was €12,000,000 an increase over EBIT being because we recognized €5,000,000 of deferred tax assets. Moving on to the next slide. Let me go into more depth on the income statements. Total revenues recorded in the Q1 were €62,000,000 up from the €54,000,000 in both Q4 and Q1 2017. Compared with previous quarters, the mix of sales was much higher in Europe. 38% of our sales were in Europe this quarter compared with 8% in the year ago period and 13% in Q4 2017. We also had a favorable product mix. Gross margin improved from 25% in Q1 last year to 43% in this quarter, which reflects the sales mix and the absence of the R6 sales, which we had in Q1 2017. Operating expenses of €19,000,000 were less than €26,000,000 in the same quarter last year. Selling and admin expenses are more or less in line with the normal run rate in previous quarters. The major change is in the R and D expense, which is lower because of last year's sales of the Manri business and the freezing of developments in T Force. We are now clearly focused on development for Opto Power and LED. As a result of the increased sales volumes, increased margins and lower operating expense, EBIT for the Q1 with a profit of €8,000,000 a significant improvement over Q1 2017. Because of the transition from losses to profitability, we've capitalized €5,000,000 of deferred tax assets, giving an overall tax credit in the quarter of €4,000,000 Obviously, that's a transition effect only. Consequently, the net result for Q1 was €12,000,000 profit. Moving to Slide 6, which shows our cash flow statement. As expected, largely because of an agreed payment related to the sale of our ALD CBD product line, we were cash flow negative in the Q1. Receivables DSO also increased from 33 to 43 days, which is a short term timing effect related to the high level of sales in the month of March. Operating cash flow was minus €21,000,000 in contrast to the previous periods where cash flow was strongly positive. We do expect that the operating cash flow will be positive for the year. Cash at the quarter end was €223,000,000 compared with €246,000,000 at year end. Turning to the next slide, our balance sheet. The principal changes in Exteron's balance sheet since last year reflect the increased levels of business. Inventories have increased because of increased orders. Receivables have increased in line with sales. Equity has increased because of the profit. And as expected, liabilities reduced because of payments related to the memory business sale. Now let me hand you over to Fruegib, who will give you some operational insights. Thank you, Charles. In the last earnings calls, we have provided you a comprehensive perspective on the market and our strategy in the core areas of to empower. This time, we would like to discuss some operational topics that are important to us. Our numbers and guidance reflect a strong uptake in revenue and orders in the MOCVD business. Our manufacturing model is very well capable of digesting this upswing. It is based largely on outsourced and delivery and pre assembly from our suppliers. It focuses the in house work mainly on production planning, orchestration of the assembly on our shop floor and test of the assembly tools. Thus, we are not running into any capacity constraints with respect to our own staff. However, we have to manage an overall tightening of supply and part availability along the semiconductor equipment supply chain. In order to do so, we monitor this very closely. And where needed, we preorder long lead items ahead of time to be able to serve customer demand and to avoid running into limitations for our output. We do not expect risks regarding our inventory level as this has a small effect compared with the inventory attributable to tools which are built to customer orders. Thus, we think we are well set to deliver the tools according to our customers' demand. Furthermore, we will need to install a significantly larger number of tools with our customers in the field, especially in the second half of twenty eighteen. Our service team has been sized to cope with the installation level of 2017, such that the increased output costs for additional installation capacity this year. As we do not want to provide this only via an increased headcount, some may be needed, we have started a service and installation efficiency program targeted at reducing the installation time per tool. Efficiency gains are a more elegant way to boost output, especially in boom times that we are seeing now. Finally, the growing number of customers in the power electronics and automotive industry as well as some of the laser customers asked for different and higher quality standards. We also addressed this topic with a dedicated quality initiative. In summary, I think we are well equipped to manage the above mentioned operational topics as we have the right manufacturing model and a set of initiatives in place to address them. Let me also briefly comment on our OLED business, Arkeeva, which addresses the $50,000,000,000 end market opportunity by 2021 with their OLED display technology. The project is progressing as announced in the February earnings call. Our Gen 2 is being set up and tested in a facility in Asia and will soon be installed at a customer's facility in order to qualify the technology for mass production. Discussion with a joint venture partner intensely ongoing, but has not been concluded yet. With that, let me hand you back to Bernd for a wrap up. Thank you, Felix. Before we finish the presentation, let me summarize the main operational points we present to you today and then give you our perspective on the broader business issues we are addressing in the months ahead. In summary, Q1 was solid with strong revenues, higher than expected orders and margins, which gives us increasing confidence for this year. We are addressing the operational topics coming along with a strong business, and therefore, we do not see limitations to deliver as desired. Based on these results, we confirm our 2018 full year guidance given in February 2018 shown on Slide 8. We expect revenues and order intake in the range of €230,000,000 to €260,000,000 and EBIT margin between 5% 10% of revenues. However, due to the positive development of the business, we expect revenues and EBIT margin to be close to the top end of their guided ranges. Gross margin is expected to be between 35% 40 percent. A positive operating cash flow for the year is also expected. With that, I'll pass you back to Guido, and we are now happy to take your questions. Thank you, Burns, Philip and Charles. Operator, we'll now take the questions, please. Thank And the first questioner is Uwe Schupp from Deutsche Bank. Yes, good afternoon, gentlemen. Two questions, please, from my side. Firstly, again, on the guidance and the well, basically implied €50,000,000 or so that you are implicitly guiding for the Q2. Question would be whether where you saw this €50,000,000 as your kind of core scenario from today's perspective? Or are you just trying to be conservative as possible in order to start rebuilding a track record? Or what is really behind? In other words, are you expecting a serious slowdown in VCSEL demand because of current nervousness in the market versus a potential bailout scenario in for 2019 devices coming to the market? Secondly, on the gross margin, could you help us understand a little bit better what the thinking behind your gross margin scenario really is? We heard you saying that you're expecting sales and also EBIT being at the upper end. Why wouldn't that necessarily be the case for the gross margin? And I heard you saying, Bernd, that you indicated that there will be always some fluctuation. But if there would be fluctuation in the coming quarters, wouldn't that also imply that given the higher end of the EBIT margin guidance that there's also some relief on the OpEx line as well. So just some background around that would be appreciated. Thank you. Yes, Mr. Schupps, thank you for your questions. Coming to the EUR 50,000,000 calculated order intake, which is missing to hit exactly the €260,000,000 We have to see certainly EUR 50,000,000 means this is an order intake, which is shippable this year. And we're seeing definitely a continued interest in terms of requests from various kinds of applications, not just VCSEL, but also other MOCVD equipment applications. So I think it's a fair and I think reasonable and realistic statement to say that we are really close to the upper end of the guidance. And we have also to see what is doable in terms of our production and what customers really also are able to take with their facilities within this year. So, this led us then to stay with the guidance, however, to refine it to come to the upper end. Second to your question about gross margin, I think we had a very good with 43%, we have been higher than the guided gross margins. And Q1 was certainly a very strong quarter, coming with several effects. 1, I think we mentioned Charles mentioned this, we had a relatively high sale into euro based orders. So we have less effect from the exchange rate. But secondly, also we had a significantly high mix into higher margin products. But this varies because going forward, we expect more orders to be shipped, which have more related with the LED business, which by nature have a lower cost margin due to the competitive environment. So that leaves us really to say we are between 35% 40% of gross margin in the average for the entire year. Yes. Thank you. That's very clear. Just to kind of follow-up on your on the first point. So the €50,000,000 is basically not your basic core guidance in terms of Q2 orders, but basically the number of orders that would be shippable for this year and the rest would potentially be then already for next year? Yes, exactly. And you should also mean this is only equipment. In the chart where we explained the split, we're assuming typically something like €10,000,000 for after sales, which would be then on top of this for the order intake. That's very clear. Thank you very much. The next questioner is Weisel Taze from ODDO. Yes. Hi. Thank you for taking my questions. The first one would be basically if we look at the Q1. Yes, the auto part was very strong, but the rest of the business was which you indicated in the LED space, particularly that it will be not a year like last year. However, can you explain a little bit on the power and the LED part, the trajectory between the quarters, what we can expect for the rest of the year because Q1 seems to be very, very weak on LED and power part? Let me comment on the LED part. Typically, orders for LEDs are typically quite lumpy. Typically, these orders come from China and are typically coming in amount of 5, 10 something even more systems per order. And as such then, we're seeing quite high fluctuations from quarter to quarter for the different applications. So as you've quite rightly seen, that effect for Q1 was low, doesn't mean it will not be different in the future. And for power electronics, I mean, that market certainly is still a very it's a growing market on a in the moment relatively low level. So most of our customers are in the phase of sampling to their customers. And we are not in the phase where customers are really strongly ramping into high volume manufacturing. I think this is not to be expected for system shipments early this year. So we expect this is something the growth really comes maybe in next year or beyond. Hello? Can you hear me? Yes, sorry. There was something in the line. So on the just a follow-up on Mr. Schupp's question on the order momentum in Q2, I mean, we are now end of April. So would you say that you could already see in April a slowdown? Or would you say, okay, the pace has been still okay? And also considering from the semiconductor companies, what we heard up to now in the earnings season was okay, No preproduction in Q2, so for the iPhone X 3 d sensing modules. So it looks like there will be still capacities for Q2 needed. Or yes, would be a color the VCSEL laser momentum and on the order momentum into Q2 in general would be very helpful. We are not guiding and give precise guidance on next quarter's order intake. However, let me say that we're seeing a very healthy continued request from the market for systems and our sales team is very active. But please also keep in mind that we're not just selling VCSEL tools. We have a broad range of products in different applications. And seeing that Q1 was very strong for laser, doesn't mean that our order intake in the next quarter has to come down. Even though that there are rumors and gossips in the market that there is obviously some slowdown in vehicle demand for certain end applications. And then another one. On one of your customers last year on the LED side, Osram, it's a company I'm not following, but I was thinking that they might invest in new capacities here in Germany as well. I mean, I don't know if you can comment on Osram, but did this not happen? I mean, that was kind of expectations also for first half to see some LED demand coming from this customer? I mean, what happened at on this side? I mean, you're quite right. We are not able to comment on specific customers. So please, please accept that we cannot make a statement. But I would suggest you may ask Osram directly. Okay. Okay, yes, fair enough. On the service business, the Q1, I think it was €12,000,000 quarterly revenues. Is that a reasonable level for the rest of the year because it's a stable business? Or were there some extra one offs or something? Well, we have typically in the range between €10,000,000 to €12,000,000 after sales business. This is a very typical range, yes. Okay. Thank you very much. And next up is Andrew Gardiner from Barclays. Good afternoon, gentlemen. Thanks for taking the question. I was interested in some of the comments you made, Felix, regarding the supply chain and the potential tightness for certain components across the semi equipment chain and just sort of comparing that to how you're framing the 2018 guidance. Are you guys suggesting now that €260,000,000 the top end of that range, regardless of where orders may be in the next 3 months or so, that really is a sort of a physical limit, not perhaps so from your manufacturing standpoint, but just in terms of sourcing of components. So therefore, it wouldn't be prudent for us to be thinking of revenue beyond that just from a sourcing point of view. No, that was not quite the message. So the message was, first of all, that we would be close to the top of the guidance. That was the first message. And the message I was giving you regarding the operational topics was that we do not have limitations with respect to output, neither with respect to our manufacturing capabilities nor with respect to our supply base, but rather that we are managing very carefully in order to be able to deliver according to the guidance that we have given. And we have this on a radar, and therefore, we are able to ship despite the strongly increased output. That is the message. Maybe, Andrew, let me add here on this. I think Felix's presentation was just to say the opposite, what you're just suggesting. We have been asked of where our limits are. And please keep in mind that 6, 7 years ago, when we had the LED boom, we were shipping 100 to 150 reactors per quarter. And so the capability of our flexible very flexible manufacturing strategy and concept, I think, allows us to ramp and as needed to the market. Of course, there are challenges. And that's, I think, also to give a credit to our operational team, we are able to manage those challenges. Understood. And I can certainly appreciate on your side, your people, you clearly have that capacity as you suggested, you demonstrated it in the past. I was just interested in the tightness in the supply chain and how much sort of room for flexibility you have. If you guys are catering to some interesting markets at the moment, if orders indeed were there over the next quarter or so, what is the theoretical revenue number for this year that you could deliver? Yes, it is being monitored. It is being managed. So the message to you is that whatever orders come, the orders will be shipped. Okay. Fair enough. I suppose another one just on Opto. One of your lead customers, IQE, have been pretty clear about their ordering and installation patterns. I think we can assume that they've taken a reasonable number of sort of revenue you guys are recognizing in the quarter. I was just wondering beyond that sort of elsewhere within the Opto space and can you give us a sense as to sort of regionally where the shipments are? There's a lot of noise about Taiwanese or Chinese customers trying to ramp their own capabilities in this area, perhaps initially R and D, but ultimately for commercial volumes. Can you give us just sort of a comment on the breadth of demand that you're seeing there? Thank you. Yeah. This is thank you for the question. So for optoelectronic application, we have a very from regional perspective, a very broad spread. So we're seeing orders, requests, etcetera and sales into Europe. You mentioned non customer, but certainly also in the United States, but also into Taiwan as well as China. And certainly, they are on different level. So as far we can see, different level of qualifications with end customers. But definitely, the interest and our business goes in these various in this very broad regional split. Thanks very much. And the next questioner is Janardan Menon from Liberum. Over to you. Hi, good afternoon. Thanks for taking my question. Just to go back to your potential peak revenues for the year again, maybe I can ask it one last time in a different way. If theoretically you were to take orders of, let's say, another $70,000,000 of equipment orders in Q2, would it is it theoretically possible that you would exceed €260,000,000 of revenue for the full year this year? I think in principle, and I think Felix tried to mention this, from what we see in terms of order, which is a reasonable assumption, we have no concern that we can serve these orders and ship them this year. Understood. And then just moving on to your OLED business. Can you just give us an update? You did give us quite a bit of an update on your Capital Markets Day recently. But are we still on track that if the customer is happy with the way the Gen 2 system is going, we are looking at an order for a larger development system by the end of the year? And if so, would that also be included in your order trend? Or because it's a development system, will you keep it out of that? So as mentioned, yes, the status is unchanged, yet making good progress since we last met and since also the last earnings call in February, which is the Gen tool is being set up and tested. And we expect this soon to be moved into the customer's facility. And then as you know, it's about the tool to pass the qualification. It will be thoroughly tested. And based on those tests, we will then the customer will make its decision. And if it is a decision for another system, would that be included in your order book in the second half of the year if it does come in the second half? I think we have not considered an order in our order forecast of 2.30, 2 $60,000,000 for an OLED system, whatever size it might be. Understood. And just lastly, can you give us any guidance for your tax rate going forward? You took a tax benefit in the quarter, but what should we be modeling as an ongoing tax rate for the business? I think there's an ongoing tax rate for the business. We should be modeling somewhere in the range of 15% to 20% because we have tax to pay in some of the other countries apart from Germany as well, and we also have tax to pay in Germany. So 15% to 20%, maybe at the lower end of that range. Understood. Thank you very much. And next up is Wachner from MainFirst Bank. Yes, good afternoon. Thank you for taking my question. A follow-up on OLED. You I mean, you have 2 discussions, one with your customer that you said is progressing well and the second one is with your potential joint venture partner. And how is this going? And when should we expect a decision? Yes. This discussion is also progressing well, but not concluded yet. You know such joint venture discussions need to cover many aspects, yes. And these aspects, if you already want to discuss it out, that simply takes some time, So this is why it continues. But also, again, on this one, we do not want to give a forecast now when it is concluded. It will be done when both sides have achieved a good or an excellent win win result that makes this business together successful. But you could serve this follow-up R and D order with your customer without having concluded joint venture talks. Is that right? Or do you have a plan B saying then you do it on your own? Or There is no dependency on the operational follow on order on having concluded by then the joint venture discussion, yes. However, for the longer term, the objective is still to close the joint venture and come together with a partner, yes? But that is not a limiting factor for anything in the near term. Okay. And second question on as you mentioned in your prepared remarks, VCSEL is driving sales closer to EUR 260,000,000 this year. How much of that revenue number will be VCSEL equipment? Certainly, we do not specify this in detail. I think what we have said is that we had a very, very good sales in the Q1. And with this, I think we have the confidence and having particular this strong order intake in Q1, which was dominated by laser applications, we are having now this confidence that we will be closer to the upper end of the guidance. But we do not give now a breakdown of the application. We spend this for the annual results in February next year. Okay. Thank you. And the next questioner is Gunther Halselder from Baader Hefei. Yes. Just some follow-up questions. Actually, one on the what you just said dominated by Optor, the order intake. You disclosed that sales, Optor accounted for around 70%. So it's in the Q1, it was similar then also in the order intake level. That was what you were indicating? So sorry, can you get it again? I haven't catch your exact question. So we said Yes. You said you disclosed that Opto accounted for 70 percent of sales. And so I was asking whether a similar level is also reflected in the order intake in the first quarter from Opto? Yes, yes, yes. Not Huawei. Okay. Great. And given the I was the size of the orders and number of tools, can you comment on what was the largest order you had in the Q1 and how many tools it was to get an idea how this structure is behind this large order number? Yes. We mentioned before in previous calls that in laser, you have a different order behavior than in LED. Laser typically customer order smaller single digit amounts in orders, sometimes order 1 by 1, other maybe up to 5. This is the maximum we have seen so far in terms of individual orders. Then one follow-up on your comments on the gross margin in the second quarter. I mean, if you're saying there's this high share of Opto also in the order intake, I mean, shouldn't this positive impact on the gross margin continue then in the second quarter? Or are the shipment rates more than in the second half of the year? Definitely. I mean, it's the point what I try to make is that we will see fluctuations quarter to quarter. It depends where is the majority of shipments into what applications are going. And as Q1 was strongly influenced by shipments into the laser business. We had a very favorable product mix. And therefore, a very with 43%, we've been clearly above our guided range. Nevertheless, by saying we will still stay in the guided range, you can assume that there will be quarters which will be less than the Q1. And that's all we want to say. So don't expect 43% for the rest of the year. There will be quarters where we will be below that. Yes. Maybe a last question on the OLED fill up question. What's your visibility regarding the timing of the OLED tool being moved to the customer's facility? Is it what is there a technology trigger? Or is it more timing? Thanks. It is essentially a technology trigger. As we mentioned in the February earnings call, the tool is being set up and tested, and it's tested together with our customer together. That also we mentioned before. And then when these tests and modifications reach a certain maturity level, that is then the trigger point, a technical trigger point for the tool to move into the customer's facility. Okay, great. Many thanks. And now we come to the next questioner. It is Malte Schaumann from Warburg Research. My questions have been answered. Thanks. Thank you. So as there are no more questions in the line, this would conclude our Q1 2018 results conference call. And we are looking forward welcoming you again on July 26 to our next results conference call for H1. Thank you very much. Bye.