Earnings Call: Q3 2017

Oct 26, 2017

Conference is now being recorded. Ladies and gentlemen, welcome to Xtron's Q3 2017 Results Conference Call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, VP of Investor Relations and Corporate Communications at Exstrand, for opening remarks and introductions. Thank you, operator. Let me start by welcoming you all to our Q3 2017 results conference call. I'd like to welcome our Executive Board, Doctor. Felix Grahard and Doctor. Ben Schulte 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 re recorded or rebroadcast without expressed permission. Your participation in this call implies your consent to this recording. As with previous results conference calls, I trust that all participants have our results presentation slides, Page 2, which contain the usual Safe Harbor statement. I will therefore not read it out loud, but would like to point out that it applies throughout this conference call. You may also wish to have a look at our latest IR presentation, which includes additional of the new information on Exron's market and its technologies and is available on our website. 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 Doctor. Ben Schulte for opening remarks, Mark, on Slide number 3. Thanks a lot, Guido, and welcome to the presentation of Exelon's Q3 2017 results. I'd like to start with an overview of the major developments in Q3 before handing over to Felix Travers, my new colleague in the Extra Management Board, who will introduce himself and give you more insight around our priorities in the coming quarters. This will be followed by Charles Russell, our Vice President of Finance and Administration, who will guide you through our 9 month financials. I will then come back to you with a summary of our general business prospects. We delivered a solid Q3 with revenues of over €62,000,000 and an order intake in excess of €69,000,000 Both were stronger than the previous quarter, which reflects the demand for our MOS DVD solutions, in particular for the production of lasers for 3 d sensing and datacom as well as red, orange, yellow and specialty LEDs. We have announced recently that we have received a significant order from IPV, one of the key suppliers in the field of vehicles, underlining the dynamics in this market. We're also becoming excited about our opportunities in the polycloids area, which Felix will go into more detail later. Now to Slide 4, our guidance. Given the increased demand across most of our markets for the second time this year, we are able to raise our guidance. Now we have refined our guidance for 2017 revenues to the upper end to be in between EUR 220,000,000 EUR 230,000,000 and we have raised our order intake guidance to a range of EUR 240,000,000 EUR 2 €60,000,000 We announced in the previous quarter that we have entered into an agreement with UGENE Technology in South Korea for the sale of our ALD and CBD memory product line. We received the approval for that transaction by Syphios early this week. With this, we believe that the transaction will be closed this year, and this puts us in a position to forecast a breakeven on EBIT level for 2017. Regarding our orders activities, we have established Akita, our OLED subsidiary, where we are seeking a joint venture partner to share both the risk and the rewards of what we believe is a very big market opportunity. Now I'm very happy to introduce you to Doctor. Felix Carras, who joined me on the Exxon Executive Board in August. I'm very much enjoying working with him, and we are both convinced that we have a team in place, which can deliver substantial shareholder value in the coming years. Felix? Many thanks, Bernd, and welcome from my side as well. Since this is the first time that I'm talking to you, I would like to share with you my initial impressions on Exteron and on our strategic priorities in the coming quarters. In terms of my background, I spent the last 4 years at Infineon, where I headed the business of high voltage power transistors. Prior to that, I worked as a consultant at McKinsey in the areas of semiconductors and industrial high-tech. Through my work in both these companies, I got to know Xtron. And having been a customer of Xtron for a number of years, I'm deeply convinced of the technology and the market potential of the company in the years to come. In the last year, Exstrum has successfully made the move beyond the commodity LED business and now addresses a number of markets of higher value that play to the strength of the company, in VCSELs, in laser diodes and in the emerging market for power semiconductor. Our customers ask for the position technology of highest performance. Here, Anxtrom has a lot of differentiation potential and the excellent performance of its product proves value for its customer. We believe that our advanced market will grow over the coming years into a sizable business opportunity for Extron. Let me take power semiconductors as an example. Today, this market relies on silicon as a material. The wideband gap materials gallium nitride and silicon carbide offer a higher energy efficiency and allow for smaller form factors of the power converters. For example, industry experts estimate that a silicon carbide based main inverter in an electric vehicle allows a driving range that is up to 10% more than a silicon based solution. Alternatively, the cost of the vehicle battery can be reduced by up to 10%. We see the 1st EV manufacturers adopting silicon carbide based power electronics in their products today, and we expect others to follow in the future. Now none of us know how fast EVs will grow and the adoption of compound based power electronics in them. Nevertheless, we believe that electrification of transportation is providing us with growth opportunities over a multiyear period. Having worked in the power electronics industry, I believe that we are at the beginning of a transition towards wideband materials, and I'm convinced that Extron has a sizable market opportunity in this area going forward. Extron is the technology leader in the segment today, and together with our customers, we want to shape market adoption of widebandgap semiconductors. As announced earlier, Extron is committed to return to sustainable profitability in the coming quarters, which is the number one priority for both myself and Bernd. We want to achieve this goal by maintaining or gaining segment leadership in the above mentioned growing high value markets. In order to achieve this, we will focus on customer value in our core segments and we will make targeted investments in R and D to strengthen our offering, but only where the market allows for a well defined return of investment. Our OLED business, now in Ateeva, is approaching major milestones in terms of customer qualification. Our Generation 2 pilot manufacturing tool is in final assembly at the customer and will be ready for testing by the customer this year. We are in discussions with potential joint venture partners in Asia for this business. With this, I thank you for your attention. Let me hand back to Charles, who will go through our Q3 number in detail. Thanks, Felix, and hello to everyone. Turning to Slide 6, our key financials. Let me first explain the adjustments we have made. These remove two effects, which do not relate to our continuing business activities. Firstly, in the quarter, we received payments for a shipment made in prior years, which has had a positive effect of €4,900,000 on order intake and €4,600,000 on both revenues and margins. Secondly, we have €1,400,000 in restructuring costs, mainly related to the sale of the ALD and CBD product line. Now turning now to the adjusted values. Orders received in Q3 of €64,500,000 continued the strong trend we have seen on order intake in recent quarters. On a year to date basis, we generated €193,000,000 in orders, giving a good indication of the positive progress we are making in our core markets. The strong order intake means that we ended the 3rd quarter with an order backlog for equipment of €99,000,000 6% higher than the Q2 2017 backlog. Revenues during the Q3 of 2017 were €58,000,000 compared with €61,000,000 in the 2nd quarter, the change reflecting exchange rate movements. The comparable for Q3 2016 was €51,000,000 Moving to Page 7, you will see that our gross margin improved from 26% in Q2 to 35% in the 3rd quarter. The improved gross margin is due to a better product mix and the absence of low margin sales, which affected the first half year. Operating expenses of just under €19,000,000 still include the costs of the ALD CBD business, the sale of which we expect to close in Q4 2017. In the quarter, we achieved an EBIT profit of 1 point €4,000,000 and a net profit of €1,100,000 Moving to Page 8, which shows our cash flow statement for the 1st 9 months of 2017 as well as the Q3. On both a quarterly and 9 month basis, we generated a positive cash flow from operating activities, euros 56,000,000 year to date compared with minus €35,000,000 in the year ago period. In the quarter, euros 13,000,000 compared with €9,000,000 in Q2. The quarterly positive cash flow is largely due to the profit and advance payments received from customers. Turning to the next slide, our balance sheet. Inventories have been cleared of slow moving items and the €40,000,000 represent over 4 index returns. Receivables at €21,000,000 remained at a very good level and have the equivalent of 31 days sales outstanding. You will also see the continuing growth in advance payments from customers, which now total €42,000,000 And our positive cash flow explains the growth in cash from EUR 197,000,000 last quarter to EUR 204,000,000 this quarter. With that, let me hand you back to Bernd. Thank you, Charles. Going forward, the major short term growth driver will be around our MOCD technology across specialty LEDs and laser applications. In the midterm, the emergence of white bandgap semiconductor power electronics applications represents a growing opportunity for us. With the approval from CFIUS and the anticipation that the sale of our memory business will be closed in 2017, we expect to achieve EBIT breakeven for 2017 and continue to expect to generate a positive free cash flow for the year. We are in discussions with potential partners for Akiva. In addition, we are well on track to improve our margins and to optimize OpEx and align them with the revenues we generate. We are clearly focused on returning to profitability next year. This requires us to remain disciplined about cost and cash flow. Finally, we are very confident in our strategy focusing on our core technologies and we believe that we are well positioned to take advantage of the opportunities we are seeing in front of us: compound semiconductors, carbon nanomaterials and OLEDs. I would like to thank you for your attention. And with that, I'll pass you back to Guido before we take some questions. Thank you, Bjorn, Felix and Charles. Operator, we'll now take the questions, please. Thank And the first questioner is Jean Robert Menon from Liberum. May we have your questions, please? Hi, good afternoon. Thanks for taking my questions. I have a couple. One is, you said you've taken some orders for Victilva and you talked about the publicly about the IQE orders. But the general view in the industry is that large North American smartphone and who is currently using 3 d sensing will spread this across the entire model range by the second half of next year, which would, in most cases, require a doubling of volume or perhaps even higher than that for all 3 d sensing components, including VCSEL arrays. I was just wondering, is that a view that you share? And if so, can we should we not expect orders for that additional capacity to come on board sooner rather than later? Or is there any reason why such orders may not come in any such magnitude over this period of time? And also while on the order side, in your presentations, etcetera, you talk about things like micro LEDs as well as silicon carbide, gallium nitride, which is perhaps slightly more longer term. But once again, do you think these are opportunities which could become converted to orders in 2018 or in any significant way? Or is it more sort of beyond that? Significant way? Or is it more sort of beyond that? Yes. Thank you for the question, Ms. Bernd. Yes, certainly, we are positive about the laser application, I can share with you that about 60% of our order intake in this quarter was into laser application, not only Wixter, but overall laser application. So this is a very positive movement right now. And we also believe this is going to continue into next year. The detail, of course, we know that we cannot share the exact numbers. Nevertheless, we are positive about the VCSEL. And as I mentioned in my speech, yes, we are very excited about this. And that is certainly one of the drivers of our current business and the business in the coming quarters. Would that therefore would you therefore think that your order levels at some point can rise from current levels? Or is that too difficult to predict at this point in time? It's quite difficult to predict. And as I told you, the current order level already include quite some impact from that market growth. Understood. And on the other applications like microLEDs, gallium, micro, etcetera? Yes. Let me speak quickly about microLED and then Felix will come back on the power electronics. So microLED definitely is something from the mid to longer term. Definitely, we're selling few tools here and there more or less for, I'd say, for qualification purposes for customers. But the major technical challenge here is in the mass transfer of LEDs, which is not related to the epi growth, which is our part of the business. And what I'm hearing and I'm hearing the same thing probably than you, there is quite some technical challenge. And I do not expect a volume ramp for microlities within short term. Nevertheless, there is sometimes there is some confusion. There is certainly the business of the so called fine pitch display, which we have to differentiate from microLED. These are very small LEDs but significantly bigger than microLEDs, which still using traditional transfer and they are used for, let's say, for 150 inches diameter displays, mainly in commercial applications. And that is certainly a driver of the business today and mainly for REC LED but also for So let me add from my side, this is still speaking about the power electronics side. So we currently see a lot of very strong momentum for the market of silicon carbide MOSFET. So this is the range, 6 100 volt, 1217, 3.3 kilovolt. Main applications going to some parts in the automotive. This is the automotive main inverter. This is the onboard charger. This is electric vehicle charging. This is also photovoltaic. And we see that the whole industry is massively moving in that direction. We are expecting also strong momentum going forward in the next few years. Customers are currently in the development phase of this product. We see that product signed in the year 2018 1st market adoption. We all know the power electronics industry and the automotive industry is a relatively slow moving industry if we compare this with the consumer electronics industry. But we are now positioning ourselves, getting tools into all the different customers, making then sure that if in the years 2019, 2021, the real volume orders come, we are well placed. So that is the market for silicon carbide, very strong momentum. The other market in the power arena is the gallium nitride. Here we have to differentiate between the Gallium Nitride RS market, which is used, for example, for radio base station, the market already very strong and continuing to grow, Exxon very well positioned with a number of customers, continues to grow, whereas the market for gallium nitride power devices, 100 to 600 volt, And it's moving a little further out. It's having a little softer staff than the industry overall was expecting, but still in the next couple of years are expected to be strong. Understood. But just a quick follow-up. Some companies in silicon carbide like Wolfspeed has publicly said that they will double capacity by the end of next year. 2.6 has also said that they're committing a lot of CapEx to increasing capacity. So are you beginning to see the effects of that on your order book already? Or is that something yet to come? Yes, we definitely see that. Understood. Thank you very much. And the next questions come from Basil Taze from ODDO. Over to you, Mr. Taze. Yes. Hi. Thank you for squeezing me in. Just a follow-up on the power semiconductors. I mean, I understand that on the silicon carbide and on gallium nitride, we are probably better positioned on gallium nitride. But in silicon carbide, who are the main competitors? And what is really your share in this business? I guess, Tokyo Electronics in this market as well? So the key competitors in the silicon carbide tool market is TEL, is LPE and is nuclear, just the main three of them. As of current and thought base, Extron is professional to the number of tools. We have made significant advances in performance over the summer of 20 17 and is our plan going forward to capture now a leadership position in this. Okay. In the orders you mentioned, the 60% related to laser, And the 40%, was there already orders in power semiconductors? Or can you give a rough indication where this forty percent were mainly related to? The other 40% has been mainly related to LED applications and others. I think the power electronics, there has been some. And don't forget, we still have in Q3 our silicon business, where we deliver tools for memory applications to memory makers. Okay. And then looking at your order guidance, I mean, that implies roughly €50,000,000 plus €6,000,000 in Q4. Is that a clean number without the memory business? Yes, it is. Okay. Great. And then on the financials, the OpEx run rate, it was roughly EUR 18,000,000 something in Q3. And if I got this correct, you mentioned around CHF 1,000,000,000 restructuring expenses. So let's say €70,000,000 is that a realistic run rate going into Q4 and into next year? Or are still cost savings kicking in? The It's Charles, the OpEx in Q3 and at the beginning of Q4 will still continue to contain the ALD CBD OpEx, which stops at the point of close, which is sometime during Q4, but expected to be lower in 2018 in respect to the ARD CBD, we expect it to be 0. But there are lumpiness in the OLED activity, which may or may not change quarter on quarter. But overall, we expect it to be reduced by the ALD CBD activity. Okay. So what would be a good proxy quarterly run rate going really into next year? So what should we model that? In terms of OpEx? I think maybe I don't think we've given any guidance on that at all, Adam. So I think it's just wait and see at the moment. We don't really want to give any guidance on the 2018 numbers at the moment except profitability of it. No, no. It's not really a guidance, but given that a lot of moving parts are still there, so just really to get a get feeling for the underlying OpEx run rate. I mean not as a guidance, just to see what I think it's a little bit too early to give this information. Keep in mind that we still are in discussion here with regard to AVEVA. And this has the timing in itself has quite some influence on that. I think give us please understand that we need some time to clarify and then we certainly answer this question. No problem. And one final question. The extra or the one off gain with the customer now paying for delivery in the past, A little bit color around that. What's the customer? What was the background on that? I mean, I certainly cannot name the customer. You will understand that. But I tell you the story. I think this has been tools we have booked order intake and took the shipment in 2013. And we had some over the time some concerns about the ability of the customer that we can collect the payments. And as a consequence, we have taken these systems out of the backlog and therefore also corrected the order intake. And now having received all outstanding payments, we were able to book full revenue and had also the order intake accordingly. We were not we didn't actually book the order intake before, which is why we booked it now. The revenue was declared because we're not allowed to take revenue if we do not expect to receive the payments. Okay, great. Thank you. And the next questioner is Gunther Rolselder from Baader Helvea. Question on the silicon business. I think it was like €11,000,000 sales in the 3rd quarter. Was this basically also in line with the order intake what you had with silicon? No, the order intake was a bit lower. Okay. And in terms of the gross margin, what's your negative impact from the silicon business in Q3? So is it below your average gross margin? Overall, the silicon business gross margin is somewhat lower than our overall gross margin. But in Q3, it was more or less the same as the rest of the business. So it was not a drag on the Q3 margin. Okay. And last question, I think, for Doctor. Gravert, it's he already talked about the competitiveness in the power semiconductor segment regarding silicon carbide. So I was just wondering on the gallium nitride side, where you already have a relatively strong position. So how do you see the risk in a single wafer penetration on the gallium nitride side at power semiconductor makers over the next years? So based on what you saw at Exxon, you're seeing at Exxon right now and also, of course, competition maybe also based on your experience at Infineon. Do you believe that batch systems will continue to dominate this market segment? Or do you think there's a risk that single wafer might move in? Yes. So on the gallium nitride power and the gallium nitride RS, as the Exstron in a very strong position. And especially, I do see the batch tools also going forward in a very strong position. The reason being that you have relatively long process time because you talk about low growth rate and thick epi layer. And this, as I just say, by the fundamental underlying physical principles, benefits the batch reactor over a single wafer tool. So we see ourselves in a leadership position. We have seen in the pipeline, and we see Xtron also in the future in the leadership position. And on the end, let's say not on the RF, then on the power side? And power. Okay. Same underlying physics, device physics. Okay. Thank you. And next up is Harald Schnitzel from Bifrost Bank. I've got a question on, well, the restructuring. Where do we see the breakeven provided to find a partner for OLED? And where would be the breakeven if you would fail to find a partner? Thank you. That is probably I have to give you, Achim, the same answer than before. I think we are in the still in the phase of structuring the Aperta business. As such, I'm we are not with that information. Definitely, you heard and we will stick to this that we plan to be profitable next year. But to exactly what extent profitability means, we are not ready yet to comment. Does that mean in your guidance, you assume that the OLED business has found a partner? We assume that we will find a partner in 2018. Thank you. And now we come to the next questioner. It is Craig Irwin from Roth Capital. Over to you. Hi, yes. This is Craig Irwin from ROTH. So the question that all of my clients have been asking me about silicon carbide is how do we quantify the market? So everybody wants to know is this a 1,000 reactor opportunity or maybe something in the low 100s? What would you point to for investors to dissect this market and understand the potential for Astrum? Sorry, Richard. So the silicon carbide market, we have to differentiate in 2 segments. There is an industrial segment and there is an automotive segment. The automotive segment probably outnumbering the industrial by a factor of 2% to 5%. And in the end, it will depend on the penetration, 1st of all, and the adoption of electric vehicles as a total percentage of cars being sold and then the adoption of silicon carbide within electric vehicles. And I think we all know how big uncertainties are among those. So in the end, I would assume that we talked here about several 100, but not about several thousands of reactors, but just an order of magnitude here. Okay. And just to clarify, both several 100 reactors, is that consistent with some of the 3rd party analysts' estimates on the market? We have compared with those and it matches. Okay. So if we looked at those estimates and had a different view, you would say we would need to move the numbers consistent with that view? So once again, as David, there's very large error bias because it's really about predicting the adoption rate of electric vehicles, percentage of total cars and adoption of silicon carbide in these. And I would not want to give you a guidance on these 2 big numbers. Okay, excellent. And then just another quick question, if I can. The G5 units that you've been selling predominantly into this market, can you maybe talk about relative pricing versus similar units that you offer? Are these premium units? And do you expect the new technology that you're introducing to this market receive a premium? I wouldn't call it a premium because these tools are typically fully automated and that additional automation certainly comes with a higher price tag. So the range is can be anywhere between $2,500,000 $3,500,000 Excellent. Excellent. That's great. Well, thanks again. We look forward to the customer feedback on your new technology. Thanks. Thank you. With that, we would like to close today's call. Thank you for your interest and your questions. You know where to find us should you have any additional or follow-up questions. Have a good day, and bye bye. The conference