Earnings Call: Q1 2017

Apr 25, 2017

Good morning, ladies and gentlemen, and welcome to Xtron's Q1 2017 Results Conference Call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Picot, Director of Investor Relations and Corporate Communications at Xtron, for opening remarks and introductions. Thank you, operator. Let me start by welcoming you all Xtron's Q1 2017 results conference call. Thank you for attending today's call. I'd like to welcome our CEO, Kim Schindelho as well as our Chief Accounting Officer, Charles Russell and COO, Doctor. Bernd Schulz. 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 the concept of this recording. As with previous results conference call, I trust that all participants have our results presentation slides, Page 2 of which contains the usual Safe Harbor statement. I will therefore not read it aloud, 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 information on Exelon's market and its technologies and is available on our website. This call is not being immediately presented in our 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 Kim Schindler, our Exane CEO, for opening remarks. Kim? Good deal. Thank you very much. Ladies and gentlemen, on behalf of Exelon's executive board, let me welcome you to the presentation of our Q1 2017 results. My name is Kim Schindelhauer. I'm the CEO of Exxon since March 1 this year. I'm with the company since 25 years, initially as a member of the Executive Board and for the last 15 years as Chairman of the Supervisory Board. It is a pleasure to be back on the bus in an operational function now. And together with my colleague and the executive board of Bernd Scholte, we will guide and turn into the next phase after the non successful takeover by a pre joint on ship last year. Brandt will give you an update on our technology portfolio and the expected development for 2017. Also with us today is our Chief Accounting Officer, Charles Russell, who has been with the company for more than a decade. He is responsible for accounting, financial reporting within Exstrone. Charles will go through the results with you and answer your related questions to that. Before that, let me highlight some key results from Q1 that we look at on Slide 3. With an order intake of €61,900,000 in Q1, we had another strong quarter. We had booked revenues of €53,600,000 and EBIT of €12,700,000 euros Included in this number are extraordinary write downs in the amount of €6,600,000 which results in an adjusted EBIT prior extraordinary write downs of €986,100,000 Long time low inventory levels of €49,900,000 as well as reduced operational and CapEx spending led to a free cash flow in the quarter of €33,300,000 and to a group cash provision of €193,600,000 a significant improvement compared to prior quarters. Charles will go into more details on that and answer your questions on that. I would like to share some additional important events with you, which happened in Q1. We received a purchase order from the large aging display manufacturer for OVPD deposition tool due to deliver to be delivered in Q4 2017. This is an important milestone in our OLED development program. Furthermore, we delisted from NASDAQ and the de registration from the SEC was completed. As of March 20, Exxon was again included in the Tech DAX share index, of which we were excluded in December for the first time due to the low free flow during the pending takeover transactions. In addition, the U. S. Class action suit against Xtron was dismissed. Turning now to Slide 4. Based on our Q1 results and in order intake, we reentered our full year 2017 guidance given in February 2017 with revenues and orders and an order intake between €180,000,000 €210,000,000 for the fiscal year 2017. We continue to expect an improvement of free cash flow in 2017 compared to 'sixteen and to achieve a positive EBIT in 2018. Let me now give you some background to the previously mentioned write downs in Q1. To explain our position, I would like to ask you for a second of your time. Exxon has a wide portfolio, as you know, of enabling technologies for highly diversified applications. Each application has a group of customers or a very large single customer. Each application is a completely separate market and is not competing with each other at all. With unique market position of Exane to deliver the treatment for complex material, deposition into different applications and or markets, while using the same core know how, provides unusual growth opportunities for the company. The negative side of the unique situation is that for each of these future applications, significant R and D funding is required. One solution would be to focus on less applications and spend less R and D to make the company profitable rather quickly. It is unquestionable that the deposition of complex materials will be the future, and Extron will be the only company to focus its entire know how towards that and support the relevant customers and market as per their requirements. We made the decision to continue our activities in these future markets, but with a more focused approach. We will organize our portfolio of future technologies and transfer them into defined independent units. For each unit, we will select technology partners at an early stage of the development to provide the required resources. These partnerships, which could be investments in R and D as well as joint ventures, we focus on specific requirements needed. This year, we will review all development programs and connect solutions in order to focus our R and D spending. This will lead to a sustainable profitability and growth as a group in the following years. As a first step of focusing our R and D spending, we froze our product development for 3 pipe materials for future generations logic chips, so called CHEOS. This led to an extraordinary write down of assets in the marketing fee amount of €6,600,000 We will not spend further R and D until a strong timeline for the introduction of its material applications has been set and a partner was found to cover the requirement for the required development expenses. We are, of course, fully committed to support our customers to introduce PFOS material to the market once this will happen. That I would like to be that should be my explanation to the €6,600,000 And I'm more than happy to answer more questions later on. At this point now, I would like to hand over to Charles, who will give you a detailed overview of your Q1 results. Charles, please. Thanks, Kim, and good morning to you all. Turning to Slide 5. Let me start by saying that Q1 was, in many ways, a reasonable quarter, thanks largely to a very strong order intake at €61,900,000 which was up 39% on the €44,400,000 we generated in the same quarter last year. This year on year growth means that we ended the Q1 with an increased order backlog totaling €87,600,000 Despite the €6,600,000 write down we decided to make in the area of our T POS activities, we also improved profitability compared to the Q1 year. Also on the positive side, we generated a free cash flow of €33,300,000 largely because of reductions in working capital. However, earnings remained negative in the first quarter with net income coming in at minus €13,500,000 Moving to the next slide, let me take you through the income statement for Q1. Total revenues recorded during the Q1 of 2017 of €53,600,000 were up from €21,400,000 in the same period last year. We improved our gross margin by 10 percentage points from 15% in Q1 last year to 25% in Q1 'seventeen, and it would have been 27% had we not written down €1,000,000 of 2 plus inventory assets in the quarter. Operating expenses totaled €26,400,000 in Q1 'seventeen, which was higher than Q1 'sixteen, mainly due to higher R and D expenses, including a €5,600,000 write down related to our 2 FOS activities. Otherwise, R and D spending would have been at a normal level of €14,100,000 EBIT for the Q1 came in at minus €12,700,000 which was an improvement over the minus €14,700,000 of Q1 2016. If we exclude the €6,600,000 write down, the improvement was more pronounced with an adjusted EBIT of minus €6,100,000 The net result for Q1 2017 was minus €13,500,000, a slight improvement over the minus €15,500,000 in the Q1 last year. As you can see, the Q4 of 2016 was around half of twenty sixteen annual revenues, was extraordinary both in terms of revenues and earnings and is therefore difficult to compare. Moving to Slide 7, which shows our cash flow statement for the Q1. We had a particularly good quarter in terms of cash flows due to a strong positive operating cash flow of €34,600,000 mainly resulting from collections of accounts receivable and an increase in advance payments from customers for new orders. The overall result was that we generated a total cash flow of €33,300,000 in Q1 2017. As a consequence, our cash balances have increased from €160,100,000 at the end of last year to €193,600,000 at the end of Q1. Turning to the next slide, our balance sheet. Exstrom continues to have a healthy balance sheet with equity of 356 €700,000 cash of €193,600,000 and no debt. I want to highlight 2 things, inventories and customer advanced payments. Firstly, inventory at €49,900,000 is at its lowest level for 10 years and is a clear reflection of the improvements we've made in inventory management. Secondly, advanced payments from customers increased to 13 point €5,000,000 as of March 31, 2017, compared with €26,100,000 at the end of last year, reflecting the continued strong order intake recorded in Q1 2017. Now let me hand you over to Bernd, who will talk about our technology portfolio on Slide 9. Bernd? Thank you, Charles, and a warm welcome to everybody. As mentioned before, we had a good quarter with strong orders, backlog and revenues. And we have reached an important milestone for our OVPD technology for the deposition of organic material with the order we have secured. In Q1, Gartner has confirmed what we have already anticipated. We have been the global number one supplier for MOS CVD equipment in 2016 with a 55% market share. In our last conference call, I mentioned that Exxon Technologies are enablers for mega tech trends, including the move to renewable energy and the electrification of transportation, both of which require higher amounts of semiconductor components and in many cases, new materials to make those components possible. To add to that, 5 gs mobile connectivity, autonomous driving and the Internet of Things, all of which require millions of sensors and other semiconductor products. As I said before, our deposition technologies will be strong enablers for these future semiconductor products, which will represent a solid demand for us. In order to benefit from these mega tech trends, we need to stay close to our customers to be ready with our technology when our customers need them. As usual, in new and complex technologies, some of this timing is not fully clear yet. We are committed to supporting our customer once a firm timeline has been announced. However, in case of such technology roadmaps are not firming up, we have to be tough on ourselves and how to focus our internal resources. This is exactly the situation with T Force. We are convinced these materials will be required in the future, but we are not sure exactly when they will penetrate the market. Against this background, we have made the decision to freeze our activities in this area with one time costs this year and saving expected in 2018. As soon as we see progress in this market side, we can intensify our efforts, however, only if the market pays off. This is the first example how we want to focus our R and D spending going forward. In the next steps, we are evaluating potential partnerships to strengthen the position of our product portfolio, as Kim described. These activities are one of our major focus areas this year, and we will give you more information on our progress in future conference calls. With that, I thank you for your attention, and we are now looking forward to answering your questions. Thank you, Bernd, Charles and Kim. Operator, we'll now take the question. And the first questioner is David Mulholland from UBS. Hi. Thanks for taking the questions. Firstly, obviously, I'm good to see some action in the cost side of the business, but I wonder if you could just give us some guidance on now that you've paused the investment in T Force, what should we expect in terms of R and D or even total OpEx for the full year? And then secondly, bookings trends continue to be quite strong in Q1. How do you see the pipeline through the rest of the year? Can we carry on at these levels? Or I guess, how do you see the outlook for bookings in Q2, Q3? Maybe I'd say something to the T Force situation. On a full year basis, we are planning with a saving of €9,000,000 to €10,000,000 Then maybe you can say something to the other question part of the question. Yes, sure. This is Bernd. Well, the ordering levels are quite solid right now. And in short term, we're seeing this is potentially continuing. However, in our business, the possibility to look far ahead in 1 quarter is quite difficult. So but in general, as Kim mentioned, we have confirmed our guidance. And with that mathematically, you can see that we are relatively positive going forward. That's great. And maybe one quick follow-up on the OLED side. Obviously, I know you probably can't specify who the customer is, but is it fair to assume that this is someone that's already active in OLED display? And can you possibly just give us a bit of background, had you gone through the full process with this customer at your own site last year that then led to this order? Maybe just a bit more color on the strength of the relationship with the Asian OLED display manufacturer. Yes. Let me answer that. Sure. You can be sure that is a customer who is already engaged in OLED manufacturing. And I think we have been mentioned in previous calls that this program goes through 3 major stages. So this is the 2nd stage where we with the customer together want to prove the feasibility on high volume manufacturing for high volume manufacturing, but on a smaller substrate size level. So this is the first step was showing the feasibility of the technology in general. Now we are at the 2nd step. And of course, the 3rd step would be doing this altogether on higher volume manufacturing size. That's right. Thank you very much. The next questioner is Jurgen Wagner from MainFirst Bank. Yes, good morning. Thank you for taking my question. Now post the R and D under the project freeze in T Force, what would be a breakeven sales level in 2018? And the second question, what is your view on the Dalunitride LED market, particularly in China? There are some reports that the competitive pressure increased. Or do you see improvement even? Ben, will you take something to China? Sure. Yes, indeed, there is certain movement in the competitive situation in China. You probably have heard that Chinese MOSVV suppliers are in the process of getting qualified with Chinese customers. And what we're hearing from the market that they made step forwards and even receiving now orders on a significant order level. And you can imagine that this changes the landscape quite significant in the market, in particular when you consider that Chinese competitors have even more aggressive pricing behavior than in the past. And so we are focusing our product portfolio in areas where we can play our unique selling points. And as such, we can achieve reasonable margins for our products. And as such, we're definitely looking in particular in the area of LED in China, but also elsewhere, in particular on specialty LED application where high yield performances are acknowledged. But also, we're seeing a good opportunity and development in the area of red orange yellow and the leaf in China. In terms of the breakeven, if you look at the quarter that we've just reported, we have an adjusted EBIT of €6,100,000 negative and a gross margin of 25%. So I think in the Q1 period, we've had some low margin sales, as we previously said in the Q4 conference call about R6. We have to get the remainder of those out of the pipeline. Then the margin should improve slightly. So I would think the breakeven is somewhere around €65,000,000 every quarter. Okay. And that is the level also for next year to look at? Yes. That might change if you if we consider any further actions on our de spending. But at the moment, kind of That is the current situation. That's the current situation, correct. Okay, understood. Thank you. At the moment, there seem to be no further questions. And next up is Gunther Hohlfelder from Baader Bank. First question on you mentioned the XR6 sales. So has the inventory sell down, has this now been completed with the Q3? Or do you expect additional sales later this year? We still have additional sales to clear during the remaining quarters of this year. And then I hope we should be done with the XL6 inventories. So you could expect that the margins in the subsequent quarters may still be rather depressed by that. Okay. And on the you mentioned the situation also in China, and you're focusing increasingly on, for example, red, orange and yellow LEDs. So given, let's say, less strategic importance for Tonnes Swan and the showerhead technology going forward. Is there any potential here for lower costs here from this perspective? I think we rate the shower technology still as a very important part of our product portfolio. But in general, the shower technology from in terms of manufacturing cost of the product is not much different to our planetary. So in general terms, what I try to say is we're looking really into areas where we can use our the strength of our products and there where the market acknowledges those strengths and simply say, pays for it. And so that could include the planetary but the showerhead as well. Okay. And then the last question on the memory CapEx environment. I mean last year, your sales were mainly related to CBD systems and for the NAND flash market. So we've recently seen a recovery also in DRAM related CapEx. So do you have any visibility? Or do you expect a recovery of your DRAM related like LD sales here this year? We expect a slight improvement, but not a big improvement in terms of QHP sales. It's still we are seeing the good news is we're seeing still this very healthy momentum for the flash memory to continue. And we're seeing a very, very good request from our customer for the CBD tools to continue at least for the first half of the year. And this is for your QXP tool. Would this be triggered by a new process node? Or what would be a trigger to get more sales related to the QXP? This would be triggered, number 1, of course, being qualified with further films at various customers. But certainly, also when our existing customers increases their investment into DRAM. And sooner or later, this is going to happen. Okay. Thank you. Next up is Thomas Becker from Commerzbank. Yes. Good morning. Thank you for taking my questions. Just a quick one with respect to the positive EBIT you're targeting for 2018. So is this based on the current, let's call it, restructuring second question is with respect to to cash. You had quite a healthy cash at cash level and you mentioned in Q1 and you mentioned inventories are at a 10 year low level. So let's say, given the reversal in the next quarter, so more normalization, I guess, what do you think will be the cash level at the end of the year? What's your target there? In terms of the cash, I mean, the guidance we've given is that our free cash flow will be better than 2016. But given that 2016 is minus 40 something 1000000 and we're plus 30 $4,000,000 at the moment, I think we'll be considerably better than last year. I wouldn't like to give a guidance to the cash balance at the end of the year because that depends on the timing of sales, timing of collections. The inventories that we still have for our fixed should reduce over the next few quarters. So on basis that other things stay the same and that may or may not be the case, then you'd expect the inventory levels to stay roughly the same or perhaps even improve slightly. But it depends on whether we get to a large number of orders or whether we're making things in advance for customers, perhaps for OLED, who knows. And the EBIT for 2018, we don't expect to be in the same structural position in 2018 that we are now. So it's based on the assumption that in 2018, we have a different structure, but we're not entirely sure what that is at the moment because clearly, we need partners and we need to agree those structures with partners. And so we think on our best estimate that we will be making even more profitable next year, but we can't say definitively what the structure is. Okay. So this means that what you have done to T Force is not, let's say, the only thing that will happen then going forward? So your positive EBIT is also based on other measures to come to be announced. I think this is what Kim Shin Lehow said this. Okay. Last question from my side is, would you rule out that given the order you received for your OLED program, that the OLED program per se is still under evaluation. So would you, let's say, rule out that the same thing like which was which happened to T Force could happen to OLED as well? Or is this now on the safe zone after you again received the, admittedly, probably small order for OLED? Generally, we always consider and watch our technology. So we never rule anything out. But it has been an important step. And if we can continue to pace and if we find the appropriate financial model to go forward, This is exactly what we're working here within the next month, and we will keep you updated as soon as we can be more definitive in the actions we're going to play. The next questioner is Charles Le Petitbar from Natixis. Yes. Hello. Good morning. I had just one question. I understand that your 2018 guidance on EBIT level is based on finding new partners for your technology portfolio. I wonder whether you have already found 1 or several of these partners or not yet and if you expect to find such partners during the next quarter. Thank you. Yes, this is Qing Lyra. We definitely are looking for partners. We do not have any concrete partners yet, but there are a lot of interesting scenarios and we will evaluate them as they come along. And then I think for 2018, then we will have a clearer structure than today. Because I think as we all know from the P and L, the trouble is really the R and D spending. And to give our future technologies, we don't want to do that as we have before. And we have some interesting ideas, and we will execute them as they come along. Okay. Thank you. Our next up is David Mulholland from UBS. Hi. Just a quick follow-up. My apologies if I missed it. I probably asked this earlier, but on the receivable side, obviously, a very low level in Q1 sitting on the balance sheet. And you mentioned part of that was due to work internally on managing the cash flow of the business. But is this a sustainable level? Have you has something fundamentally changed on the kind of agreements you're doing with customers and payment terms? Or is this at a temporary level and things normalize in Q2? I think with MSCVD, I think we do see advanced payments from customers to book the order, and that's different from most semiconductor equipment manufacturers. So has, in the past, always had relatively low receivables days. So I think it's around 50 at the end of March 2017, and that has been the sort of normal level over the past decade. Okay. So to summarize, you would say it's still quite sustainable at this level? The residual side, yes. Okay. Thanks very much. There are no further questions. Well, then thank you very much to all listeners and question askers. Yes, thank you very much. Have a good day, and we'll be still available for further questions if you have any. Thank you.