Earnings Call: Q3 2020

Oct 22, 2020

Good morning and warm welcome to Micronik's Q3 2020. My name is Tobias Bilgov and I'm heading Investor Relations. With me today here in Stockholm, I have the Micronik President and CEO, Anders Lindqvist as well as our CFO, Torbjorn Windgard. After the presentation, there will be time for questions. I would already now like to ask you to limit your questions to 2 per person as a start. Our operator today will guide you on how to ask questions. We will end at latest 11 o'clock and for your information, this session will also be uploaded as on demand on the web. For this reason, we ask you to stick to English also during the Q and A. With that, I leave you with Anders. Okay. Thank you very much, Tobias. And today, we will present our last quarter performance and starting with the agenda for today. So first, talk a little bit about the quarter And then we do comments on business area performance as well as some comments on the division level on the market development and the division development. Then Torbjorn will go a little bit in details on the financial side, talk a little bit about our platform for future growth and then as Tobias said, we will end with a Q and A session. But to start with, I want to explain or try to tell you what we are doing at Micronik. So our products and solutions makes it possible for our customers and also our customers' customers to develop and produce electronics electronic products with leading technology. And examples here are all the latest TV screens, computer centers, data centers, sport watches, state of the art mobile phones. And that is why we say that we enable the future of electronics. So looking at quarter 3, this is a short summary of the quarter. Could see that we have a strong quarter when it comes to sales. We grow the sales with 20%, we grow the EBIT with 76% and that's a very good margin. And even though we had a very strong sales, we still have a very strong backlog, which is at SEK2.1 billion and this is to be compared to SEK1.6 billion in the same quarter last year. Inside the different business area, if we start with the Assembly Solutions, so we had a mixed development inside Assembly Solutions where we could see that in the HyFlex division, we had an improved activity level towards the end of the quarter. So especially in September, we could see that we had order rates picking up quite strongly. In the High Volume division, this is mainly activities in China. For China, we had a very strong performance. And in Global Technologies, we had a mix. So in Global Technologies, we have two lines of business. 1 is in optoelectronics segment and the other one is in the camera module assembly segment for automotive. We had a very strong demand on the optoelectronic side, but a very weak demand from the camera module segment mainly serving the automotive market. In the business, Air Pattern Generators had a very strong development, good deliveries and all the service and aftermarket activities are on track because of local support. For the outlook for the year, so we have revised this to SEK 3,900,000,000 and the main reason for that is the impact of currency effect, which is the majority of the difference and also a little bit from the pandemic situation. So moving into the business areas, starting with Assembly Solutions. And as I said, we saw a mixed performance here. The overall sales declined by 4%, but we had a very strong momentum in the dispensing segment in China. This is the high volume division, which is mainly serving the Chinese market and mainly the mobile phone segment. And we had a very strong development in Optoelectronics, which is the global technologies division driven by data centers and communication equipment. The camera module assembly was on low level. It's already serving the automotive market, which has been very slow for quite some time. And also the high flex market was low in general, but we saw that it was an improvement from low levels and especially at the end of the quarter. We're very happy to see that we sell more and more of what we call full line solutions. So this is a complete production line compared to selling single machines. And we could see that and this is mainly in the HyFlex division and we could see that the average order value is increasing all the time. So it's proof of that this concept is working. Backlog is stronger and this is compared to the quarter 3 last year. The EBIT in the business area was negative by SEK6 1,000,000, but there was also impact from write down where we made write downs for the camera module assembly business on intangible assets and this is equal to SEK 43,000,000 and this is based on that we see the camera module assembly market being weaker than originally planned. So the underlying EBIT in the division was SEK 46,000,000 which is giving an EBIT margin of more than 8%. And I think this we're quite happy with. And as you know, we have a target of being above 10% for the full next year in this business area and we could see that we are on our way to that target. One way to reach the target is and we are running programs both in the HyFlex division and the Global Technology division, and this is also reason for the improved margin. And as I said, we confirmed that the target of 10% for next year is still there. So I would like to comment on the different divisions a little bit. So in the HyFlex divisions, see that where the market activity that increased towards the end of the quarter, we have seen that the investments that have been on hold throughout the period have started to materialize. And we've also seen, as I said, that the order the average order size is increasing and this is due to that when they sell more and more of full line solutions. There's still an uncertainty in the market, mainly because of the pandemic situation. Our main geographical focus or market is in Europe and the United States for this division. And we are continuing to streamline the operations and our in the division to be able to reach our EBIT target. In the High Volume division, we have seen a very strong performance, very strong momentum. We have a leading position for dispensing equipment. We have seen a very healthy and stable Chinese market and the majority of our sales in this division is in China, in particular, very good demand from key accounts, our larger customers. We have had very limited COVID-nineteen impact in this division. And we have had also very limited impact from trade war, but this is something that we are monitoring very, very closely as this can change from day to day. In the Global Technologies division, so we have two lines of business here. So we do die bonders for the optoelectronic market and we do camera module assembly equipment mainly for the automotive market. And here we have a mixed development where we have seen that the demand in optoelectronics have been very strong. And this is driven mainly from data centers and communication equipment and the background is that is driven by the 5 gs implementation in various countries. We had a very good market in China with major orders. At the same time, we see very slow activity in the camera module segment. The automotive industry is affected by the pandemic situation and was already weak before that. The recovery is very slow and because of that we also make a write down of intangible assets of SEK 43,000,000. These products are produced in the U. S. And as I said, we had mainly sold in China. So here the trade war between U. S. And China have a bigger impact. So far we have had quite limited impact on our business, but this is something that we monitor very carefully. On the Pattern Generators business area. So we had a very strong development, very good deliveries in the quarter. We had 2 machines, an FPS 6,100 Evo and the Praxision 800 Evo, our most advanced system. So the net sales was up 60% and we ended at a little bit more than SEK500 1,000,000 in sales. The order book is strong and intact. No changes in the delivery plan. We plan to deliver 3 systems for quarter 4 and also one major upgrade. For the next year, we have 7 systems on the schedule for delivery and no changes so far in the time line of deliveries. But of course, the pandemic situation could make that more uncertain, but so far no signs of that. And in this business area, all the service activities are on track. We have a local service support in all the markets where our customer have their operations. So this is going on as planned. If we look on the long term performance, so we have revised our target or our outlook for this year where we believe that we will reach the sales of SEK3.9 billion and the majority of the difference between the previous outlook of SEK4.1 billion is because of quite a large currency effect on our business and also a little bit of this pandemic situation. Even though we have a very strong order book, it's up compared to last year and we confirm our long term target of being at or above SEK 5,000,000,000 for the year 2023 at the latest, as well as our profitability target of being above 15% over a business cycle and specific target in the Assembly Solutions business to be at or above 10% for full year 2021 and we were as I said above 8% in the quarter already. For Pattern and Enrators, our profitability target is to continue on healthy level. Capital structure net debt should not be higher than 3 times average EBITDA counted over 3 years. So by that I want to like to hand over to Torbjorn to go a little bit deeper on the financials. Thank you very much, Anders. We look with confidence on our robust order backlog where we, over the last 12 months, had an order intake of SEK 4,500,000,000. The Q3 order intake though decreased with 40% to a little bit more than SEK 700,000,000. And for Assembly Solutions, the decrease was 24%. And for Patent Generators, there were no new system orders. And as you know, there is a natural variation in the order intake for Pattern Generators. Looking then at the backlog and compare that to end of September last year, it is quite much higher. It's a bit almost at SEK 2,100,000,000 compared to a little bit more than SEK 1,600,000,000 last year. And for Assembly Solutions, it's almost SEK 1,000,000,000, a bit more than the SEK 879,000,000 end of September last year. For Pattern Generators, it's a bit more than SEK 1,100,000,000, which is also then significantly higher than end of Q3 last year. And for this year, in Q4, deliveries in the backlog that are scheduled, as Anders mentioned, are 3 mass cryter systems and 1 major upgrade. Looking then at net sales, it was a net sales growth of 19 percent to SEK 1,000,000,000,000. And as we previously had described here, there was a mixed performance within Assembly Solutions and there was a decrease of 4%, while in Patent Generators, there was an increase of 60% to a little bit more than SEK 500,000,000, including then the seasonal deliveries of FPS 6,100 EVO and the PRECISION 800 EVO, together with stable aftermarket revenue. In this, we had a negative impact of SEK 57,000,000 in foreign exchange. And the rolling 12 months net sales is now at SEK 4,100,000,000. This all helped us to good margin development. So the Q3 gross margin was at 58.3%. That was despite a slight decrease for Assembly Solutions going from SEK 40.9 percent to SEK 38.9 percent, but a strong increase for Pattern Generators, 79.7%. Looking then at EBIT, that was 32.6 percent compared to last year's 21.9%. And with Assembly Solutions, which had a 1% negative EBIT margin, that was affected then by a SEK 43,000,000 write down in Global Technologies related to the AEI business. It's an impairment of their intangible assets related to customers and technology. The underlying EBIT margin was a bit above 8%, which we feel good and feels good as preparing for next year's target, which Anders mentioned was above 10%. And then for Patent Generators, the EBIT margin was quite fantastic seventy percent. Looking a little bit on our R and D spending. It was slightly lower than the same quarter last year, but still we are at a 13% little bit more than 30% R and D to cost to sales ratio. And this is important for us to continue the R and D spending as we prepare for future of our products and our future product portfolio. Rounding then off a little bit with cash flow. We have a very strong cash position. We had a positive contribution from change in working capital. And then in the quarter also, we amortized SEK 200,000,000, which was the part that we had used of our credit facilities, which amount to SEK 2,000,000,000. And we also paid a dividend, which was then related to our AGM being a little bit later than usual. So the dividend was paid in Q3. And we feel confident then around our cash holding at the end of the period, which is almost at SEK 1,100,000,000, which gives us a strong balance sheet and strong position and also makes it possible for us to use any opportunities potential acquisitions. Having said that, I would like to give the word back to Anders. Okay. Thank you very much. So we believe that we have a strong foundation, a very strong platform to grow further and to reach our longer term target of the SEK5 1,000,000,000 in 2023 latest before is of course appreciated as well. We changed the organization earlier this year and now we have a very scalable structure and also a very clear focus on the different market segments with clear leadership in the divisions, clear accountability and clear responsibility and authority. I think this is in place and it's working very well. We are continuing to invest in R and D and next generation solutions. We haven't really changed the spending at all. And I think we are somewhere around 13%, 14% of revenue that we invest in R and D to continue to offer leading products and solutions. This is important to us. We are doing we are actively looking for acquisitions and other type of partnerships. We do have an again that we have a strategy on what kind of technologies, what kind of segments, what kind of markets do we want to participate in, and we have a strong balance sheet. So should there be any opportunities, we should be able to act on that. And we also have a quite good or very good credit facility to support the acquisition activities. Very much a result of the reorganization earlier this year. We have increased our market focus and customer focus. The divisions are organized after the different market segments and customer segments that we serve. As I said, we have a customer obsession and the long term growth strategy remains intact. So even though we calibrated a little bit our outlook for this year, the long term financial outlook has no changed and we confirm that. So by that we move into the questions. Okay. Thank you Anders. With that we conclude the presentation and move over to the Q and A session. And as I said in the start, please limit yourself to 2 questions at least as a start. Operator, please go ahead. Thank you, So we have one first question from Mr. Daniel Drouberg from Endalsbanken. Sir, please go ahead. Thank you and good morning and congratulations to stellar margins in especially PG, of course. My question is first on the can you comment a bit on the display market trends? We have seen some disruptions, of course, with Huawei and so on and some display manufacturing movements, etcetera. Can you comment a bit if you expect this to create uncertainty and delay the time line for your customers to order from PG? Yes, I think we have also in the report and we show also the 3rd party investigations and analysis on the display market and it is a little bit slower development than it has been on the number of displays and the sizes. And so but still there is a growth in the market long term and then there could of course be short term changes. What we see that our masquerages are sold maybe 3 years before a technology change or even more than that. So we are not are not really affected, I'd say, right now what is happening right now. It's more really we're more driven by the really long term and especially the long term development when it comes to technology shift and we still see a positive impact from the shift from LCD to AMOLED. But short term, of course, investments could be put on hold and delayed because of disturbances among customers. If you look at your funnel sales funnel in Q4 last year, you had an amazing order intake for PG. Should we expect that to be more into various quarters coming 2021? Or can you when you look at the funnel, can you see a similar possibility for Q4 coming months, 3, 4 months to see this kind of order intake as well? It's difficult to comment on that. But I can say that we had a very strong order intake and also in quarter 1 this year and so maybe stronger than normal. And I think that is still visible in the backlog, which is up compared to last year as well and that backlog is filling almost the whole of 2021 and a bit into 2022. So I think you need to see it on quite a long perspective. But we haven't had any order. That's been said, we haven't seen any orders in the PG now for 2 quarters. So of course we're looking forward to get that. And there is a pipeline and there is a maturity progress in the pipeline, but the sales cycle is very long in PG. So it's difficult to say how that how it should look like and when it will materialize. What I can say that we see a good pipeline also on the SLX, the semiconductor business, which we haven't had before. So this is an addition to before. Perfect. Okay. I guess that was my 2 questions and good luck here in Q4. Thanks. Thank you. Thank you, sir. Next question is from Mr. Michael Nassem from Carnegie. Sir, please go ahead. Yes, good morning. I also have more or less the same questions, but I focus on Assembly solutions instead. Just to clarify, the margin target next year of 10% or more than 10%, is that the underlying margin excluding amortization or intangible assets? Or is it the reported margin? It is the reported margin. Excellent. And another question actually on the cost side. The PD segment had very low SG and A cost. It looks like that at least. What is the reason for this? Could you repeat the question, please? The P and G segment had very low SG and A cost in Q3 compared with prior quarters. What was the reason for a low cost? So the reason was reversal of partly the reason was a reversal of provisions for customer credit losses. So that impacted positively on that line. Okay. So approximately how much was it? We don't disclose that exact number. But in the size, so that it's visible from your analysis, that's correct. Okay. Got it. A couple of million. Yes. Hagen, on more than that. Okay. Thanks. Thank you, sir. Next question is from Mr. Victor Watsman from Reddy. Sir, please go ahead. Thank you for taking my questions and congrats on a strong set of numbers. And I have a question on the SLX market that you mentioned Anders. Do you think there is a chance that this market could be a lot bigger than you previously expected now with Intel waking up for instance? I think the market for mass writers we believe is kind is what we have said before. It's around $60,000,000 and we would like to take a big part of that. So but of course the willingness to invest in new technology will likely be higher with successful customers. So I think the market may be not grow, but the kind of speed of replacing the installed base might increase. And think it's we are in a good position to capture a good part of that market. Okay. Good. And the second question on the order intake in Assembly Solutions that was down 24 percent. Can you give some guidance on how much is delayed customer decisions and how much is currency, etcetera? Currency will be a little bit difficult, but I think you can maybe use the same numbers on the sales side just to be closer because we don't look on currency effect on the order intake side. But and it's very mixed. I think in the Assembly Solutions we have had slow very slow demand in the camera module assembly side. So that is we have not sold any equipment for quite some time or not get any orders for equipment for quite some time there. On the other hand, we had very strong development in the opt electronics with the dye bond. There's strong demand on the high volume side and lower than targeted demand on the high flex side, but a good improvement in the quarter 3. To quantify, I think also you could say that the order intake was actually higher than the sales in the quarter. So I think it shows that we are not as bad as the minus 24 looks like, I think. Okay. Yes, that's good. Thank you so much. Thank you. Thank you, sir. We have another question. We have another question from Mr. Victor Watsman from Reddy from CERRE. Please go ahead. Okay. Thank you. I will go ahead then with 2 questions. Can you discuss the pricing of the My Pro lines in Assembly Solutions. I remember when you charged SEK1.5 million for your systems and now I saw that in your last press release order you the systems cost you $1,500,000 So that's a big, big leap there. Can you discuss the pricing in general, what it looks like if you're increasing it and how, etcetera? I think, yes, it's difficult to get a fixed price because the composition of the order could look very, very different from case to case. In general, we're selling to a not very price sensitive segment and we haven't lowered any prices. But we could say that the value of a combination order is bigger than the single parts, you can say the value for the customer because we offer more productivity than if it would be the same kind of stuff with single orders you can say. So and this is a benefit that we of course ask a little bit of premium for as well as offering bigger productivity. So I think with that offering, we will get we have a better pricing power than we would have without that. But there is no it's difficult to put an average price or a fixed price on that because the composition is so different from case to case. Okay. And I will squeeze in one more question also. You mentioned previously entering new dispensing markets like semicon and automotive in the starting. And I'm just wondering how big is this potential investment of yours and what will it take in terms of boots on the ground, etcetera? How big is your commitment? That's quite big because we have a leading position in the dispensing market for mobile phone in general in China. And to expand that, we need to look into new segments or adjacent segments. And as you said, the semiconductor is 1 and we already have started to offer equipment now in the semiconductor industry for that also based on dispensing, but also some other technologies, which is very adjacent to dispensing and belong to the same process steps. And then also serving the especially the electric vehicle market or the sub suppliers to electric vehicle market, which is very strong in China. Our investment, it's ongoing. It's kind of it's in the R and D spend that we have. So there's nothing more to come on that. It's already happening, I would say, in the kind of run rate of R and D investment that we have. But we believe that when entering these 2 additional segments, we will open up for an addressable market which is quite bigger than we already have. So we see that as a great opportunity. Okay. Very good. Thank you. Thank you, sir. We have no other questions. Okay. As there seems to be no questions left, we will end the call. Thanks for joining us today and welcome back next quarter.