Earnings Call: Q2 2021

Jul 15, 2021

Hello and welcome to the presentation of Micronic's Q2 report. My name is Sven Czadkovich. I'm the Director, Investor Relations at Micronic. And with me today, I have Micronic's CEO and President, Anders Lindqvist and CFO, Torbjorn Wijnggaard, who will be presenting today. And with that, I hand over to Anders. All right. Thank you very much, and Good morning to you, Oren. So what you see now on the screen is the agenda on what we want to talk about today. So it is the usual things, quarter 2 in short, divisional development. We have also added I thought it was interesting to also show a little bit of our sustainability strategy. Torbjorn will Fill in some fill in with some financial details. And then we have also a little bit of information on the recently made acquisition of ATG, Lutte and Melzer. And then we will end with a quarter question and answer session, of course. And today, as an extra service to you, we have Also added a compilation, which is the appendix market update, which is a compilation of market data from third parties, which can be Helper for you. And this will be in the presentation that is posted on our website afterwards. So this together with this presentation, obviously. Okay. If we start with a snapshot of the quarter. So what happened in quarter 2, we had we completed the acquisition of ATG, Lutte and Melzen. That was completed on the 25th June. And all the comparisons here is to the same quarter last year, obviously. And compared to the same quarter last year, the order intake, we saw an increase of 54%. And the increase happened in actually all four divisions. So at the same Time that net sales decreased by 2%, and that was very much due to a less favorable product mix. We had a very good Product mix in the same quarter last year and also impacted by negative currency effects of SEK 83,000,000. That resulted also in a decrease of EBIT with 14% down to SEK 241 1,000,000. And we had improvements in the HyFlex division, High Volume division and Global Technologies division. So the decrease was in the Patent Generator division. The EBIT margin ended at 23%. And we are very happy and proud to see that in the what we call the former assembly solution business area, where we have a financial target of reaching about 10%. This year, we recorded 13% EBIT margin. So we see step by step improvements on the margin side On that side, the order backlog declined to almost SEK 1,800,000,000 and we have 9 Maerskwriter is now in the backlog as of end of the quarter. That backlog also includes the SEK130 1,000,000 that we get Together with the ATG acquisition. If you go a little bit more in detail on details on the different divisions, starting with the patent generators. So So again, everything is compared to the same quarter last year. So we had the sales of close to SEK 400,000,000 and the 45% EBIT. We only had one order. The order intake improved despite that compared to the same quarter with 8% to 9%. And we had also quite a lot of orders after the quarter. But during the quarter, we had an SLX order. And if we look on Automask markets are all in place. We still see the same shift from LCD panels to AMOLED panels, more complex displays, More higher resolution displays and more displays with different shapes and so on. So we see that all the long term trends are there. Although, and that you will see also when you look in the appendix, if you want to do that, that we had a negative impact last year on the photo mask market for display, which actually declined during 2020. And there's a forecast improvement from this year and also the coming years On that side, the backlog is NOK 617,000,000 as of the end of the quarter. And at this very moment, we have 11 systems in the backlog, which also includes 2 orders that we get now in July. The result, the sales, the gross margin and the EBIT is lower compared to the same quarter. And although we delivered 4 system this quarter compared to 3 system. We didn't have any high end system. So therefore, the margin and EBIT is Somewhat lower. If we move to the HyFlex division, See a very positive market here. We have a very strong demand from consumers. And also we see the same strong demand for electronics in general. We could also see that the order intake Increased with 63%, mainly driven from Europe and also U. S. And we had really a major big order in Europe. In the quarter, the sales increased by 6%, so a little bit less. And then we had an EBIT of SEK 11,000,000 or corresponding to 4%. And the same quarter last year, we had minus SEK 15,000,000. And that big difference is actually mainly explained that we had a very big negative currency impact in the quarter 2 Last year, which was SEK 22,000,000. So that the difference is actually less than it looks like. The strong order intake, of course, have an impact on the backlogs. We're now up to NOK 150,000,000, which is a very good backlog for the division. If we move further then to Assembly Solutions, high volume. Here we see also a very strong market, mainly driven by that we can see that so the majority of the business we have here in this Vision is in China. And we have seen that the Chinese production that outside of China have is moving back to China to a large degree. And at the same time, there are large investments in automation in this kind of business, which is both favorable For us, we have a number one position in the Chinese market, and you could see that the ordering take increased by 21%. Net sales increased 40%, so now up to SEK 315,000,000. And for the quarter, we had a very strong gross margin. And we had a very favorable mix in the quarter, 53%. And EBIT, almost SEK100 1,000,000, which is corresponding to a 30% margin. So very strong performance in this division. If we move into Global Technologies, so this is the vision which will be the home of the recently made acquisition, ATG, Lutte and Melzer. So the acquisition was completed on June 25. And the remaining days between June 25 and the end of the quarter is not consolidated into the results. So all the quarterly result is without the impact of A2G L and M, except for the backlog in the balance sheet. So that is how we have treated that part. So after many months of weak business in the camera module for the automotive industry, we have seen now quite a good increase in the activity from everywhere, both in the U. S, in Europe and China. We have seen there is quite an intense local competition in China in this business. But we have had very good order Take increase in this part of our business. We also have good progress in the dye bonding business and With also new customers and some major orders in China here as well. So all in all, for the division, the order intake increased by 94%. So very strong increase. Sales was a little bit down, but margin is still stable at 38%, the gross margin. Also, we saw an improvement on the EBIT side. So We're happy to record a positive result. We have had negative result here for quite some time. So now we had an EBIT margin of 6% or equal to SEK 7,000,000. And that is actually coming from efficiency improvements that we have made during this last year. So very good to see that is coming through in the numbers here. The backlog here is Yes. The backlog here is now NOK 250,000,000 almost, close to and that includes NOK 130,000,000 that is Coming from the acquisition of ATG L and M in this case. So that was about the divisions. Feel that we have a good momentum here. And therefore, the Board also have revised the outlook For the year on the revenue side, and we believe that we will reach a sale of sales of SEK 4,500,000,000 And this is at current exchange rates. And the reason for change is partly because of the acquisition. Of course, we will have a half year of Revenues of the acquisition of ATG L and M in here in the result as well. But also we have seen we have a volume increase in the remaining business. So That together led to this decision. The other targets are still the same as they have been before that It should be EBIT profitability above 15% over cycle or business cycle. Dedicated specific target for the What was at that time the Assembly Solutions business area, where we said that we want to be about 10% for this year. And for the quarter, you may have noticed that we were at 13%, so ahead of this target right now. And the net debt should not be larger than 3 times EBITDA, and this is Also on average over 3 years. The long term target is that we should reach sales by SEK 5,000,000,000 in 2023. So coming very close to that right now as you can see. Okay. Thought it was Should be a good opportunity also to show a little bit on what we are doing on sustainability and also our sustainability strategy. So at Micronic, we have put 3 different strategic goals in place when it comes to sustainability. And the target is to reach those goals by 2,030. One is around innovation and our customers, where we said we want to have innovation for sustainability. And this is really to enable our customers to achieve Their sustainability goals and ambitions, and we can do that through innovation of our product. The second goal is that we want to foster and develop future engineers through diversity. And we really want to foster diversity, equality And inclusiveness in all the communities where we act. And the last Goal is around environmental footprint, and this is our own environmental footprint where we want to reduce our own carbon dioxide Emissions by 50% at 2,030. And if we look a little bit on What kind of impact we have as a company on the environment and we if we look in terms of carbon dioxide equivalents, We have the 3 different scopes as the standard says. And the scope 1 and scope 2 is direct emission. So this is all the energy We consume in our own facilities both fuel for vehicles, oil or gas for heating or electricity and also the electricity that we use In all of our facilities, you can see that this is only 2% of the total impact that we have as a company. So the largest impact we have as a company is from indirect emissions, which is 98%, which is Business travel, transportation, waste and so on. The largest part of that one is the use of product. The use of product is 80% of the total Impact. So this is actually the customers' use of our products in their businesses. That is where we have the Biggest impact. And this is also, of course, where we have the biggest possibility and opportunity to make a change. And so and therefore, we have this Target Innovation for Sustainability. And I want to show you one example on what we're doing within this initiative. And this is really about our mask writers. So mask writer sold from the PG division. They're typically used 24 hours a day, 7 days a week at the customers. And there is the laser in the mask rider consumes Quite a lot of energy. And this use of mask writers is the largest source of the emissions that we We have at Micronic or that we generate at Micronic. On the innovation side, what we have done is that with the latest mastrite or the SLX, We have a different type of laser, which is called solid state laser technology. And this laser technology You can save up to 99% of the energy used for the lasers, a very big improvement in the area where we have the biggest impact. So our ambition long term is to enable this technology in all of our mask writers in the future, and then we will have quite a significant Change on our impact on environment. All right. That was Well for me, I will come back a little bit later. But now Torbjorn will talk a little bit about the financials. Thank you very much, Anders. When we look at net sales and EBIT margin over Rolling 12 months, we can see that we had revenue amounting to SEK 4 point €4,000,000,000 And we also have an improved EBIT in the 3 divisions, just like Anders mentioned, HyFlex, High Volume and is coming out of the previous business area, Assembly Solutions. And we are very satisfied About this improvement, which has been very good work by these divisions. And For patent generators, it's still generating a very good result. But in terms of comparison with previous In the quarter in the previous year, the product mix is less favorable for patent generators, and that, of course, then Impacts our EBIT margin in Q2, which ended up at 23% and for rolling 12% at 29%. And as we clearly see illustrated here on this slide that our aftermarket business really constitutes A strong and stable base of recurring revenue for our company, which we find is a very good thing to have in terms of our performance. If we look at then at the lower EBIT in Q2, where the 23% should be compared to 26% In the same quarter in the previous year, we can see that the effects come partly from volume and partly from The COGS, which was, of course, impacted by product mix. The negative volume effects, they were Pertaining to Patent Generators and to Global Technologies, while we could see a positive contribution from HyFlex and High Volume divisions. Increase in R and D expenditures, and we'll come back a little bit to that later. Of course, R and D expenditures are very important for our company and For a continued strong future, we have an impact from lower capitalization behind this increase in R and D costs. And as you know, It's important to reiterate that we are very conservative in terms of activating R and D cost on our balance sheet. But this time, there was a bit of a difference, and the difference was that the capitalization was lower, as I said. In terms of the selling cost, that has been impacted by M and A activities, and I'm very happy about the acquisition that we I could conclude here in quarter 2. And then in terms of current results, they were, in this quarter, positive effect compared to and ending up at other income and expenses. And when looking at the Quarter and the previous year, you can see there are quite big swings in some of the currencies impacting us. So ending the quarter then at 23% EBIT margin for quarter 2. If we then look a little bit closer and now when we present our divisions externally since some time back, We can see that the change here, as we have described, to a large extent, is for patent generators. So while PatternGenerators still generate a very strong performance, it's when comparing to the quarter 2 in 2020, It's SEK 99,000,000 lower. Then as we said, for the other divisions, there is Good improvement. HiFlex, SEK 26,000,000 high volume, SEK 37,000,000 and also Global Technologies, despite lower volume, still an improvement because they have worked very diligently on their cost side. And then for the group functions where we have taken costs for the acquisition, we have an increase in cost At that part of the business. And as you can see, the 3 divisions from the former Assembly Solutions Could not fully outweigh the change in product mix for Patent Generators, but it's a significant chunk that could be compensated by improvement in those divisions, which we Feel very, very satisfied about. Looking then at R and D for innovation and growth, which is continues to be very important for our future. We would like to iterate that, of course, our spending in R and D is based on conscious and Business cases in each of the divisions in terms of their respective R and D opportunities. And that is the guiding principle in a new Organization with decentralized decision making. So underpinning this is the decisions in the respective divisions. Still, we find it interesting to display and comment at the group level how we develop here. And as we said before, impacted by lower capitalization, the R and D spending increased SEK 10,000,000 compared to quarter 2 in the last year. And we have a rolling R and D cost to sales ratio at 12%. Of course, in terms of our strong balance sheet, that had an impact from The acquisition that we performed, so in the investing activities, which you see here is almost SEK 1,100,000,000, The acquisition of ATG L and M was a little bit more than SEK 1,000,000,000. In terms of the financing activities then, we utilized credit facilities for almost SEK 500,000,000. We also then paid the dividend of close to SEK 300,000,000, and we also Had a small acquisition of non controlling interest in a subsidiary to Axon. We ended the quarter with a net cash of a little bit more than SEK 300,000,000 on June 30. And in terms of available cash, we then have a little bit more than SEK 1,000,000,000 cash at hand. And having said that, then I hand the word back to you, Anders. Okay. Thank you Very much. And I want to talk a little bit about this latest acquisition of ATG, Lutte and Melzer. So ATG L and M is a company headquartered in Germany, Wertheim in Germany. 190 people in total, global business and global Coverage with all these people. And the company develops and produces and sells what is called flying probe and Grid Test Systems for PCB. And this is what this equipment is doing, it is testing connections on PCBs with Pins. And we have here 2 different type of technologies for doing that. So you can see illustrated on this page on the top right This is what is called flying probe. And the flying probe test, there is robotized where the pins that test is the electrical connectivity on the boards. They are robotized and can move in various patterns, which allows for a very high flexibility in The test and they can test different type of boards with high throughput at the same time. The other technology is called the grid test and the difference to that, so it's still pins testing electrical connections, But it's in a fixed pattern. And this is for high speed production because here you have no flexibility. You put the grid in a specific pattern that corresponds to the board, When it comes to the different product lines, so we have what is called flying probe PCB test. And this is this robotized flying probe technology on PCBs and typically with high flexibility in the lowtomid Volume Market. We also have flying probe technology for testing substrates with the same robotized Technology Solutions. And here we can test down to very high accuracy of 10 micrometer on the pad sizes for different substrates. And then we have the grid PCB test, which is just a fixed pattern on the testing pins for high volume production. So This is the offering. In addition to that, ATG also have a very strong aftermarket and consumable business, which is Very nice. Why we believe that this was a good company for Micronic to be the owner of is that we could see that ATG LMM really have very good DNA and culture. They have very similar thinking with us. We have a similar position in most markets where we also have a strong position in the HyFlex market with high precision and a niche position in this kind of market. The business is very stable. It's well established, has been there for a long time. It's the company have a leading position in the Flying Pro Test, very solid aftermarket business and a strong profitability, which is also very stable. So I think it's a really good company and a very good fit with us. And why we believe that we can be a good owner and a good home for A2G LNM is that Coming out of different ownerships in the past, we will be a long term focused owner really to allow ATG L and M to focus on its business and develop that business. We have what we can offer is that we have a very strong global presence In the right markets and the right places in the world that HNG can leverage. And especially strong presence What we have from Micronic is our China presence with more than 800 people in China right now with that HED L and M Also can elaborate on. And you saw that just from Terminate, even though we have just made acquisitions, we still have Strong financials to allow for further expansion around this technology. So you see that we can be a very good owner, And we're happy to have ATG L and M on board with us. All right. So Just some final remarks before we move into the Q and A session. So I think that we have See that we have a very strong position for continue with the sustainable profitable growth. We have with the setup and operating model that we are running in Very customer centric, very scalable and decentralized organization. In all our businesses, we have a very competitive product portfolio, which we continue to invest in to stay competitive. And we want to make this sustainable growth Through a combination of organic growth and acquisition driven growth. And on top of everything, very dynamic, Responsible culture. So I think we have a very good position to continue our growth journey. And Yes. We look forward to the coming quarters with that. All right. That was everything from me. Now we can move into the Q and A session. Okay. So now we're moving over to your questions. In general, please keep it to 2 questions per time in order for in order to allow for everybody to be able to ask questions. And if you have more questions, You could ask them later and we will try to get to those questions as well. So then I will ask the operator, do we have any questions? Thank Our first question comes from the line of Daniel Jurgen of Handelsbanken. Please go ahead. Your line is now open. Thank you very much and congratulations to the very good report in especially the former AS Segments. I would like to ask 2 questions, if I may, and that is mainly to the on the piggy side on displays. We saw in your presentation that in the appendix that The market expects or the market's growth for the masks in display is 4.5% this year of 1st of 2020. I was wondering if you have any insight in how this growth is expected to pan out in terms of More advanced, Maersk, IO, AMOLED and G10.5 or versus the more low end up to Generation 8 and more LCD. So far, the orders you took here in Q or July has been more tilted to the lower end, but hopefully, we will see The more advanced masks also in second half, but any comments would be great. Yes, that's a difficult correlation To be made there, I think. In general, I would say that an increasing photomask market must be a good thing for us and so on. And then What kind of equipment that will result in, but we see that there is still a very strong you see also in the same On the other page, I think after that actually that you can see the transition from LCD to AMOLED is quite much stronger than the display Area Growth in general. So we still believe in a technology shift there where the AMOLED that requires more advanced photomask will have a Stronger growth over the other type of technology. And also the same is valid for the new kind of the complexity of displays where we see We believe that there should be a breakthrough or we will see more of foldable and curved and New shapes and so on. So how that will be at the end, that we cannot really comment on, of course, but I think on the market trends, we believe that it's going in the right way. And can you do you have any insight on how large part of the AMOLED and that you do serve or is Currently served by the Precision 800 Evo and so on. And how much more masks that Right. That's it. It needs to be done here again if we expect to if you understand my question, The underlying demand uptake in MLAD versus the current Availability for Advanced for the masks. Yes. So Any data? Yes. I can see where you're going, but it's not possible to make it correlation as the we know that I mean all the AMOLEDs displays are And the backplanes and so on or the backplanes on those displays are used are using high end mask writers. But the driver for mass provider is the change in technology and so on and not the volume of it and so on. So And that split we cannot see. No, of course. And the last question, if I may, and that is with regards to the EUVs on competition to SLX, is those machines much too expensive still to be seen as Competition to the SLX business or are they coming down in price so it can start to compete also with the SLX. Now there's a significant price difference between that kind of equipment. It's not only in the writer itself, it's also On the surrounding equipment, what you need downstream and upstream is such a process. So you need to build the complete process around the UE technology or the laser Technology and the equipment used also after and before also have a very different price point And so there's a clear distinction where you can use laser technology and where you will use other type of technologies And it's really coming down to the node sizes, the fine patterns are printed. Perfect. Thanks. I think I have my two questions. So good luck here in Q3 and have a great summer. Thank you. Our next question comes from the line of Frederik Littau of Danske Bank. Please go ahead. Your line is now open. Thank you for taking my questions. Hope you are all well. I had a thinking around the MicroLED and MiniLED. If you could sort of address those 2 sort of emerging technologies, even though they are in very early stages, What would that sort of imply for you in terms of what type of equipment on the PG side that would be Demanded for those type of applications, are there any differences? Are those applications even more Complex each of them? Or is it any other thing we should think about there? Thank you. Yes. I I think that's a very good question. And we could see that those technologies are picking up and also have positive impact on our other divisions actually from this technology as well, which is in total a good thing. So I cannot give you a very straight answer, but the both the microLED and the miniLED and the microLED technology requires also Backplanes in building up the displays, quite similar to the LED technology. And so still photo masks will be required for making that. But how that will look at the end, I don't have an answer on that actually. Okay. Can I take another question on then on The similarities or differences between HyFlex and Hyvolume, I mean, you have a very, Very strong demand from customers in HyFlex as you have in high volume, but you have very different type of EBIT margins here? Is that due to and within HyFlex, for example, you have stated in earlier years that you are one of the leaders and have Up to maybe 50% market share on the HyFlex. Is there a difference between these two segments that make it So that the HyFlex should run with around 4%, 5%, 6%, 7% EBIT margin. Meanwhile, the high volume is the 20% to 30% EBIT margin or can we see HyFlex moving higher? Thank you. Yes. So Yes, it's very different segments. I mean, if you look on the end products, it's really high volume is mobile phone, Consumer Electronics, Computers. And for our HyFlex division, we're really serving the market that where the end products are typically Medical equipment or aerospace equipment and high end industrial equipment and so on. So very different, but the demand is strong in both right now. If we start with the HiFlex, so we are not happy with the margin We have an Ilflex, so there is I mean, that's also part of this former when it was all assembly solutions, where we said we want to be about 10% and with a Strong emphasis on above 10%. Now, of course, high volume is contributing quite a lot to that Difference, but we want all divisions to contribute to that target quite a lot. And I believe that we can reach higher Margins also in the HyFlex business actually on that. So still work Going on there, I think why we do so good in the high volume, it's also different technologies. So the majority of the equipment we sell in high volume is dispensing equipment, which is a higher margin product than compared to what we have in the HyFlex division, which is more pick and place and jet printer Equipment, which is typically lower margin products. It's also the different type of products that generates the different type of Profitability here. But But shouldn't one assume that jet printing, for example, which A very unique technology where you don't really have any competition should carry and should help the HyFlex to create better margins due to The uniqueness and thereby that you can price it in a different way. Yes, absolutely. And we are looking we are striving for better margins in the total Sven, I think the same is actually valid for the uniqueness of our pick and place equipment and also the storage solutions that we have. So Improvement possibility all across in that one. Okay, perfect. Perfect. Thank you. Thank you. Our next question comes from the line of Mikael Larsen of Carnegie. Please go ahead. Your line is now open. Yes. Good morning. Hi. I have a couple of questions on ATG. First of all, can you tell us the growth rate And that we have generated past couple of years, maybe or 4, 5 years. And the expected market growth Going forward for flying probes and grid test systems. So now we cannot I mean, they had a different owner the last years and so on. I think we stated when we acquired that last year, they have a revenue of SEK 420,000,000 if I look at turbine a little bit. Yes, SEK 420,000,000 for 2020. And so that is the only what we can disclose from that. I think also I said that the growth rate has been on the conservative side over the last couple of years. We've indicated that also. Yes, exactly. So it's not This business is not a superfast growing business, but a very stable and with moderate growth in it. Is this also the case going forward that they will have maybe 3%, 4%, 5% growth? Or could it be better than double digit maybe? So we'll not comment on the numbers there, but We are looking for we want our expectation is that this business should grow, but not that super high numbers. Okay. Got it. And then just curious to hear about the growth drivers, the Global Technologies product there, I guess, They have good support from structural trends, autonomous driving and 5 gs and data center investments and so on. So what about HED? Is this company also benefiting from underlying trends in the PCB or Substrate markets in any way? Yes. And it's different type of drivers. It's also the drivers we can generate with the products, but also in the market. If you look in the market, so the market we're testing in general is a growing market. There's more quality assurance. There's more testing. And we also know that the HiFlex side of market is a good market to be in, especially now with Production being more localized everywhere, so maybe the volumes will be actually lower when it's produced in More places than one. The big road driver in this market is on the substrate side, which is still quite a small part Of the testing or of the how do you say, the market or the products that will require testing. And The substrate market over PCB have a quite strong growth actually. So that is also a driver to participate in that one. So for sure there are as well here some good market drivers for us. All right. That was my 2 questions. But maybe can you say something about the PPA amortization? If you have any early guidance on that, that would be great. Thanks. So we just like we always do following the IFRS setup, We have done the preliminary PPA, as you can find in the quarterly report. We see the pattern just like in our other acquisitions that in respecting the Valuing the inventory at market value, it means that for the 1st 2 quarters, we will have an impact of Turning around that inventory that has then been valued upwards in connection with the acquisition and so Lesser gross margin than what is the case on the underlying. We have commented On that, as we proceed and we will use similar types of communication tools to show what the underlying How the underlying business is performing for that. But of course, in the coming two quarters, the contribution for this recently done acquisition, Just like in our previous acquisitions, it will be lesser than what it is in the medium and long term. Okay, thanks. Thank you. Thank you. We currently have no further audio questions. I will hand back to the speakers for any further remarks. Okay. With that, I think we've reached the end of today's presentation. Thank you for attending.