Earnings Call: H1 2020

Aug 13, 2020

Any conference is being recorded. The presentation will be followed by Q and A session. Webcast viewers may submit their questions in writing by the relative field. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Heinz Kondert, CEO. Please go ahead, sir. Thank you very much, and welcome to the earnings conference first half of twenty twenty. I shortly go through 4 chapters, give you an overview on the Total situation financial situation of the group as we go into the financial review. This is being done by Nicolas Rodondi. He is the Chief And then we go into the outlook and of course, we're going to have the opportunity to ask questions. I'll be following with the slides So as an overview, ComEd has a solid first half twenty twenty. We have significantly improved our performance versus the previous year half year. Strong growth in semiconductors markets, The PCP division more than compensated for lower demand in X rays, which is the division IXM and IXS. Execution of strategic the strategy progress as planned. No relevant impact on operations from COVID-nineteen, thanks to fast and implementation of protective measures and the top management completed reinforced smooth transition to new CEO and CFO in Jurgen. We'll come back to most of these themes again. Going to the next slide, the half year result improved On semiconductor sector strength, you can see that we have increased the sales in the first half by 3%. This mainly came from the PCSemiconductor division. We could double more than double the EBITDA to 10 point 3% compared to 4.8% in the first half twenty nineteen. And the free cash flow is almost the same, a little bit less 2019 is mainly because of higher net working capital that is due to The buildup of inventory to safeguard our supply chain relative to our But also in front of our own customers to make sure that there's no interruption in the supply chain. And we still maintain a Sound based on the equity ratio with about 50%, almost 50%. Next slide, where does this come from? PCB owes more than half of The revenue and increased the revenue in the first half by 33% compared to the first half twenty nineteen It's remarkable and of course it's also led to a higher EBITDA, which is in the range of 19%. As you know, the goal my goal is to have a 25% EBITDA on the group level. So 90.2% is good, but Still not what we want to achieve. We have to improve that over the next quarters. IXm had a reduction of 18% in sales And still could make a reasonable EBITDA of almost 14% compared to 2019 where we had almost 28 IXS unfortunately fell back into the red numbers after they had a positive EBITDA in the second half of twenty nineteen. We realized in the first half a minus of 2.1% simply because the end markets were down Quite a bit and we are still in a transition to get away from low margin products in IXS. This is ongoing. Very positively, the EBT, the E beam business has Slightly improved sales by 6%, not really remarkable for the size of the expenditures. But the good thing is that they could almost make breakeven. So financially, the EBIT business is not an issue anymore in our It's also cast out, so there's no connection anymore to the core business. Next slide. Going to the PCB in more details. We have seen in the First half, an excellent market situation from our customers. Data storage is We have 5 gs networks coming along artificial intelligence, Internet of Things and I could All these end users which were in a positive growth mode and have contributed to the increase of sales. We are also preparing the manufacturing In Malaysia, we start manufacturing in Penang in October this year. This will again help them to improve our bottom line significantly. We also had significant spec wins with our main customers. In fact, The strategy that we announced last year by focusing on the core, getting The E beam putting more money into the semiconductor related activities has been well received with our customers and we are now in The situation where we get more inquiries for new products or for existing products in higher volumes, very positive Going to IXS, the realignment is in full swing. As We told you before that we are in transition. We have to get out of the low volume, low margin, high mix Product portfolios and moving that to high volume, high margin and low mix products which are mainly coming then from the semiconductor industry. So the semiconductor industry, the semiconductor technology As such, under SMT, the midstreams will contribute more to the sales in the next couple of years. Fortunately, due to the pandemic and as well as the transition, the The EBITDA went down to minus CHF2.1 million and It's of course a concern that needs to be changed. We are positive that all the changes that have been enacted and are underway are Looking to improve in the next couple of months. IXm, as I mentioned before, had a reduction of 18% in sales, but still doing pretty well in EBITDA. We believe that by the way both IXM and also IXM has reached the bottom. And we expect a slight improvement of the situation in the next couple of months. Still hard to say because there are a lot of factors that influence the business, not only pandemic, but also structural changes in the automotive industry and the aerospace and the security sectors that do have a negative or positive influence on our business. We'll see in the next couple of months How these markets are developing, but we are not negative. We see positive signs and believe that the flow rate will go up. Again, EBITDA impressive, the reduction in costs. So we're definitely came to breakeven and we are also Okay. You see that the cost savings and the restructuring that we did in the E beam business by Reducing the manpower and cutting down the activities to meet the requirements of the future has helped us And this will continue in the next couple of months. And we expect that this business is going to be In the new constellation within the next couple of months, hopefully and expect It's going to be at the end of the year. At latest, that this division will be in new hands. With that, I'll transfer to Niccolo Dorton who talks about the financial results in detail. Thank you, Heinz. Good afternoon to all also from my side. Before I start with the financial review, let me share some considerations. Like all companies also we were hit by COVID-nineteen. First, the supply chain bottleneck from the pandemic were luckily less than originally anticipated. 2nd, we were forced to adjust our production lines and working shift set up To meet health regulations, which in combination with the short lockdown in Sao Jose and in Shanghai caused for a few weeks Our production processes and those absorbing less fixed costs. Overall, both elements did not have an actual impact on our financials. Which we realized in the second half of twenty nineteen helped us to achieve a decent result. In addition, based on our ongoing strong balance sheet and solid cash position, we did pay back a portion of a loan, Which is underlining that we don't have a pessimistic view of the near term future. To be clear on this, we remain vigilant in order to react fast in case of a worsening situation in our market. Next slide please. Even with only slightly higher sales of 3 The profitability increased significantly both in Aftolut and Parela's reserve. The increase of net income is not visible in our free cash flow, which is slightly below previous year value. I will later explain these KPIs in more detail. Next, please. Despite the slightly increased net debt, the leverage ratio on the last 12 months basis measures as net debt to EBITDA is still low at 0.6%. Also the equity ratio with 49 point 2% is still solid and on a high level. Economic profit and return on capital employed increased Significantly driven by a higher NOBOT in combination with reduced capital employed. Despite the strong increase of the economic profit, this is still not meeting our expectations and Our goal is to be at least breakeven as soon as possible. Next please. This page we see the P and L and I'm going to talk about the items which will not be discussed on the next page. The new orders are above prior year level, but this is only driven by PCT. I examined that excess are showing year over year a lower value. The same is valid for our order backlog, which is 30% higher compared to prior year or 14% higher compared to the beginning of the year. Looking at gross profit and comparing it with the sales increase, we see that we were able to increase it over proportionally. This was based on a favorable product mix. In fact, we have more high margin Matchbox from PCT compared to the previous year. As a result, we did those increase our gross profit margin by 1.3%. Further, I would like to explain what happened in R and D. As you see, we did increase it year over year by roughly 1,000,000 to execute on our strategy. Looking at SG and A is Showing the highest cost reduction of €6,200,000 From a divisional point of view, the main was in IXS followed by e beam and CCT. Looking at from a cost item view, the main reductions was in consulting, travel, trade shows, sales commissions and also a favorable currency impact. So in total, we reduced our functional cost by €6,000,000 of which we do consider €2,000,000 to €3,000,000 To be sustainable, while the rest must be seen as a direct consequence of the travel restrictions. Next please. Here, I will explain what were the main driver of the free cash flow. 1st, driven by higher net income, we have a higher cash flow of €11,000,000 before the change of net working capital, This you cannot see on this slide. 2nd, while in 2019, we did reduce our net working capital by €8,000,000 In the current year, we did increase it by €9,000,000 which is a cumulative difference of €70,000,000 This was the driver that reduced the net cash provided by operating activities with almost €7,000,000 compared to the prior year. We had the lowest spend for capital investments of €5,000,000 compared to prior year, which helps to have a free cash flow almost at Looking at the financing section, while in the prior year, we took Below the bank 1,000,000 in the current year, we repaid an amount of €4,000,000 So net, we did reduce our Cash position by $11,000,000 from $60,000,000 to $49,000,000 which is still on a high and comfortable level. Let me say something to both capital investments and networking capital management. As you can see, capital investments are at a very low level as we were very prudent due to the uncertainties caused by COVID-nineteen. Having now a clear review of the situation, we will start to increase capital investments again for both replacements and expansions during the second half of the year. Now to the net working capital. On one hand, net working capital requirements grew in the first half to support the large sales increase of PCT. On the other hand, as a percentage of last 12 months net sales, the average net working capital decreased to 23%, In fact, by 3 percentage points lower compared to the previous year. But we are not yet happy with this and are aiding to further Optimize our net working capital in the future. Next please. What we can see here is that our balance sheet looks very solid and straightforward. And so I will just highlight a few points. Current assets increased mainly due to higher inventory and accounts receivable and were offset partially by a lower cash provision. On the liability side, you can see the reclassification of the bond, which is due April next year from non current to current And the higher customer prepayments of €10,000,000 coming from the division IXF. The equity ratio decreased slightly as combination of lower equity and grossing of the balance sheet compared to the prior year end. Next please. We will now see the breakdown of the sales, The EBITDA margin and the net income. So let's start with sales. The positive volume effect at local currency was in total €12,000,000 or 7%. While PCT had €27,000,000 higher sales compared to the previous year, Which is a plus of 37% at constant currencies, the division X-ray systems and the X-ray modules have a shortfall of 11,000,000 and €5,000,000 which is a minus of 16% 14% at constant currencies. Total negative currency impact of minus €7,000,000 is driven by a negative euro impact of €2,000,000 and a negative dollar impact On this page, we have the breakdown of the EBITDA margin. Let me guide you starting from the left hand side. The higher sales and actually mainly the better product mix in 2020 increased the EBITDA margin by roughly 4 percentage points. In addition, the lower functional cost base compared to previous year had a positive impact of roughly 2 percentage points. Those on a comparable basis, the EBITDA margin was almost 6 percentage points higher than in the previous year. The negative currency impact was minor with 0.4 percentage points leading to an EBITDA margin of 10.3%. We can see here that the product mix or ultimately the end market mix has a major impact, which underlines why we want to focus also IXS on the semiconductor and electronics sector. Next please. At the last breakdown, we will see based on the same structure how the impact was in CHF 1,000,000 at the level of net income. All impacts are always after tax. Positive sales and mix impact was €6,000,000 and the cost reduction was €4,900,000 which brings us to a net income at constant currencies of $7,800,000 Those on a comparable basis, The net income was almost €11,000,000 above the previous year. The negative currency impact was 1,300,000 which does lead to a reported net income of 6,500,000. It is even more visible that the sales increase of €5,000,000 was only partially explaining the decreased net income of almost EUR 10,000,000 compared to prior year. So with this last slide, I close the Chapter related to our past performance and I hand over to Heinz so that he can explain how our future performance will look like. Thank you very much, Nicolas. So let's move to the outlook. As we have And we all know the fundamental growth drivers of the semiconductor industry is intact. And can you go to next slide? Okay. The fundamental growth drivers are still intact, especially in the semiconductor industry due to the acceleration in the We also continue to focus on our core technology, RF Power and X-ray Technologies. It's also very welcomed by our customers when we announced the new strategy to focus on these technologies and markets has very much helped to intensify the cooperation and relationship with our key customers. We have a strong financial footing as we have heard A good message comes from the executive team, as we have already announced, Kevin Crofton will become new CEO of comment by September 1. So on September 1, he will start his duty. He already moved to Switzerland. He is leaving in turn We are very much looking forward to have Kevin with us. I know Kevin for 15 years and I know that he understands this industry Inside Out has been doing that for his whole life and it will definitely contribute to the success of It was not an intention, it was a kind of coincidence that the new CFO It's not only a woman, but it's also an American citizen. However, she has already been living in Switzerland for a year And has been in major functions at rating technologies in the United States as well as in France where she had important functions in a joint venture between Tavis and Reighton. She is very much familiar with the global Accounting system and situations in larger companies, I'm pretty sure that she will help us as well to become more profitable and more successful. So welcome to both of our new team members. Looking ahead into the second half of twenty twenty, the driving forces as we know them are still dynamic and the industry is Growing stronger than ever. This has been confirmed by our customers. We have deeply calls with our customers and there's absolutely no change In what we have seen in the last couple of months, it's going even into the Q1 of 2021, where the order income is already very We continue our current business environment in X-ray technology, we see, as I said, a bottom out of the orders It should become better. However, it's still a fragile market segment because main markets, as I said before, the automotive, aerospace and The security business at the moment is not in good shape and we have to wait for certain recovery. Comments pushing ahead with the numbers of promising projects and products in the group foremost in order to Move from the NDT from the non destructive testing into more semiconductor oriented technologies, Also in the back end in packaging, where we see enormous opportunities for the company. Short term trends in the global economy is much more difficult to forecast. There are uncertainties raising from the not only from the pandemic, but also Political Turbulences, you may have heard that Intel moves part or wants to move parts Of the manufacturing to Taiwan, Taiwan is really the biggest manufacturer of microelectronics and this Some concerns what's going to happen in the future in that respect that of course we cannot influence at all. But all in all, we are very positive into the second half twenty twenty, and we are also looking positively The latest estimations are such as the The semi organization expects revenue of approximately €17,000,000,000 in 2021, up from 3,000,000,000 this year. That means we can expect the growth above 10% if that is going to happen as planned. So that's the outlook and that brings me to the end of the presentation. And of course, you are now free to ask questions. Fine. Thank you very much. And with this, we conclude the session. And thank you very much for attending Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.