Earnings Call: H1 2019

Aug 15, 2019

Ladies and gentlemen, welcome to the Comet Media and Investor Conference Call and Live Webcast. I'm Sarah, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. Webcast viewers may submit their questions in writing via the relevant fields. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Heinz Kundert, CEO of the COMET Group. Please go ahead, sir. Good afternoon, everybody, and welcome to the presentation of the first half report 2019. I'm going to start on the Slide number 4. On the Slide number 4, you See that the net sales in the first half of twenty nineteen has been SEK 177,000,000. This is a down of 23%, 23% 0.8% versus the H1 2018. So this is a significant reduction of the sales due to the downturn in the industry. It's mainly because of the memory sector, where we are very much engaged and the memory market has been hit Hardest in comparison to the total market. This had a big impact On the EBITDA, which is only 4.8%, and mostly, it is driven by the volume, that means Select volume gives us a lower much lower EBITDA margin. All the other activities like the Improvements of IXS could not compensate, of course, for this big loss. On the other side, the cash flow has been increased from 2% to 8%, thanks to rigorous networking capital management And also CapEx freeze and some other cost saving activities, especially in the field of central costs. We do have still a very robust financial footing with a 48.8% equity ratio. That means on the balance sheet, we look pretty good. Going into more details on Slide 5, you can see the 4 divisions. As I said, PCT, Plasma Control Technology, With the sales of SEK 73,100,000 is 40% down Compared to H1 2018 and 17.6 percent down from H2 to 2018. In the first half, the sales or the market as such has reached a very low point, and I'm convinced that we have reached the lowest point and from here, it should become better In the next couple of months and quarters, at least this is what also the market researchers and our customers are saying. These had a tremendous impact on the EBITDA with CHF 3,200,000 or 4.3 And which is, of course, a very unsatisfactory result. Going to IXM. ZEM has a reduction of 10%. This is due to lower business in the field of The security inspection at the airports, which is mainly coming from the freight and large packages, The money in this sector went to the checkpoints. That means the personal checks, which is a market where we are not very active right now. Of course, we want to improve that in the next couple of years. Nevertheless, the EBITDA margin with 21.1 has been pretty high, and this is because this division is in good shape as far as volume, standardization is concerned. And we are absolutely positive that IXM makes progress in the next couple of Quarters when the basis, especially on the airport sector, is coming back. IXS has improved the top line as well as the bottom line compared to last year, although, of course, with 5.1% of EBITDA, This is not a number where we are satisfied. Of course, we believe that with certain Activities in this segment, and I'll come back to that later, it would be possible to get a much higher EBITDA over the next couple of years. EBIT EBIT is another sector where we had the changes. Maybe you remember, There was the divestment of Davenport, which was part of EBT here, and the sales has been reduced from EUR 9,600,000 €7,000,000 in the first half of twenty nineteen. On the other side, the EBITDA has improved because of the divestment of of the Teijin Port. So this is the result of the 4 divisions, and I'd like to go In the market for semiconductors, the market research is, as you can see here on the left side, This is Gartner, Cohen, VLSI Research, ISInsight, UBS, VSTS. They have a forecast that the market is growing on average By 7.8%. Again, these are the devices, not the systems. So there's a kind of understanding that from now on, The market will turn up again. The question is how fast and when it really starts. You can see on the right side some Quotes from SIA. SIA is the semiconductor industry association. They were surprised of the surprisingly strength Of the memory price stabilization, it clearly shifted suddenly from customer Depletion of inventory to customer build. So this is a good sign that the memory business as well as the logic and the foundry business is coming back again. An interesting slide is online. It shows now the direct market. I mean, this is the equipment market on the left side where we deliver our systems as a part of these markets of these equipment. Clearly, 2018 with the highest value of more than $60,000,000,000 revenue, It went down in 2019, as we can see, and is expected to go up again 2020 As a forecast, so that also confirms our opinion that the lowest point in the market has Of course, we still have some answer to this, maybe not as far as the market is concerned. It's more the geopolitical situation on tariffs. And that effect is that makes us a little bit cautious on the interpretation of these numbers. What you can also see here interestingly It's that the majority of the market is reddish, and reddish means it's Asia, and that the U. S. Is the dark blue part Of the bar that is relatively small. So despite all the issues with The tariffs, the main market is still in Asia and will remain Asia. This year, Taiwan will become the large Market in 2019, China will be the largest market in 2020. So despite all the discussions between the U. S. And China, China is the dominant player in semiconductor manufacturing in 2020. Going to the financial results, this will be presented by our CFO, Beat Malakane. Thank you, Heinz. I would like to explain our financial situation of the first half year twenty nineteen based on a few slides only. Before I go in, I would like to draw your attention to Page number 11. Page number 11 shows you here the first time of a new accounting standard, which is IFRS 16, that we, again, as I said before, applied for the first time with effect 1st January 2019. So as a consequence, when you apply a standard in a business year or in a financial year, You also would have, for comparative reasons, to adjust than the previous year, which in our case now is the first half of twenty eighteen. And you see that here on the right hand columns. IFRS 16 defines that Rents and leasing contracts lasting longer than 1 year would have to be capitalized. That means we have to take the assets to our balance sheet and also show the respective liabilities in our balance sheet as well. And also as a consequence, of course, is that the lease payments and also the rent payments that we have in our balance sheet in different functional costs and in COGS Well, it would have to be taken out and be replaced by a depreciation amount and also by a financial or, let's say, an interest amount. So in our case, taking out all the lease rents and the rent payments out of our functional Costs and COGS has a positive impact on EBITDA. That's the first line here that you can see here on the right hand side. So Decreases our EBITDA by 1.1 percent from 12.7% as we have reported last year to the 13.8%. And then, of course, to compensate that, we have an increase in depreciation and we have an increase in Financial results, as you can see in the slides here. Of course, 2019, we do not adjust as we already apply IFRS 16. Down on this page, you see also the impact on total assets and total liabilities. We take in these particular assets As an asset in our balance sheet and goals and respective liabilities accordingly. With that, I would like to move to Page number 12, which is our income statement here. And here, I have a few comments. So our net sales, as we already heard from our CEO, went down from 232 To 177, which is a decrease by almost 24%. You know that our biggest The division that we have in our business portfolio is PCT, the Plasma Control Technologies, And this particular division experienced a downturn of over 40%, to be precise, 41%, and that has And whenever we have deviations in our P and L or whatever, this is basically mostly driven by the PCT business. So this volume impact has also negative impact on our gross profit margin, which reduced To 36%, roughly about 36% from about 40% in previous period or previous year, 6 month period. And that was mainly a volume impact. Now looking at the functional costs, which are below the gross profit line. Here, I would like to make 2 comments. 1st, COMET managed to significantly reduce the functional costs. So when you look at development expenses and SG and A together, then you realize that we have saved about SEK 11,000,000 in functional costs, which is about 40% compared to previous year, the same period. But having done that, we have not stopped any project, Which is an important development project, development projects which will generate future cash flows there. We continue to spend and have continued to spend, of course, in a way that we secure our cash flow future also in for the next years. But other than that, Altogether, CHF 11,000,000 savings. Below the operating income or the EBIT, as you see here as well, is the financial Result, which is a little higher, they're a little higher because there was higher interest expenses, but also there was a negative impact because of foreign currency Development. Our income expenses became not an expense here in this particular first half year, And it's a positive amount because we are in a loss situation. As you can see, CHF 3,100,000 net income, Which is a negative number here. That means a loss, which compares to positive 14.5% last year. Below there is also added the EBITDA went down from CHF 32,100,000, which is a margin which was a margin last year of 13.8%. It went down to CHF 8,500,000 or a margin to CHF 4.8 million. And I would like to give you a few explanations On Page 14, which is the waterfall for the EBITDA. Here, you see again the SEK 32,000,000 goes down to the SEK 8,500,000 Mostly driven here by the first column or the first column shows, it's mostly driven by the PCT business where we experienced EBITDA loss Of almost €28,000,000 When you look at IXS, there is a positive impact. Last year, there was a restructuring in IXS, which results this year in much lower costs at the end of the day, and that has a positive 3,100,000. Going further to the right, which is the X-ray module business, There is a negative impact. This is a purely volume driven thing. We have heard from the CEO before that there was a drop in sales compared to Previous year period of roughly about 10%, and that, of course, has left its traces also on EBITDA, which is a little bit negative here. And moving further to the right, where we see the EBT. EBT here is clearly the sale of the Davenport business, That means the e beam system business that we had in the U. S. That took place in 20 'eighteen, second half. And of course, there is less cost, less losses with that sale of that business, and that has resulted to a better EBITDA of SEK 4,400,000. So that leads now to the 4.8% EBITDA margin. And with that, I would like to move to our cash flow statement, which is on Page 17. Despite the difficult situation that we are in with our operating business Activities we have managed to increase our cash flow margin. Our cash flow margin in the current first half year twenty nineteen Amounts were roughly about 8%, which compares to about 2% same period last year in 2018. So the reason why it came out that good is because of rigorous networking capital management. In In the year 2018, we have increased our net working capital, while we decreased our net working capital in 2019. And that, of course, had quite a big impact at the end of the day. And it results in a much better cash flow margin as we see in 2019. Looking at the cash flow used in investing activities, that amount has reduced substantially. There are two reasons leading to that. First of all, we have introduced the CapEx freeze in 2019 early 2019. Secondly, we still spent quite a bit of money in 2018 for the new building in La Motte. And these were the two reasons why we have a much better situation in the investing cash flow than we have had in 2018. And as a consequence out from this rigorous net working capital management and also The CapEx freeze and lower spending in investing activities, we have achieved the free cash flow. You can see here that our free cash flow is CHF 5,900,000 compared to a Quite high negative number last year. And that, in turn, also results in lower financing activities, which you see in the line below. So that is quite an acceptable cash flow situation, I must say, But always considering in the difficult environment that we are in, I always say that usually a cash flow margin Of a normal business, it should be at least 10%. Between 10% 12% would be a zero result that we could achieve. Look, in that particular year, acceptable result. So with that, I move to Page 18, which is our balance sheet. This is actually a nice picture to look at. You already see it in the title. We say it's a robust balance sheet. It's Stefan Key, a robust balance sheet. Long term assets are financed with long term needs. Short term assets financed with short term means. That is always a good situation to be in. Our equity ratio amounts to close to 50%, to be precise for the 8.8% here. The best, you cannot really read out of these numbers here because they are quite condensed, But we have a good liquidity. I think our liquidity is good and our liquidity reserve is also good. And that definitely gives Just some room to breathe in a situation that we are in and we are not quite sure how long it will last. So we We have a balance sheet, which allows us to be in a rather relaxed situation balance sheet wise. So that is a nice picture to look at the end of the financial results, and that's all I have to tell you at this point in time. With that, I would like to hand back Our CEO, Heinz. Thank you very much, Peart, for your explanations. So let me talk about the Strategic direction. Actually, usually, it's not part of the balance sheet conference here. And But as I'm here now for 3 months or let's say 100 days, I feel obliged to give you some kind of thoughts What direction the company will develop in the next couple of years? On the left side, you see the issues So that I have discovered during the last and the days. This is simply The state of technology in most areas is still there, so we are really competitive on the technology side. We do have highly skilled and motivated people who are eager to outperform. And despite all the shifts We have in the company, they still are fully behind the company, and they want to perform and they want to go with us in the new direction. We have long term partnerships with leading companies, and it was my one of my first action to visit them, mainly in the United States, and to make They go with us and they invest with us and they give us a chance for more business, and they can only say that this is what they said. They said, listen, You are the supplier of choice, and we want to go with you into the next couple of years and having success It's also clear that RF and X-ray technology are key enablers in the progressive digitalization of society. Without those 2 technologies, the semiconductor industry would not be able to achieve the ambitious goals for the next couple of years. We also have a high potential in services. And please remember, service is repair and parts. Services is more than that. Services also includes software that we need in order to build entire Production systems or integration lines that is not only equipped with a scanner but also with And as we heard from Bernd, our CFO, we have a very robust financial basis that gives us some Room to Manoeuf. On the right side, you see a kind of action list what we need to do to improve because the financial Situation is not satisfactory at all. So we have to take action to increase market share, to increase our sales and also, of course, to increase the bottom line. I would say next couple of years, we should definitely be between 20% to 30% of EBITDA. Basically, it's possible compared to our peers. So what are the actions? The biggest issue I have recognized is the complexity of the company. This has to do with The lack of focus, we did too many things, one of a kind systems, long term delivery time, low profitability, and we have to Quickly change that into a focused company that is going for profitable market growth. The second point is we have to invest into more software. When I talk about software, it's not only operating software for a machine. It also includes artificial intelligence, machine learning and data analysis, in particular in the X-ray business. This is Extremely important to have a feedback system that controls the process and is not just showing a nice picture where you can see all the defects. The third point is expansion in high volume markets. What I Before, actually with a high degree of standardization and high probability of remaining or becoming a market leader, This is the condition to have a higher EBIT margin or EBITDA margin in order to really show good results. The 4th point is operational excellence and the ability to manage the cycles So make or buy decisions. When you compare to other companies in the same sector, I'll give you an example, VAT, which is my former company, Then it's exactly the same cycle. They have components like us. They are still in the 25% EBITDA range, although also being affected by the cycle, I do not see a reason Why we cannot do the same, and we are working on that with a high priority. Another issue is expansion of a footprint in Asia. You've Most of the equipment are sold or bought by Asian countries, and we have to expand our operations So there are activities in general in Asia. So these five points are on top of my agenda, and we have already started to work on them. More details will now follow. Looking at the Page 21, this just is illustrating again That the market is growing. The CAGR is approximately 7%. And of course, here you cannot see the cyclicity Because it's flattened by the CAGR over 4 years and that shows that despite the ups and downs, these markets are going to grow. And both areas, RF Power Solutions as well as X-ray Solutions are part of this growth. Without them, this industry, as I said before, It's not booming anymore. So we are in the middle of this attractive market. Going to Slide 22. This is the result of a strategic discussion what we had, how do we go forward, where to focus. So our DNA is of the same technology is RF power and X-ray. This is where we are coming from. This is where we have High market shares in some areas, we are market leader, and this is what we call the call, and the call should be strengthened. They're also expanding expansion in services, what I said before, which is going beyond repair and And parts, it's including preventive maintenance and systems control by artificial intelligence and so forth. Now you can also see that E Beam is disconnected from the core. Here, we are looking to Have strategic alternatives, how to reduce the risk to almost 0. We do not want to have risks in this business anymore and also to eliminate the losses. We are in discussion with some of the potential Candidates, and we are quite optimistic that we can find a solution to continue this business, But with a much lower involvement of ComEd and, of course, without any risk and without any losses for the future. Then going to the Page 23, it shows you a little bit in more details what we intend Doing in the RF Power Business, the PCT division, on the left side, you can The vacuum capacitors where we are absolute market leader. We are also market leader in Matchboxes. And newly, we are entering the generator business with a totally new product. This square here, Alfau unit, is so called kind of increased the share of wallet. We have very good positions at large customers, and we're going to expand that and hope to finally have Up to 100% share of wallet at the big customer. This is possible. VAT has achieved that, and I do not see a reason why COMET The second box is product innovations. Here, we have a new RF power generator, which is unique, which is disruptive and has been presented to key customers in June 2019 in the United States. They're very intrigued on that new generator, but it has to be tested, has to be adapted to the customer's Certification will take a while to do so because we need a certification for the product that is going The machines of our customers that will take 1 to 2 years. So we expect to have revenue Dreams starting from 2,001, if everything goes right. We also have to increase the flexibility to buffer cyclical swings more effectively. It's clear that downturns, upturns will come again sometimes Later, we have to build an operational flexibility that during downturn, we are not Losing so much money as we do right now. Also here, we have peers which are doing that, and we will build the Such as the necessary measures in order to achieve this high flexibility. I already talked about the focus in Asia. This an important issue for two reasons. 1, our tariffs, we have to get away So of these obstacles and invest more in Asia, also in operation, not only sales and service, but also in operations. Going to the next slide, this is 24. Here, we have a tremendous change in the Repositioning of the X-ray Systems business. Up to now, we had 7 markets that we serve. Some of these Market sales are not really attractive, and we decided to focus on electronics, semiconductors. This is 1. Then Aerospace and Automotive. We see in those 3 areas the highest potential to grow To profitably grow, firstly and to increase our EBIT margin substantially. That also includes, So as I mentioned before, artificial intelligence, machine learning data analysis, this is part of the concept. And I must say at the moment, these skills Do not exist sufficiently in our company, and we will have to look to get resources, be that collaboration, be it that we buy a company or be it that we buy teams with the capability to bring these kind of skills into Just Canis and sell it as a complete solution. With those measures, we are sure that if If we do that right and we're going to produce or achieve the volumes with standardized systems, we have a plan to I have just one standard system with additional modules similar to the car industry, which has maybe 2 or 3 platforms that In the next 3 years, of more than 20%. Also here, we have peers who are doing this and no reason why we cannot do it as well. The third one is X-ray modules and components. Here, we have actually a very good business model Based on volume, based on standardization, this is also one of the reasons why this division is also making Decent EBITDA margins, which is more than 20%. Last year, it was even 26%. We do not have A radical change here. We just do more of the same, increase the addressable market from 100,000,000 Market to a €300,000,000 market where we have still room to grow in the area of in line CT, computer, tomography, Security, 3 d printing and miniaturization. We also moved some components, which are right now in Hamburg At Exelon, back to Flamat because it belongs to components and makes the whole process less complex. The outlook, so as a summary, we can say that the fundamental growth drivers are fully intact. We also believe that there's a moderate recovery of the semi market expected in 2020. Could be more than that, but we have Be careful because there's so many factors which could kick in and make the life much harder. But from a technical point of view, from a market point of view, should be possible to start growing again in the next year. We have strong financial footing. We mentioned that before. The strategic focus It's based on plasma control and X-ray, repositioning X-ray systems and the evolution of strategic options for the e beam technology. All these activities are in the middle of the transition, and we hope that by November, When we have the strategic day in Flamat, we can tell you more about the current status at that time. We also have measures to considerably increase efficiency ongoing, and we will also Continuously report on these successes. Come to the last slide on 28, the summary of the outlook. We I tend to say that the net sales in Swiss francs will be between CHF 350,000,000 to CHF 370,000,000. This should be achievable by an EBITDA margin of 7.0% to 8.5%. We believe this is doable. Of course, always under the condition that there is no Geopolitical event or shift that makes our life much, much harder. We firmly believe The lowest point of the silicon dioxide industry has been reached. And from now on, it will continuously go up in the next couple of years. With that, I conclude my presentation here and give back to the moderator. We will now begin the question and answer session. We have no questions from the phone, but we have a question from the webcast coming from Simon Montaigne, which is asking what is the typical time from the IXM order to sales What was the IXM order intake in 19 H1 versus 18 H1? How are IXM sales expected to develop in 19H1 versus 19H2? It's a very, very tough question. The problem here is That is really a component that is standardized or something special. But in case of XM, oil to So then the second part of the question was the iXm order intake in 2019 in first half year Versus 2018, the intake order intake of IXM in the first half year was about our sales amount, So pretty much in line, and that was about the same also for last year. So it's pretty much a stable situation here. How are IXM sales expected to develop in 'nineteen half year versus 'nineteen half year, too? We clearly believe that The slide shortfall that we see in the security business and also in the NDT business, oil and gas, We will gradually recover and come back. So this is just a fluctuation that we see, a certain volatility, But we believe that the business drivers are intact and that the business will come back and gradually in 2019. Gentlemen, there are no further questions from the phone or Webcast. Would you like to conclude the call? No, that's it. Thank you very much for joining the meeting today, and we're looking forward to have you 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.