Earnings Call: H1 2018

Aug 16, 2018

Ladies and gentlemen, good afternoon. Welcome to the ComEd Group Half Year 2018 Results Analyst and Investor Conference Call and Live Webcast with Rene Leggenhager, CEO and Markus Portman, CFO. I'm Moira, 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. After the presentation, there will be a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Rene Lingenhage, CEO. Please go ahead, sir. Thank you very much. Dear ladies and gentlemen, I want to welcome you most warmly to the financial results audio webcast of the COMET Group. I will start with a review of the first half year of the group and the division. Then our CFO, Markus Portmann, will comment on the most important topics of the financial results. Afterwards, I will talk about the outlook and open the floor for questions. So let Let's start with the review of the first half year. The group continued its growth in the first half of the year, beating a record high first half of twenty seventeen. We increased our sales by 4.4% to CHF 232,400,000. Net income excluding onetime effects is up slightly to CHF 19,000,000 surpassing the record year ago level. Including the one off effects from the previously announced divestiture of the EBU Systems business, net income is at CHF 14,400,000. The COMET Group remains soundly financed Despite significant capital investment in the new construction in Flamat, the group's equity ratio improved by 1 0.5 percentage points to 53.2%. Markus Portman will unpack these key figures for you later. Now let's look at how our individual divisions fared. As you can see in this overview, the Strongest growth in the 1st 6 months was achieved by PCT, followed by IXM, our X-ray module business for non destructive testing markets. We will start with PCT. PCT delivered the strongest growth of all divisions in the first half year at 17.9% And that is no mean feat considering the record sales of the same period 1 year earlier. The main driver remains the business with high end impedance matching networks or our matchboxes in the semiconductor market. But Komet also expanded sales of vacuum capacitors for the production of flat panel displays with customers, mainly in China. To round out the product portfolio by developing a modular, flexible and highly precise RF system solution and create the foundation for growth after 2020. PCT continued to invest in R and D as well as the expansion of the smart lab in Flamat. The EBITDA margin of 24.4 reflect this intensified investment activity. Beside investments in R and D, the lower GAE margin is also explained by increasing marketing and sales activities and the changed product mix. We remain confident for the future in this business area. Despite short term postponements of projects, the drivers for the future growth are fully intact. Smart data, smart manufacturing, Internet of Things, artificial intelligence are the drivers. Ajit Manocha, President of Semi, speaks of a rebirth of the semiconductor industry based on artificial intelligence. All these major trends demand enormous computing and memory of storage power and hence require prolific RF technology to create all this capacity. COMET is confident that through our work on the new RF system platform for the generators. We will in the medium term be able to tap into a new US700 $1,000,000 market segment. We are well on our way. The first prototypes will be tested with customers at the start of next year and are to be launched from 2020 on. Let's turn to the X-ray Systems business now. I accessed in the first half of the year did not meet our expectations. In local currencies, sales of the division decreased by 14.4 percent year over year to CHF 65,000,000. Certainly, the business with systems for the inspection of tires showed a positive trend. However, this was not able to make up for the decline in sales for systems for its research and new materials and Inspection of Castings and Wheels. The revenue reduction coupled with high investment in product portfolio development led to a negative EBITDA result of CHF 0.9 1,000,000. A very positive trend was seen in orders for the newly launched Kuga and Cheetah EVO systems for the inspection of electronic components. They were introduced at the end of last year and have been available since the beginning of this year. IXS recorded Strong new orders for this that will be reflected in sales in the second half of this year. For the second half of the year, ComEd expects Sequential Sales Growth of 10%. To revitalize the earnings performance of the IXS Division, a sweeping profit improvement program has been put in motion that is now being implemented. We have appointed Doctor. Matthias Baartz as interim head of business. He is very well versed in systems businesses and has carried out successful improvement programs in other companies in similar situations. Komet has developed an action plan of measures with Mr. Bart that he is now executing together with the team. The program will run to the end of the year, and we are on track. The measures are as follows. 1st is the reprioritization and acceleration of projects. This mainly revolves around project control and managing more commercial criteria and less by technical ones. The goal is to get to market faster while using less resources. Speed up, Time to market, time to money are very the focus on this reprioritization. 2nd, workforce reduction, IXS is cutting 25 positions in Germany, mostly through severance agreements as well as by attrition and also not filling vacant positions. To a comparable extent, IXS is also suspending non essential support contracts with external experts. 3rd, we are boosting our efficiency. IXS is critical reviewing and optimizing its organization and processes in all the organizational units. One example of such an improved process is going forward, Komet will reap the benefits of a strong reduction in throughput times in the production of the Cheetah and Kugar EVO systems, so we were already able to cut labor hours by 1 5th. The priority aim for IXS remains portfolio renewal. We can point to our first Success stories on this front in the form of the already mentioned redesigned Kuga and Cheetah EVO products, which soon after their production in the electronics market helped achieve new orders in this product group in the first half of twenty eighteen. Likewise, the launch of the FF85CT in the first half of the year was a success and already generated the first orders. Our first customer Siemens is absolutely delighted by the system's high resolution and its versatility. To accelerate the renewal of the portfolio, we have placed the overall project portfolio on a new foundation, reevaluated all projects and and New Priorities. In 2019 2020, we plan to bring a number of further innovative products to the market. This will stabilize sales in 2019 and are expected to contribute to substantial additional orders from 2020 on. The rising importance of additive manufacturing and automated processes provides an outstanding opportunity for IXS. Our goal remains to optimally support Industry 4.0 with our smart X-ray solutions. Next up, we'll look at IXM, our X-ray modules business and a very solid growth contributor for Group. Its sales growth in local currencies was 6% in the first half of the year. The performance was especially positive in the business with the robust portable smart evo x-ray solutions for pipeline inspection, thanks and not Leased to the investment friendly climate in the U. S. The investment of the previous years in the innovative I Vario generator, also did their part in May, we sold already the 100th I Vario Unit. The EBITDA margin went up by 7.5 points to 25.1 percent, driven above all by the volume growth and the favorable product mix. The X-ray modules business is marked by continuous solid growth. The division's marketing of the new I Vario generator is on track. In X-ray Cubes, Comet already enjoys a very strong market position today. For the IUario generator, we are confident we will achieve further growth in the coming years, both with the existing X-ray cube customers and new accounts. The chart shows you the very attractive potential we have here. I would Now like to discuss E Beam. The performance in the E Beam Systems business did not live up to our expectations. Despite the high investment last year in the overhaul of the product portfolio, sales of systems declined by 35.9% year over year in the first half of twenty eighteen. The resulting EBITDA loss was CHF 7,700,000. As we already announced, we have therefore decided to divest the EBIM Systems business. Markus Portmann will go into the financial details on this later. On this slide, you see an overview of the past business portfolio and the continuing business. As we have said, the operation in Devonport, Iowa has proven unsuitable for building an attractive scalable systems business with standardized products. Komet worked on various options and determined that the closure is in the best interest of Komet's shareholders. The closing effect is about 60 employees and is to be completed by the end of the year. As described in the major release, the closure will reduce the group's net income in the full year 2018 by about CHF 10,000,000. The benefit gained by this is the elimination of a significant source of losses. We see E beam's future in the scalable OEM components and modules business with its higher long term margin potential. We are thus focusing on the clear strength and USPs because only ComEd is able to make the sealed e beam lamp with the desired performance and Lifespan. The steel lamps industrial processes can be made more eco friendly and more productive. What is more, the modules can be integrated into the customer's existing value chain as our OEM partners are already doing today. Here is an update. The E beam Components and Modules business is to be further developed in a focused way in close partnership with strong OEM partners. We have made progress in all the projects involved. This overview shows the state of play. Tetra Pak is fully committed to e beam technology. The work for the product development of the new generation of barrage filling systems is on track As regards e beam, the technology development and feasibility stage of the specialized e beam lamp is now almost complete and we are making preparations for the next phase. As to Uteco, in May at the Print for All trade show, Our partner launched the upgraded Gaia printing system with 4 times greater speed, more colors and higher resolution. Birla presented its e beam based machine concept LATU to selected customers as one of 5 big innovations in May. The machine helps to reduce microorganisms on granular dry food. The machine is approved for the treatment of spices. The process is ongoing to get further applications approved in European Union and in U. S. The first sales contracts are expected by Buhler in Q4 2018. Compelling progress was made in the project with Bell, The first test for the disinfection of hedging eggs yielded promising results and are being continued. This is about treating hedging eggs with e beam instead of the conventional formaldehyde treatment and thus achieving better hatching results, a higher hatching rate and healthier chicks. Komet will continue to invest in the E beam business. The plan for the medium term is to develop new applications. Let me now hand over to Markus Portmann for more details on our financial results. Thank you very much. I would like to give a warm welcome to all participants from my side as well. I will now lead you through the financials of the first half year of twenty eighteen, starting with to income statement. I'd like to make you aware before I start that the numbers of 2017 are all restated according to the IFRS 15 regulation. Now if we look at this income statement, what you see besides the fact that we have increased our revenue, you can also see in the first The new orders that we have much higher orders compared to the prior period and accordingly also a higher backlog of 7% compared to the prior year. What I would like to you to look at is also the increased gross profit margin in absolute and relative terms were able to increase our gross profit compared to the prior period. This is on one side driven by volume and the mix, whereas the business, the strongly growing business of PCT has strongly contributed to the relative gross profit margin on one side. And on the other side, we also have our operational initiatives that are now starting. We have seen first positive impacts from the lead buyer initiatives on one side and Into the next year, once our new plant in Switzerland is fully productive, we will see more positive impact from the lean automation initiative, quality improvements and global logistic initiatives. Included in the improved gross profit is furthermore the impairment of intangible assets, dollars 2 point €2,000,000 were booked into the cost of goods sold. And despite the negative impact of the foreign exchange rates, we were able to show this Strong improvement in the gross profit margin. Not only gross profit has increased, also our functional costs have increased. We have according to our strategy, our growth strategy, we have on a continuous basis increased the number of headcounts, for example, in the R and T environment where we, in the meantime, have up to 19% of our employees working for R and D. I'd like to mention here initiatives in the PCT environment with the new generators, but also the fact that we are strongly now working on new products for IXS. At the same time, we have also increased our headcounts in the marketing and sales environment, where we have different initiatives that will help us sell the products, the new products. On the bottom line, you can see the improved results, the financial results and income taxes. I will give more details on the slides to come. Moving to the next slide, you will see What the impact is and how ComEd is positioned with respect to foreign currencies. The left column is showing you revenues split up by the different currencies. And on the right hand side, you see the split of all costs of ComEd for the different currencies. What you can immediately see is that most currencies are naturally hedged, with the exception of the U. S. Dollar. It's also the U. S. Dollar that has or had an impact of 2,100,000 to our EBIT in the first half of twenty eighteen. In order to give you an overview what The sensitivity is of that U. S. Dollar exposure to the Swiss franc. I have added a comment under the 3rd bullet saying that on a yearly basis, the change by CHF 0.01 to the U. S. Dollar has an impact on sales by approximately EUR 1,500,000 and an impact on the EBITDA margin by 0.2 percent to 2 percentage points. This takes me to the next slide, where I would like to show The results as they were reported but on a comparable basis. Starting with the blue column on the right hand side, These are the results as reported as per June 2018. On the left hand side, you see The results as they were reported for June 2017. Now if we do make them comparable, we take the one off impact, the IAS 19 one off impact related to a change in our pension fund, We take that away. We also make the currencies compatible by showing The results of 2018 at Exchange 2017 in order to get 2 comparable results. Those are the gray columns. In the gray columns, you can now see that revenues increased by $9,000,000 year over year on a comparable basis, That the EBIT is down by €5,300,000 mainly related to the additional costs that we have added, the functional costs related to our growth strategy. On a comparable basis, results on the EBITDA margin level were down by 2.7%. If we now add back the impact of the foreign exchange rates, you will see that there is 700,000 related to foreign exchange rates on the top line and that we have the before mentioned EUR 2,100,000 negative impact on the EBIT level related to the foreign exchange rate. This has an overall impact of 9% on the EBITDA margin. This is what you can see on the bottom of that column. The last column called, titled EBS Impact, shows you how we have booked or what the impact was of the divestment for EBS in the first half of twenty eighteen. We have so far and as per June 2018 and impaired all intangible assets, where off we have impaired 2,200,000 in the cost of goods sold and the rest in the functional cost. It has this adjustment, this impairment had no Impact on the EBITDA Margin. This takes me to the next slide where we show the change in net income on a yearly basis. At first sight, income goes down from CHF 18,700,000 to CHF 14,400,000. If you adjust that by the one time impact of EUR 4,600,000,000 you can see that the adjusted net income It was EUR 19,000,000 slightly above prior year. The major impact on the operating income is related to the impairment on one side and the cost increase related to the growth strategy on the other side. Then what you can also see is that we have positive impacts, first, on the net financing expenses and second as well on the income tax expenses. Let me first talk about the net financing expenses. There were 2 major impacts. The first one is that we do show lower interest expenses. They increased year over year as a result of the increased capitalization of interest related to the facility expansion in Flamat. The second one is the currency translation impact. The euro Year over year increased by 9%, approximately the dollar went down by 3%, and all in all that more or less netted out so that we have only very limited loss recorded in the income statement amounting to EUR 100,000. As you know, we have besides the U. S. Dollar a natural hedge on all foreign exchange positions and that net exposure in the U. S. Dollar is partly hedged by foreign by forward exchange contracts, which is limiting the risk of losses. If I now Move to the income tax expense explanation, you will see that we have The tax rate which is temporarily down to 14%. If we would apply the expected group tax rate of 24%, that would lead us to an expected tax expense of €4,000,000 The actual tax expense as reported is at €2,300,000 only. The difference of $1,700,000 from the expected tax expense is mainly the result of the impairment of assets in the E beam systems business in Davenport. On one side and on the other side, it's also related to a loss in Germany, where we have Capitalized as a deferred tax asset, those losses. In addition To the above, we also have a positive impact due to the U. S. Corporate tax reduction in the USA, this U. S. Tax Cuts and Jobs Act, which leads to a positive impact of EUR 500,000 for COMET. We expect the effective tax rate for the full year 2018 to end up at roughly 18%. Let me now move on to the balance sheet. The total balance sheet is more or less unchanged at about CHF 390,000,000. As you can see, we have an ongoing strong balance sheet and very strong balance sheet ratios. Let me shortly go into the different sections of the balance sheet, starting with the current assets. Current assets went down mainly driven by and Reduction of the Cash Position. In the detailed presentation in the handout, you will see that we have an increase in inventories. This increase was done on one side in order to be ready for future shipments. On the other side, it's related to the it's a seasonal impact, where usually in the Systems business, we have higher inventory in the first half of the year. The last one is the fact that we are about to move in FlamMap from the Current facility building partly to the next to the new building. And during this time, we will not be able to useful production capacity in Flaman. Therefore, we have pre produced and put on stock part of our goods. Moving on to the non current assets, so the fixed assets. The explanation is and you can see here a slight increase of 4% compared to the prior period is that we are strongly Investing in the new building, we have invested almost EUR 10,000,000 in the first half of twenty eighteen. Overall investment is now sums now up to EUR 47,000,000 and we expect to further invest in the second half of twenty eighteen to end up at roughly €55,000,000 all in all. At the same time, we are now we have now started to invest in production equipment for this new facility. Depreciation are on an ordinary level, roughly between 2% to 3% of our revenues. And we have a onetime impact of the impairment of the intangible assets that totaled EUR 6,000,000 in the first half of twenty eighteen. Moving on To the equity side of the balance sheet, I'd like to focus on the equity ratio. Equity ratio increased to 53%. And also in absolute terms, we have an increase in Equity Driven by Profitability. This is what you can see in the comprehensive income. We have added CHF 14,000,000 in net income, And we have a cash out of roughly EUR 12,000,000 for dividend payments. At the same time, we have an actuarial and actuarial gain on defined benefit plans, which has added EUR 1,300,000 to the equity. This takes me to the last slide, where we discuss the financial risk management of Komet. We are not just looking at the equity ratio only. We are strongly also focusing on the net debt to EBITDA ratio. What you can see is that we have an increase to 0.6% in the first half of twenty eighteen. The reason is, and we are looking at it on a 12 month rolling basis, is that the EBITDA on a 12 month rolling basis is slightly below prior year's results on one side. And on the other side, net debt has increased and this is in relation to the actual Investments in our property, plant and equipment. We do expect that ratio to slightly go up towards the year end and improve from there on in 2019 again. That's it for the financials, and I hand over to Ronen Lenkenhagen for the outlook. Thank you, Markus, for this insight. On to the outlook now. In a word, the outlook for the Komet Group is positive. PCT in the medium term remains an important driver for growth going forward despite short term project postponements in 2018. Hey, meet the worldwide need for data processing and storage memory capacity as well as the initiative for accessing the RF generator market. IXM is maintaining its solid and stable contribution to the business. At IXS and EBT, ComEd has put in place Key Prerequisites for Future Profitable Growth. In IXS, we have launched a comprehensive profit improvement program and are on track. We have realigned EBT and are making progress in all development projects. The building expansion in Flamat has been completed. It creates urgently needed space for the further development and growth of the business and for enhancing the efficiency of production processes. Management and the Board reiterate the recently revised guidance for 2018 of CHF 440,000,000 to CHF 460,000,000 in sales and an EBITDA margin of 10% to 12%. With assumed exchange rates you see on the slide. At the division level, This is the respective picture compared to last year. PCT, due to the unexpected short term postponement of some projects, PCT now expects sales for the full year 2018 to be in line with the strong prior year. Medium to long term, ComEd sees the growth drivers for the business with Semiconductor Technology as intact. The continued investments in combination with lower sales lead to a decrease in EBITDA margin versus the full year 20 17. For IXS, for the second half of the year, the division is projecting sales growth of approximately 10 Compared to the 1st 6 months. For the full year 2018 as a whole, we project sales in line with 2017. As mentioned, the profit improvement measures will get traction in 2019. EBITDA in 2018 is expected to come in below that of the prior year. For iXm, for the second half of the year, the division predicts a solid profitable performance and We paid sales slightly above the level of the first half as well as slightly above 1 year earlier. Thanks to the higher sales volume and further cost optimization, we expect an increase in EBITDA margin from the year ago level. EBT, with the closure of Davenport site in the USA, ComEd expects EBIM sales and the EBITDA margin to decline year over year. The continuing business includes the compact D Beam Engines. Here, Comet continues to work with partners such as Buhler and DetroPack and intends to develop new applications. Organizationally speaking, this is our current structure. The search for new division presidents for e beam and the X-ray systems business is underway. This is Matthias Baerp. As an interim manager, we have a very good solution for rigorously implementing the planned profit improvement. The E beam business is under my leadership. Operationally, I am supported by a strong management team. At this point, I'm going to close the presentation part and open the Q and A session. We will now begin the question and answer session. Webcast viewers may submit their questions in writing by the relative field. There are no questions from the phone at the moment. I have a question here on the screen. The question is, where are you regarding a suitable head of EBT? So let me answer this question. Based on the new setup that we have, We have made a short break in the search of this new head for e beam, But we have resumed that and we are well underway with evaluating appropriate candidates. Okay. Then I would like to thank you for your interest. And one more thing looking ahead, we would like to invite to join us whoever is capable to participate at our Investor Day on November 13. Thank you very much for your participation. 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.