Earnings Call: Q3 2019

Oct 17, 2019

Ladies and gentlemen, welcome to the Insikom Third Quarter 2019 Results Conference Call. I'm Andre, 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. The conference must now be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Lukas Vlimker, Chief Executive Officer of Inficon. Please go ahead. Thank you, Andrea. Greetings, and good morning, everyone. Thanks for joining us today to review our results for the Q3 of 2019. Sales of the 1st 3 quarters of 2019 have all been within plusminus2000000 at the stable level. The expected upswing or rebound in the semiconductor market did not start yet, and the U. S.-China trade conflict as well as the general economic uncertainty had some impact on our results. You can find the PowerPoint presentation, as always, on our Investor Relations tab on our website that supports our conference call. I'd like you to turn to Slide number 4, please, where we start with the key figures for the reporting quarter. We closed the Q3 with decreased sales year over year in all our target markets and all sales regions except the Americas. Total quarterly sales reached USD 93,200,000, which is 8.1% below last year's Q3 and 3.5% below the Q2 of this year. With a gross profit margin at about the same level as a year ago and lower operating expenses, we finished the quarter with operating income of CHF16,300,000 after exactly CHF20 1,000,000 a year ago. Sequentially, compared to the 2nd quarter this year, we increased our operating income margin from 16.3% to 17.5%. Matthias Strandler will review the detailed numbers later while I now go through all our target markets, and I'm going to start with base down on Slide number 5, where you see the 4 markets that we serve. The pie chart on the left side indicates only minimal charges and has been as stable as the quarterly sales level in the 3 Q1 of this year. On the other hand side, the graph on the right side shows the sales fluctuations in Asia, while the contributions from Europe and America have been relatively stable during the last two years. Now I will go through the 4 key markets and start with the smallest one, the security and energy market on Slide number 6. Health decreased more than 18% year over year and 6% sequentially and reached US6.3 million dollars The main contributor was still the sights, our main portable on-site chemical warfare detection instruments. We've decreased activities in Europe I'm sorry, with increased activities in Europe, the geographical breakdown has been more balanced than in the past. Overall, the spending for security applications were lower than a year ago, but has been slightly offset with increased sales to the energy and environmental market. Looking ahead, we have become less skeptical than at the beginning of the year. And despite the ongoing geopolitical uncertainties, we experienced a positive order momentum for all existing and new applications. Now moving to the Refrigeration, Air Conditioning and Automotive market on Slide number 7. With sales of US20.1 million dollars which represents a sales decrease of 5 point 6% year over year and a surprisingly high decrease of 13.7% compared to the Q2 of this year. All regions were weaker than a year ago, and for the first time since 3 years, we experienced a sales slowdown in the REC and automotive markets. The sudden weaknesses came as a surprise, but indicate clearly the economic uncertainty around the world, combined with the trade conflict and the change in the automotive market towards e mobility. RAC device and automotive manufacturers became more reluctant to invest in new capacity given the unstable outlook of the world economy. Even the e car battery manufacturers became more cost cautious that the price for batteries needs to go down in order to be competitive. Nevertheless, as the preferred number one supplier in this market, we are able to keep our high market share and expand into new sophisticated leak checking applications such as the rechargeable battery test market for small batteries to be used in mobile devices, phones, wearables and wireless earphones and so on. For our line of handheld battery powered after sales service products, the distribution strategy in conjunction with a multi, private or white label brand strategy pays off, and we are on the way to gain market share globally. We still expect to finish the year 2019 on a new RAC level. Now let's go to the semi and vacuum coating market, which includes solar display optics and semiconductor applications on Slide number 8, where sales decreased 9.5% year over year and 3.8% sequentially to US40 $100,000 Investments in new capacities, mostly memory chips, in certain countries in Asia have been reduced, postponed or sometimes even canceled. On the other hand side, sales for new technologies such as the eolithography or new software solutions to enhance quality and efficiency to logic device manufacturers in the U. S, Europe and at least 1 Asian country increased. He expects that the positive market trend will continue. The expected general rebound of the semiconductor market did not happen so far, and all the indications point to 2020 as the recovery here now. Nevertheless, we remain cautiously optimistic about Inficom's sales growth opportunities earlier on. New products, software and services just started to generate 1st revenue, and the need for new EUV lithography continues to grow. Investments in new OLED capacity are discussed widely, but the business activities are still at a low level, stable at approximately 40% below last year's record investments. The China initiative for semi and OLED Technologies experienced some setback due to the U. S.-China trade and IP issues. Unfortunately, defending our market position and the duties we have to pay will cost us a small single digit U. S. Dollar1000000 figure on the bottom line this year. Also, 2019 will be seen as a challenging year. Looking ahead, long term, the semiconductor market will remain the most attractive growth opportunity for Inficon. Finally, we had a sequentially improved quarter in the general vacuum market on Slide number 9 with sales of US26.7 million dollars which is 5% below last year's Q3, but as I said, 7.2% above the second quarter of this year with growth coming from all regions. As you know, we sell analysis, measurement and control products for many different industrial applications through private label partners, primarily vacuum pump manufacturers, but also directly to industrial OEMs and distributors. We gained market share with our direct sales channel as well as with private label products and get slowly into new applications such as sterilizations, life science and analytical markets. And as a positive side note, we sold the 1st Contura S400 leak detector for food packaging applications to North America. Before I turn over to Matthias, I'd like to close my part of the presentation with an outlook on Slide number 10. 2019 will remain a challenging year with market and geopolitical uncertainties, with a delayed semiconductor rebound and an unknown outcome of some U. S.-China trade discussions. The list of the main challenges on this slide did not get shorter for the Q1. We rather face new issues such as the cost pressure for e car battery manufacturers. And on top of that, the exact year end shipment timing can have a large impact on our final annual sales recognition. Special efforts will be needed, and we'll do our best and focus on reaching our ambitious unchanged guidance of sales around US400 $1,000,000 and operating income of approximately 19% of sales. With that, I'd like to turn over to Matthias, who will give you more details about our financial performance. Please? Thank you, Lucas, and good morning to everyone to our Q3 conference call. I will start my presentation with the Q3 financials and followed by the guidance for the full fiscal year. My commentary starts on Slide 10 of the PowerPoint. Revenues for the Q3 of 2019 came out at $93,200,000 compared with $101,400,000 in the same quarter of last year. Total sales decreased by USD 8,200,000 or 8.1%. Compared to 1 year ago, the U. S. Dollar did strengthen against some of our major currencies. Due to that, we had a negative exchange rate effect of minus 1%. Further, we had a positive impact due to acquisitions of 1.5%, which means we had an organic sales decrease of 8.6%. Looking at the end market developments, all markets decreased. The semi and vacuum coating market had the highest decline due to a drop in sales in Asia and decreased by approximately $4,200,000 or 9.5%. On a sequential basis, sales in the 3rd quarter did decrease by 3.5% compared to sales level in previous quarter Q2. While the general vacuum market did grow by 7%, the overall decrease was driven by weaker sales to the semi and vacuum coating and the refrigeration, air conditioning and automotive markets, which did drop by 4%, respectively, 14%. Let's take a look to the regional performance. On a geographic basis, Europe and North America reached 29% and Asia Pacific ended with 41% of total 3rd quarter sales. As you can see from the chart, Asia sales did fall by approximately 19%, and as just mentioned before, was mainly driven by the semi and vacuum coating market decline. Europe developed more or less stable and North America did grow by approximately 8%, thanks to higher sales to the semi and vacuum coating and the refrigeration air conditioning automotive market. Compared to previous quarter, Q2 sales did increase in Europe by 2% due to higher semi and vacuum coating sales, while the other two regions did decline. Let's go to the next slide. The gross margin for the Q3 of 2019 reached 49.6% and ended nearly on the same level as last year. Compared to previous quarter Q2, the margin increased by 120 basis points. Moving on to our operating expenses. R and D expense in the 3rd quarter reached $8,800,000 and increased 11.4%. The number and the increase is mainly driven by the acquisition impacts as well as some favorable FX impacts. As a percent of sales, this represents 9.5% after 7.8% in the last year. SG and A, selling, general and administrative expense in the 3rd quarter was $21,200,000 or 23.7 percent of sales, a decrease of $1,200,000 or 6%. The decrease in SG and A expense is influenced by lower variable compensation and commission spend as well as some favorable foreign currency impacts. Now let's turn to the bottom line. For the Q3 of 2019, we achieved income from operations of $16,300,000 or 17.5 percent of the sales. This compares to $20,000,000 or 19.7 percent in last year's Q3, which means the result $3,700,000 or 18.5 percent compared to last year. The decrease is mainly driven by the combination of lower sales volume and therefore lower gross margin contribution, while the cost did decrease slightly. Let's go to the next slide. For the Q3 of 2019, we recorded tax expense of $3,600,000 which represents an average tax rate of about 22 0.7%, slightly 1.6 percentage points higher due to our profit mix in the different countries. As a result, net income for this year's Q3 reached $12,400,000 or 13.3 percent compared to 15 point $3,000,000 or 15.1 percent in the same quarter of last year. The decrease for both the decrease of 19% for both net income and earnings per share is more or less in line with the operating income development. Now let's move to the balance sheet. Our net position in Q3 was $29,200,000 This compares with $62,300,000 at the end of last year, which means a decrease of about CHF 33,000,000 This decrease is due to the CHF 54,000,000 dividend payment we did do in April this year, which is partially compensated, of course, by new cash flow generation in these last months. The operating cash flow, which you can also see on that slide, did increase from previous quarter level and reached with close to $50,000,000 solid level. For the Q3, our DSO day sales outstanding was through to some higher accounts receivables levels with 52.7 days, a little bit above the level at the end of last year. Inventory turns did decrease and reached 2.9, while the working capital level increased driven by higher AR and inventory numbers. On a sequential basis, both inventory AR and therefore working capital level did decrease slightly. On the balance sheet graph, on the left side, you see structure and composition of our assets and liabilities. The equity ratio reached close to 66% in Q3 after 57 after 75.9% in Q4 and 71% 1 year ago. No material long term liabilities and the net cash position of €29,000,000 confirm a solid balance sheet structure. With that, I covered our current quarter result. I conclude my portion of today's call with our guidance. Mr. Winkler did already give some comments and insights to our view of the various end markets and the various internal and external challenges we see. Based on our assessment and of course, with strong effort and focus on achieving our outlook, we confirm our previous guidance for the year. We expect sales of around $400,000,000 with an operating income margin of around 19%. The last slide shows our corporate calendar and the upcoming dates. This concludes now the formal part of the presentation, and we are ready to take, as usual, your questions. We will now begin the question and answer comes from the line of Jern Iffert with UBS. Please go ahead. Good morning, gentlemen, and thanks for taking my questions. The first one would be, please, on the guidance. It would imply that you have the strongest quarter ever in the history of the company in Q4 if you come close to it. And can you give us some more clarity? I mean, book to bill, you said it is above 1, but where is it? It's 1.2, 1 point 3? Also, you can comment on the order backlog and the sales recognition. You stated what is behind it, what is the effect for Q4? And second question would be, please, you also mentioned some delivery delays, so there were some delivery delays happening in Q3. What is the magnitude here? How much of this do you expect to materialize in Q4? And then the last question is on Europe. General vacuum is improving. Where exactly is this coming from? How sustainable do you think it is? And what is this reflecting? Is it macro stabilizing or any specific things? Thanks very much. Thank you, Jorgen. Let me summarize the question 12 together because they belong kind of together. Everything that we have not shipped in Q3 will, of course, ship in Q4. So that helps achieving the strongest quarter, as you mentioned. And we will have to do whatever it takes to ship what we have in our backlog. We have a pretty high backlog, unusual high backlog. The trend on the order side looks positive as well. So we with some help of, let's say, last minute sales recognitions, And that usually includes installation and includes also a sign off from the customer side. And that can easily make a swing of €3,000,000 plusminus. But assuming that we will be able and if we attack it early on, that's what we do right now, so that we don't have to fear the last minute changes. So we're approaching it already in the next few weeks. So in order to be prepared to have this last minute sales recognition, not necessarily as we usually have, but we early enough would know if we can make it or not. And as you said, it will require a lot of efforts, but we do our utmost best to get there. And the trend looks positive. Our backlog is quite high, and we have some leftovers to be shipped from Q3. So that all helps to get to a very strong last quarter. On the Europe side, I think it's a combination of several levels. We have been able to gain back some products that we lost a few years ago. We see some catch up effects from early in the year. We see some fulfillment of larger projects that we did in Q3 with some bulk shipments in the general vacuum market only. So a combination of all led to this increase in Europe in the general vacuum market. Can that be seen as a trend already? I have my doubts. I would hope so, but I see it more or less a stabilizing element, not necessarily as a change in trend. Okay. Many thanks for this. And may I come back to the guidance for Q4? I mean, where do you expect the strongest sequential improvements in which 1 or 2 divisions? Is it then really semi or is it also emergency? No. These both clearly semi will have the single biggest impact and probably in absolute terms anyway. In relative terms, it might also come heavily from the security and energy. Okay. Many thanks. You're welcome. The next question comes from the line of Marta Brusca from Berenberg. Please go ahead. Hello, good morning. Thank you for taking my question. I have 3 of them. So firstly, I would like to ask with the 120 basis point improvement in your gross margin, when does it come from? Is it mainly from the improvement in the situation with the Chinese tenders? Or is that the product mix? Secondly, if you could please give us some more insight on the EUV situation, how does it currently develop? We had some positive comments yesterday from ASML. Can you maybe disclose how your contact per machine is developing? And thirdly, on the OLED applications, how big of the share, if you could remind, of the SMI and vacuum coating end markets is OLED at the moment? I think I hand over the first question to Matthias regarding the gross profit improvement. Yes. Let me try to answer your question. The majority of the increase in the gross margin is driven by the product mix. So there have been some higher more shipments in some areas, which have a more favorable contribution. Nevertheless, there was also some smaller impact on the headline pricing pressure. It's a combination, but more focus on product mix. Okay. And then the EUV part of the question, let me answer that. As you know, we are the sole supplier for that piece of instruments that we ship to the main customer in this market. And we are glad that the customer actually is looking forward for the last quarter as well and increase the guidance because we simply follow their trend. The content per tool did not increase because we still keep the same amount of content that for the current product generation, I have to say. For the next product generation that we work on, it might change. But for the current product generation, the content per tool did not change. But the trend is clearly looking in the right direction, and we are glad that our customer confirmed the positive trend. And on the OLED side, unfortunately, there are the news are still very mixed. There's a lot of capacity in the market for normal OLED displays, and it has not the flexible applications or the application that would require flexible displays did not start yet. And therefore, I do not expect huge rebound in the market in 2019. So it will be depressed throughout the whole year. And our experience is it is probably down approximately close to 40% from the record year last year now. Now having said that, it doesn't mean that we are not working on some new applications because as I mentioned before, eventually, the flexible displays might work. And once they work, new investments will be needed. But it's unclear as of today how those new investments will start to materialize. Okay. And you give us a bit of an indication how big OLED is in terms of the sales at the moment for you? Relatively low. I will link it down to I would have to figure out the number. But it's as I said, it's about 40% below last year's. So it's probably below around the single middle single digit figure overall. It was yes, that could be it was close to 10% last year. Now it's probably somewhere close to half of it. Thank you very much. You're welcome. The next question comes from the line of Joerg Rune from AWP. Please go ahead. Yes, good morning. This is Joerg Rune. Could you give us a little bit more information on new products, especially in general vacuum and industry? Okay. I'll try to do it. Interestingly, you asked about new products in the general vacuum market. So most of our new products actually go into semiconductor market. But nevertheless, we have at least 2 products out there in the general vacuum market that we now generate to make more revenue than we used to do. One is with the I mentioned in the call, the leak detector for food packaging, where we expanded now our distribution network into the U. S. And now got the 1st orbit, which I'm very happy about it. And the second product that we finally got some breakthrough is a leak detector for gas pipelines, where we have signed up a nice contract with the number 2 service provider in the U. S. Who does provide those type of services for the gas distribution providers. And we are lucky that they now picked Infikon as their instrument provider, and they slowly are going to replace all their instruments with 1 of our Inficone. It's called the Erwin, the yellow box. And then finally, I've been able to get into the U. S. Market with that product as well. Other products that might be of interest that goes more into industrial part are the leak checking applications for the small rechargeable batteries. We talk about batteries that go into ear plugs and small wearable devices, but also into mobile phones. They are all lithium ion based or kind of therefore relatively dangerous if they get exposed to air. And we work very closely with 1 of the largest battery manufacturer, rechargeable battery manufacturer, I have to say, to work on new solutions, and we got now our solutions patented. So we got some first successes, and we expect that businesses will grow in the next 2, 3 years as well. But those are the main new products for the more industrial market. Most other new products go into the semiconductor application. The next question comes from the line of Raimo Rosenau from Elvatisha Bank. Please go ahead. Yes. Thank you. Good morning. For this very strong Q4, you expect the order the execution on the old backlog is crucial, right? However, you also said that the trend on the order side looks good, promising. That, however, is more relevant for 2020, right? So could you elaborate a bit more on these trends, on the positive trends on the order side? And if that is also mainly happening on the semiconductor side? And within that, where exactly? And hence, is the conclusion fair that you should see a good start into 2020 stemming from that order trend? I'm not looking that far yet. We focus on achieving the guidance in Q4 first. But let me give you at least two information regarding what we've asked for. Yes, we have a relatively high backlog for those products where we have a very long lead time. And there, it's all about fulfillment, shipment and getting the sales recognized and getting the sign off from our customers. It's at least as important. That's especially for those products that have a very long lead time. Some of them, let's say, they go in 2 main markets. 1 is the semiconductor market, mostly to end users, not to the OEMs. And secondly, they go to the emergency and response market, again, end user related, so we have to wait sometimes for the sign off. On the other hand side, we see the order trend, especially for those products looking to the right direction where we have a relatively short lead time, talking about 2 to 3 weeks. So everything that we book now is order will get shipped this year. And that trend we clearly see from the OEM market coming from the semiconductor OEM side, not the end user side, meaning the guys who make the equipment. And those products have a relatively low lead time, which is good because that means we can already turn them into revenue if the trend goes on as we see it right now. So those two groups of products have different characteristics. And luckily, the positive order trend is more on those products with short lead times, and we have a huge backlog that needs to be shipped for those products which have a longer lead time. Now if we ship everything and you ask now about Q1 next year, if the backlog will be begun, then we have to build up backlog first, of course. But that is too far out to give you some indication how Q1 is going to look like next year. Okay. So as the orders are strong on the short lead time projects, you should not get overexcited on the start of 2020 yet? No, not yet. That's too early. Okay. And to be very clear on the Q4, I mean to make it quantitative here, I mean in order to reach your guidance, you must have sales above $110,000,000 which is almost 20% above the previous quarter, well, Q3 and above the previous year and the margin of around 23% operating margin plus, that is right, correct? Yes. Okay, good. Thank you very much. You're welcome. The next question comes from the line of Rolf Reinders from Helvea. Please go ahead. Yes, good morning and thank you for 1 or 2 questions. You mentioned in the opening remarks that you expect now 2020 to be the semi recovery year. And I always wonder, can this be predicted? And if so, what are your indications for this confidence? Okay. Let me quickly answer that. As you know, the logic part of the Samsung Master Market is in good shape. I have just been in Taiwan yesterday, and TSMC is booming. And they primarily provide or make chips for the logic market. And they are actually the single biggest user of these new EUV tools. So this part of the market has already started to show very nice positive tendencies. The recovery needs to come from the memory market. And the memory market, at least that's what we get indications from the memory market itself is that they the projects, primarily from the 2 large memory makers that they postponed from this year into next year, they did not cancel those projects. They only postponed them. And we have now first technical discussions about where they might need some help once the tools are installed. So those indications for me are the ones that let me assume that the rebound in the memory market will start next year. Okay. Great. So you think it can be done? And Yes. Good. Thank you. And the other thing is, are there any extraordinary cost elements to be expected in Q4? Oh, I will have to ask my CFO. I don't hope so, but he might know more than I know. What year do you expect? No extraordinary, no. We will reject all costs. No, no, just kidding. No, we don't expect any major upticks. So as you maybe have seen over the last quarters, the cost basically did decline from Q1 to Q3, the operating expense. And I would expect for Q4 a similar level. And I also would not expect any major surprise in there. Okay. That's great. Thank you for your time. We have a follow-up question from Jorg Iffert from UBS. Please go ahead. Yes, thanks again. And just quickly coming back to the food and gas leak detection products, and you are now also revenue market you're expecting here for both in 2020 comparing versus 2019? And the second question, sorry to come back on this, on the guidance. I mean, you said even for the products where you have short lead times, order intake is now improving. But what is giving you confidence that this is sustainable also into November, December? And is there any larger project on the customer side? Will you say, yes, given our experience, There should be orders for 3, 4 quarters now for these product lines or for 3, 4 months. So some of our clarity here would be appreciated. And then again, on the Q4 guidance, will it be relatively equally split to the revenues between October, November, December? Or do you really need a very strong December? So will it be quite a bit skewed to December to make the guidance? Let me start with the first question. The revenue expectation for next year, we can simply give you a rough figure. We believe we can double revenue. Now revenue is still single digit million figure, as you know, but we expect to double revenue with those new contracts in the especially in the U. S. So we expect 200% of revenue compared to this year, but we'll still be relatively small. Now coming back to the semi guidance. There is never a perfect confidence level that we have, but we get as you know, we are hooked up to the online system of the larger OEMs, the equipment manufacturer, and we get a weekly forecast about their needs for the next 2, 3 months. And based on that, the orbit trend, if they stick to their forecast, needs to go up. Now it's not guaranteed yet because we ship, as I mentioned, very fast, within 2 to 3 weeks, and the backlog is relatively low for those products. But the forecast that we get from the equipment manufacturer, they are pointing towards the right direction. Now last thing is how equally will it be distributed? I don't know yet. I have not looked into the detailed shipment plans. The only thing that I know is that we start early enough to make sure that we can recognize everything that can be recognized as revenue early enough and don't have to wait for the last minute. All right. Thanks. And from the OEMs, the order books, the order indications they are sharing with you, is this linked both to memory and foundry and logic? Or is it more skewed to logic and foundry? Logic and foundry? We do not know that part because they use the same equipment. We only know that once they have shipped the tools when our engineers see them showing up in the field. But while they just give us the forecast during that period, we don't know for what end product will be used because it's the same piece of equipment. All right. Many thanks. You're welcome. There are no more questions at this time. If there are no more questions, then I simply like to thank you all for your patience and for the interesting questions. And we'll hear about the financial results at the beginning of next year. And then until then, I wish you a good time and a nice day. Thank you very much. Bye bye. 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.