Earnings Call: Q2 2019

Jul 25, 2019

Slides

Ladies and gentlemen, welcome to the Insikom Second Quarter 2019 Results Conference Call. I am Eugenia, 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. At this time, it's my pleasure to hand over to Mr. Lukas Winkler, Chief Executive Officer of Infikon. Please go ahead, sir. Thank you, Eugenia. Good morning, everyone, and thanks for joining us today to review our results for Q2 of 2019. As always, we have a PowerPoint presentation on our Investor Relations website, which supports you with additional information and some graphs. Please turn to the Slide number 4, where we start with the key figures for the current quarter. After a Q1 with a weak semiconductor and OLED market, we experienced a similar overall second quarter, but with an improved semiconductor market. And on the other hand side, a disappointing development in our general LACU market. The highlight in the Q1 was clearly the record sales in our refrigeration, air condition and automotive market as well as the book to bill ratio above 1. In total, our revenues were 7% below last year's 2nd quarter, but 1% above the Q1 of this year, and we finished with sales of US96.6 million dollars Adjusted for foreign exchange currency fluctuations, the organic decrease was 6.3%. With gross profit margin below 50% of sales and lower operating expenses, we finished the 2nd quarter with operating income of $15,800,000 or 16.3 percent of sales compared to $22,000,000 or 21% a year ago. Net income after taxes was $11,800,000 or 12.2 percent of sales. Matthias Doerndle will review the numbers with you in more details later and now go through some important developments in our target markets first. Please turn to the next slide, Slide number 5, where you see the sales breakdown into the 4 key markets that we serve. The pie chart shows a higher contribution from the RAC and Automotive market at the expense of the reduced share from the semi and vacuum coating as well as general vacuum market. The graph on the right hand side shows the sales rebound in Asia. While sales with Americas remained stable, our shipments to European customers went down. Now let's do a quick analysis market by market, starting with the smallest one. In the Security and Energy market on Slide number 6, sales decreased 7% year over year, but increased 15% sequentially and reached US6.7 million dollars The HEXIGHT, our main portable on-site detection instrument, represents still the majority of sales in this market, but the contribution from sales to energy and environmental applications increased. Some geopolitical uncertainties, especially the U. S.-China conflict on tariffs made it more difficult to sell U. S.-made products into China. Nevertheless, we continue to develop the next generation of products to remain the preferred supplier for portable battery powered laboratories in the security market. As I mentioned before, investments into energy environmental applications increased, and we see a growing interest in new green energy technologies such as Geomethane and biofuel applications as well as water and air quality monitoring in Asia and landfill analysis in the U. S. Looking forward, we remain critical for the full year guidance and expect sales to be below last year's level. Moving to the Refrigeration, Air Conditioning and Automotive market, Slide number 7, where we reached a new quarterly sales record of US23.3 million dollars which represents an increase of 12% year over year and 9% sequentially, mainly driven by a small acquisition that we made last October and higher sales to all regions around the world. Growth came from all major application in this market. We have even seen a sales rebound to the RAC manufacturers. A recent study from the International Energy Agency predicts that the numbers of installed air conditioners will more than triple by the year 2,050. The current heat wave clearly supports that prediction. These numbers of installed units are the basis for our handheld after sales service leak detectors, and we expect this market to grow even faster. In the automotive market, we continue to enjoy the increased popularity of e cars and the necessary investments in lithium ion battery manufacturing capacities around the world. With our full line of helium, hydrogen, refrigerant and multi gas leak detection instruments, sensors and modules, we can fulfill all customer needs for their quality inspection, safety and leak tightness applications. We expect that this positive market trend will continue. Now let's go to the semi and vacuum coating market, which includes besides semiconductor and optics, also some display and solar activities on Slide 8, where sales decreased 12% year over year to US41.7 million dollars which is an increase of 6% compared to the Q1 of this year. All indications that we track show that we have reached the bottom of the cycle, While capacity investments into the memory market will continue to be low over the next few months, we see at least 2 positive indications in the semiconductor market. The logic market will expand again already in 2019 and investments in new technologies such as the extreme ultraviolet lithography and 5 nanometer technology continue to grow. On top of that, the OLED activities, which are used for flat panel display technologies, did not stop completely, and the 2019 sales to this market might not be as bad as originally anticipated. Contrary to that, we remain concerned about the negative impact of the China U. S. Trade discussions, especially for the China Semiconductor Initiative. We experienced already some negotiations and price pressure for our U. S.-made products sold into China, which had a negative impact on our gross profit margin. Looking ahead long term, semiconductor will remain the most attractive growth opportunity for Inficode. New chip designs, new material and manufacturing processes are asking for more accurate process control and monitoring. We are working very closely with OEMs and end users around the world to develop new sensors, solutions and methods to assure high quality mass production of new chips. 2019 will remain challenging, but we expect a stronger second half of the year. Finally, we had a disappointing quarter in the general vacuum market on Slide number 9 with sales of US24.9 million dollars which is 13% below last year's Q2 and even 15% lower than the Q1 of this year. Driven by lower sales in all regions, the biggest negative impact coming from Europe. As you know, sell analysis, measurement and control products for many different industrial applications through private label partners, primarily vacuum pump manufacturers and also via our own direct The unexpected slowdown came from our direct sales channels as well as from our private label distribution partners. The global geopolitical uncertainties as well as a weakening economy directly influenced our sales to almost all customers around the world. We therefore expect now to end the year 2019 below the 2018 record sales level. Before I turn over to Matthias, I'd like to close my part of the presentation with an outlook on Slide number 10. For the next 6 months, we expect a mild rebound in the semiconductor environment with accelerated growth for new technologies as a positive note. On the other hand side, the risk in the general vacuum side of our activities increased. Overall, we remain confident to reach our 2019 targets. Therefore, we do not change our previously given 2019 guidance of sales around US400 $1,000,000 and an operating income of approximately 19% of sales. With that, I'd like to turn over to Matthias Trendle, who will give you more details about our financial performance. Please. Thank you, Lucas. Good morning, everyone, to our Q2 2019 conference call. I will start my presentation with Q2 financial performance, comment the half year results and follow by the guidance for the full year. My commentary starts with Slide 12. Revenues for the Q2 of 2019 came out at $96,600,000 compared with 100 and $4,200,000 in our so far 2nd best quarter Q2 of last year. Total sales decreased by $7,600,000 or 7.3 percent. 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 impact of minus 2.4%. Further, we had positive impacts due to acquisitions of 1.4%, which means we had an organic sales decrease of 6.3%. Looking at the end market development and Mr. Winger did already go into the details. All markets except the refrigeration, air conditioning and automotive market decreased. Semi vacuum coating market had a not unexpected decline and decreased by approximately $5,800,000 or 12%. The general vacuum market showed a decline of 12.6% and the security energy market had a lower second quarter sales and decreased by approximately 7%. The positive thing is, the picture looks a little bit different on a sequential basis. Sales in the 2nd quarter did improve slightly and increased by 0.9% compared to the sales level in the previous quarter Q1. This increase was mainly driven by a solid growth in semi and vacuum coating and the refrigeration, air conditioning and automotive market, which did grow by 6%, respectively, by 9%. Further, the security and energy market showed a good development with approximately 15% growth, while sales to the general vacuum market did decrease by minus 15%. Let's take a look to the regional sales performance on a geographic basis. Europe reached 27%, North America 31%, and Asia Pacific ended with 41% of total quarter 2 sales. As you can see from the chart, Asia sales decreased by approximately 12%, which was mainly driven by the semi and vacuum coating market. Europe weakened by approximately 9% and North America did grow by approximately 8%. Compared to previous quarter Q1, sales did increase in Asia by +14%, mainly semi and vacuum coating, but also security and energy developed well. North America developed more stable, while Europe did decline by 11%. Let's go to the next slide. The gross margin for the Q2 of 2019 reached 48.4% compared to 51% the same quarter of last year. The margin percentage decreased by 2 50 basis points, and the absolute margin decreased by $6,400,000 or 12%. Our actual gross margin are a function of several factors such as business volume, product mix, customer concentration and also we experienced some price pressure. And therefore, we always have to expect to see some variability quarter over quarter. Moving on to the operating expenses. R and D expense in the 2nd quarter reached $8,500,000 and increased by 9.5%. The number is mainly driven by acquisition impacts as well as some favorable impacts from foreign currency. SG and A expense in the second quarter was $22,400,000 or 23.2 percent of sales, a decrease of $900,000 or close to 4%. 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 Q2 2019, we achieved operating income of $15,800,000 or 16.3 percent of sales. This compares to $22,000,000 or 21.1 percent in last year's Q2, which means the result declined by roughly 6 $200,000 or 28% compared to last year, which was, by the way, one of our best quarters so far. The decrease is driven by the lower sales volume and therefore lower gross margin contribution, while costs did decrease slightly. Let's go to the next slide. For the Q2 2019, we recorded tax expense of $3,100,000 which represents an average tax rate of about 20.9 percent, slightly 0.5 percentage points lower due to our profit mix. As a result, the net income for this year's Q2 reached $11,800,000 or 12.2 percent compared to $17,100,000 or 16.5 percent in the same quarter last year. The decrease of 31% is comparable to the operating income development. The 2nd quarter net income equates to earnings of $4.84 per diluted share compared with net income of $7.05 per diluted share in the same period of last year. The decrease is also here in line with the net income development. Let's move on to the balance sheet. Our net cash position was $18,300,000 This compares with $62,300,000 at the end of last year, which means a decrease of about $44,000,000 The decrease is clearly impacted by the $54,000,000 roughly $54,000,000 dividend payment just a few months ago in April this year, which is partially compensated by new cash flow generation. The operating cash flow, which you can also see on that slide, decreased from previous year's high level and reached with close to $10,000,000 solid level. For the Q2, our days sales outstanding DSO was despite some higher accounts receivable levels with 51.3 days, a little bit below the level of the end of last year. Inventory turns decreased and reached 3 turns, and the working capital level increased solely driven by the higher accounts receivable numbers. On the balance sheet graph on the left side, you see the structure and composition of assets, liabilities, the equity ratio reached close to 64% in Q2 after 57.9% and at the end of last year and as a comparison 70 point 1% 1 year ago. There is no material long term liability and the net cash of close to €18,000,000 confirm a solid balance sheet structure. With that, I covered our current quarter results. I wanted now to give some comments regarding our half year performance for the current year. Net sales for the 1st 6 months of 2019 reached $192,200,000 compared with $214,900,000 in the same period of 2018. This is a 10.6% decrease and includes a positive impact from acquisitions of 1.4% and a negative 2.5% impact from foreign currencies. With that, the sales decreased organically by 9.4%. In the second half of twenty nineteen, sales to all end markets except refrigeration, air conditioning and automotive decreased. Refrigeration, air conditioning, automotive achieved a new record level with $44,700,000 and increased 7 point 2%, mainly due to higher sales to customers in Europe and North America. Also, we benefited here from some acquisition impacts. The sales to the semi and vacuum coating market decreased by $18,800,000 or 18.9 percent due to lower demands from our OLED display and semiconductor and equipment makers mainly in Asia. Sales in the general regular market decreased to $54,000,000 or 9.1 percent, reflecting lower sales sales trends with European and Asian customers. In the Security and Energy market, where we have a more long term and project business related environment, the sales declined 10.7 percent or $1,500,000 primarily due to lower sales to Asian customers. From a regional point of view, the majority of sales did go to Asia, where we reached $74,000,000 of sales and approximately 39% of our worldwide sales. This is a 23% decrease compared to last year first half and is solely driven by the sharp decrease in sales to the semi and vacuum coating market. 2nd largest region is Americas, where we had $60,000,000 of sales and 8% growth. And in Europe, we had a 5% decline and a 29% share of worldwide sales. We reached in the 1st 6 months operating income of $32,500,000 or 16.9 percent $46,600,000 or 21.7 percent last year. This is a decrease of 30%. Lower sales, a weaker gross margin percentage and a lower operating expense level did drive this lower result. As mentioned earlier, the complete half year report 2019 with more details and comments is available in our Investors section of the Inficon website. I'll conclude now my portion with our guidance. Mr. Winkler already did give comments and insights to our view of the various end markets. Based on our assessments, 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. And this concludes now the formal part of the presentation, and we ready for your questions. Thank you. We will now begin the question and answer session. Yes, good morning. I have a question regarding your the gross margin development. You if we look at it sequentially, it was down quite significantly despite nearly stable volumes on a sequential basis. So I would like to understand sequentially really what happened because it can't be related to the volumes. Maybe you can quantify how much was mix related and how much is price pressure related. And the second question would be regarding the activities you see in semiconductor and displays in a bit more specifically in the second half of the year? What sort of are you seeing any significant ramps of or fab activity in the second half of the year that would drive your business, be it in the memory space, in the logic space or in displays? Thank you. Thank you, Michael. Let me start with the second question first and then go back to the gross profit margin development. What we see in the semiconductor and display market are kind of 2 to 3 elements that we see as a positive trend. 1st of all, the investments in logic chips and the inside logic chips foundries and so on going to now 7 nanometer and even below. They require definitely the new lithography technology. So we continue to see nice growth coming from the EUV lithography part of our business, and we don't expect any kind of a slowdown there in the second half of this year. Secondly, with OEM or in the OEM market, what we have clearly seen that is that they have used up all their inventory. So they have to start ordering again to make at least shipments to their end users. And again, the majority of their equipments goes more to logic companies and less to the memory guys. Memory is still pretty depressed, with the exception probably in the China market. And 3rd, on the end user side, which is not necessarily always directly linked to the CapEx cycle, we clearly see a higher demand for, let me call it, more sophisticated process monitoring applications to scope with the increased complexity of making semiconductor chips in the 10 and below nanometer dimensions, they need more sensors, more information to get a better output and higher yield. So the need for more software and sensors is actually still going up. And we are not talking just to 300 millimeter device manufacturer. We also have increased penetration, especially with our software products in some of the 200 millimeter. We call them the 2nd tier chip manufacturers. So that's all positive. And even the acquisition that we made in last October, which is pure software driven, They continue to gain market share, and this is based on the subscription sales. So even our recurring revenue then goes up the more installed basis we have. Last but not least, in the OLED sector of the business, I was much more pessimistic at the beginning of the year. Now it looks like the slowdown is still there compared to 2018, but it might not be as severe as I originally thought. And we see a continued investments in even rigid displays, but also in flexible displays in especially in China, but also now coming a little bit back in South Korea. Now that's the should answer your second question. So overall, we see clearly a trend positive trend on the OEM side They have used up their inventory. Secondly, logic investments. 3rd, new technology investments. Memory is still down. Now coming to my concerns and that has also do a little bit with the gross profit development, the Chinese semiconductor initiative on one hand side is still going on. But on the other hand side, we have we face 2 elements there. One is the tariff. So we have to pay some tariffs when we import products made in the U. S. Into China. That had an impact negative impact on gross profit margin. Secondly and we shipped more in the second quarter than in the first quarter. And secondly, most, not all, but most semiconductor companies in China tried to get the best price by doing a kind of a public auction. And as the number one for some of the end user products, we used to have it clearly the highest price level. But if you go through a public auction and the bidding process, you sometimes have to justify or have to not justify, but to lower prices just to keep your high market share. And that did cost us, Matthias might know the numbers better than I know, more than we originally expected just to keep our high market share. So we had to give up some on our high price policy, especially in China, and the majority of the shipments actually happened in the second quarter. So the single biggest impact from our negative gross profit margin development on a sequential basis was coming from those two elements and both were in China, tariffs and price pressure. Excellent. Thank you. You're welcome. The next question is from Jorn Iffert with UBS. Please go ahead. Yes. Hello, Lucas. Hello, Matthias. Thanks for taking my questions. The first one would be, please, on the semiconductor recovery you're mentioning for the second half. Can you tell us or give us a little more detail what is really the underlying market? And what is the sales contribution from your new product launches? And also the incremental sales contribution from the EUV rollout? 2nd question would be, please, I mean, your book to bill is above 1. How much above 1, if I may ask? Can we expect that Q3 revenue Q3 revenues are reaching €1,000,000 plus? And last question, you mentioned ODD. I know 2020 is very far out for this kind of end market. But would you see that supply is meeting demand again and there is a likelihood that in 2020, all the investments are increasing again? So what are the signals you're getting from your customers here? Many thanks. Any questions? Thank you, Jern. You asked me about what we see in the semi recovery. I think it's not necessarily pure market driven. The only market that we see is actually coming back is the logic market and the semiconductor market, not memory at all. Our more positive view on the semiconductor market is coming on our own strength of selling more products to the EUV market, which is still booming. So there's no way. And the EUV part in 2019 will clearly above the EUV of 2018. Secondly, with those new initiatives that we have with new products and also new services that we deliver to the semiconductor market, we add a few millions. It's still single digit, it's not double digit, but nevertheless, single digit more revenue for those new technology. And last but not least, what I mentioned, we definitely sell much more we call them software alone stand alone kind of products into semiconductor area, not just to 300 millimeter, but also to 2nd tier and 200 millimeter semiconductor guys, where the acquisition together with our own piece of software gains traction, and that will add also midsize single digit revenue figures compared to last year's pure software sales to the semiconductor recovery. So as I said, it's not necessarily driven by the market itself because based on the interviews that we did or based on this not interview, but based on discussions we had in the semiconductor trade show 2 weeks ago at Semi West in San Francisco, nobody expects a recovery in the memory market before 2020, only in the logic market. Now to our bookings, we never really disclose our orders. So the book to bill ratio was above 1. It was not hugely above 1, but it was above 1, which is a good indication from a trend point of view because in Q1, it was below 1. So you can see the order trend is that was over proportionately going up compared to the sales trend, and that makes us feel even better about what's coming for the next few months. But we do not disclose all those directly, and therefore, I'm not going to go into too much details. Now you even asked about 2020 outlook. I don't know yet, of course. Based on projects, based on forecast, based on our own ability to launch new products. I think we see or we look actually forward to for a good 2020. On the OLED side, I remain cautious. I don't think that it will come back to the 2018 or end of 2017 levels. But on the other hand side, it's not going to crash. There are at least 2 large OEMs who believe in OEM, and we are working on design wins on new type of equipment that are only going into the OLED market, and they believe in that market, they see a big growth. I'm a little bit more skeptical, but nevertheless, 2020 should be above 2019 on the OLED side. On the semi side, it will clearly grow again. How much? I don't know yet, but I'm not concerned about 2020 yet at all. Okay. Many thanks for this. And if I may, a follow-up question from my colleague on the gross profit margin. What you roughly expect here for the full year? And how can you reverse it? What are your actions for the second half to improve the gross profit margin again? We can let me say that way. What happens sometimes, and this is not a secret in the market, but you sometimes have to lower the price to get the first application. And then once you're in, you can actually start to generate value, you can start to show what the products are capable of, and then you have a much easier time to sell the 2nd round of investments at a higher price, even for the same application, even at the same customer. And so therefore, we don't expect the same negative impact. But do we expect the full rebound? Not necessarily on that side, but we have other elements, especially new products that usually carry a little bit higher gross profit margin than older ones, and there are a couple of newer products even in the not only semi, but also in the refrigeration air conditioning market to actually carry a above the average gross profit margin. All right. And the pricing pressure only has to do with the tariffs predominantly. It's not the underlying market change. No, no, it's not it's the tariff is one part, the price pressure, it has to do with this open public bidding process of most of the semiconductor chip manufacturers in China. All right. Those are prestigious projects, and the Chinese government wants to have wants to basically prove that they are capable to make chips in China at a decent price. And one other end out of that is that they go through a public bidding process. Okay. Many thanks. You're welcome. The next question is from Marta Brusca with Berenberg. Please go ahead. Hello, good morning. Thank you for taking my question. I just wanted to come back to the EUV opportunity. I a bit better understand how to think about it in terms of this year sales perhaps and the opportunity for 20 20? There has been a lot of news flow regarding the larger players investing heavily into the new tools. And yes, how what are your expectations already maybe looking into 2020 even if you might, please? Thank you. Thank you, Martha. And if you listen to the CEO of the only supplier of EUV tools, let me call it that way, very simple, they usually are very detailed about how many shipments they are expecting for the full year. And that's on the shipment side. So in a growing market, if you are the supplier to the OEMs, then you have even a higher number than what they ship. This is one element. So you can easily calculate how many EUV tools get shipped this year because they disclosed that figure. And since we are the only supplier for those special monitoring products, we always get our share automatically. It's a must have product for those tools, so we get our share. Secondly, those products require a certain amount of revenue service, sorry, service and on a regularly basis. So whenever they do a plant maintenance, they usually have to replace that piece of instrument, which is quite large and send it back for service purposes. So even on the recurring revenue side, we get increased volume with the increased installed basis in the market. So from two sides for us, this is a very interesting opportunity. So we grow together with the OEM, and we also grow with the number of installed bases on the service side of the business. Now if you look at what they tell you about the 2020, I believe they said they like to go from 35 systems to 50 something systems next year. So that's another 20% to 25% growth on the OEM side plus additional revenue on the service side. Thank you very much. That has been very helpful. Thank you. The next question is from Philippe Saliba with HSBC. Please go ahead. Hi. Just trying to elaborate again, of course, on the difficult question on how 2020 will look like, specifically on the memory side. I mean, there's still different indications. Hynix today said that they would cut the DRAM production starting from Q4. Let's say, what are chances that memory could go down further? What are chances it could go up? And what's, let's say, the probability that it stays flat as it is? Just have a feeling there. I'm not sure if I'm the right person to actually ask you that answer to that question. I can only give you my kind of own gut feeling and what we see and what we hear. It is clearly a hard time for the existing memory guys like SK Hynix and Samsung because they now have a new competitor. It's called China. And in China, they start, of course, first with making memory chips and not with the more complicated logic chips. So there is a huge new capacity that has been installed in China. And so the memory prices went down. And if you just listen to the experts around the world, and then it looks like that the rebound will not come before, whatever they say, Q2 2020 or something like that. So overall, most experts assume that 2020 will only see a slight rebound in the pure memory market. But everybody expects a growing market in logic and MEMS and those, do you call it, Internet of Things sensors, which are usually based on MEMS technology, that part of the business will grow. The memory market, will probably have to be a little bit more patient. Okay. Thank you very much. You're welcome. The next question is from Alexander Koller with ZKB. Please go ahead. Good morning. I've got a question regarding the R and D expense since we saw there an increase in the 1st two quarters due to acquisition effects. What can we expect for the second half of the year there? Thank you. Not much change. That's the short answer because as we explained and as you said, the main driver for the increase is really the acquisition we did last year in October. So we added some more fixed costs, and this will remain there. And this is due to the acquisition of FPS, the software, basically software company where most of the expenses are shown and have to be shown in the R and D section. So we don't expect to see a major change. Thank In that case, I simply like to thank you all for being listening during those hot days of the year. And I'm looking forward to talk to you again on, I think it's October 17th, when we are going to disclose our Q3 2019 financials, and I wish you a nice hot and comfortable vacation or summertime over the next few weeks. Thank you very much and have a good day. 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.