Earnings Call: Q1 2019

Apr 17, 2019

Ladies and gentlemen, welcome to the Inficom First Quarter Results Conference Call. I'm Alice, the Chorus Call operator. I would like to remind you that all participants will be in a listen only mode. And the conference is being recorded. The presentation will be followed by Q and A session. The conference is not recorded for publication or broadcast. At Thank you, Alice, Chrissy, and good morning, everyone, and thanks for joining us today to review our results for the Q1 2019. After finishing a good year 2018 with record sales and net income, but with a negative trend quarter by quarter, we started into 2019 with a sequentially improved 1st 3 months compared to the last quarter of 2018. Nevertheless, we are far behind the record Q1 of 2018, primarily driven by reduced semiconductor and OLED activities in Asia. You can find a PowerPoint presentation, as always, on the Investor Relations tab on our website that supports our conference call. Please turn to Slide number 4, where we start with the key figures for the reporting quarter. In total, our revenues were almost 14% below last year's Q1 and we finished with sales close to $96,000,000 Adjusted for foreign exchange currency fluctuations and acquisitions, the organic decrease was above 12%. On the other hand side, our sales slightly increased sequentially by 1.6%. With decreased sales, somewhat lower gross profit margins, but still above 50% as well as reduced operating expenses, we finished the quarter with operating income of US16.7 million dollars or 17.5 percent of sales compared to the record US$24,600,000 or 22.2 percent of sales for the same quarter a year ago. Sequentially, the operating income margin improved from 15.8% to 17.5%. After tax, net income reached US12.8 million dollars or 13.4 percent of sales. Matthias Treundley will review the numbers with you in more details later, while I now highlight some important developments in our markets first. Please turn to next slide number 5, where you see the sales breakdown to our served 4 key markets as well as the regional sales trend. The pie chart on the left side shows an increased contribution from the general vacuum and refrigeration, air condition and automotive market at the expense of a reduction from the semi and vacuum coating market. The trend chart on the right hand side indicates dramatically the slowdown in Asia compared to the more stable North American and European markets. Now let's do a quick analysis market by market, starting with the smallest one. In the Security and Energy market, Slide number 6, sales decreased 13% year over year and more than 20% sequentially and reached US5.8 million dollars We had a slow start in 2019 and also the majority of the sales was still for security applications. We are facing a weak demand from large government agencies in the U. S. And China. Political as well as trade uncertainties are the main drivers behind this slowdown. We are working on some interesting heapsite projects, but the timing as well as the budget approvals are hard to predict. Therefore, we remain cautious for the coming months. On the energy side in this market, which represents a smaller part of our business, we continue to see an increasing interest in new green energy technologies, such as biometan gas applications, especially in Europe, as well as new landfill applications in the U. S. In the energy market, we do serve a much larger customer base from the private as well as from the government sector. Therefore, our energy business is less lumpy compared to the security activities. Overall, we expect a weak 2019 in the security and energy market. Now moving to the Refrigeration, Air Conditioning and Automotive market on Slide number 7, where we reached a new quarterly record, partly due to the small acquisition that we made in October 2018. Sales increased 3% year over year and 16% sequentially and reached US20.1 $400,000 The growth can be allocated to American and European customers primarily while sales in Asia slowed down. Inficone is the preferred supplier for all quality leak checkling applications in the refrigeration and air condition manufacturers market, and we have been able to defend our number one market share position. Using the same world class technology and application know how enabled us to enter the automotive manufacturing market. In the meantime, we became a preferred partner in this market as well, especially due to the increased regulation requirements. The production of lithium ion batteries for e cars is one of those new and growing applications where leak tightness is a critical security issue. E car battery manufacturers around the world rely on our technology for quality assurance. Similar requirements will soon start to be necessary for small rechargeable batteries for all kinds of variable and mobile devices as well. Additionally, we continue to expand our distribution network for our full line of handheld battery powered after sales service products around the world. The previous mentioned small acquisition is a nice addition to our existing products and enables us to get better access to the automotive after sales service market. We expect 2019 with a stable market development and some growth coming from our after sales service activities. Now let's go to the semi and vacuum coating market, which includes solar display optics and, of course, semiconductor applications on Slide number 8, where sales decreased 25% year over year and reached US39.2 million dollars Compared to the already weak Q4 2018, sales decreased another 3%. Almost all of the reduced sales can be attributed to weak semiconductor and OLED flat panel display market in Asia. Design wins in the EUV, the Sograft technology market as well as increased sales of our semi manufacturing software in Europe and North America helped to offset the very low investment in new semi and OLED tools, especially in Asia. Nevertheless, we expect that this slowdown demand for semiconductors will reach or has reached the bottom that the business will come back in the second half of twenty nineteen since the need for new and existing applications for all kinds of smart sensors for industrial health and automotive applications as well as Internet of Things, Big Data, artificial intelligence and other new high-tech application has not changed. The speed of the China semi initiative will depend on the outcome of the China U. S. Trade discussions as well as the availability of know how, meaning manpower with semiconductor experience. The first issue can be resolved easier and probably sooner as well. Looking ahead from a long term perspective, the semiconductor market will remain the most attractive growth opportunity for IntriCon. 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 to develop new sensors, solutions and methods to assure high quality mass production of new chips. So we expect a challenging 2019 from a market or financial point of view. But from a technology point of view, challenges mean new growth opportunities for new solutions together with our customers. Finally, we had a mixed Q1 2019 in general vacuum market on Slide number 9, with sales of US29.3 million dollars which is an increase year over year of 6%, but decreased 6% sequentially. As you know, we sell analysis, measurement and control products for many different industrial applications through private label partners, which are primarily vacuum pump manufacturers, but also direct sales channels to OEMs and distributors. A positive economic environment together with new private label product initiatives and direct market share gains, especially in North America, will be modest growth contributors to Inficom. And as a positive last topic, our Contura S400 Leaf Detector for food packaging applications has reached the market acceptance breakthrough in Europe, and therefore, we decided to expand our distribution into the U. S. Market. Before I turn over to Matthias, I'd like to close my part of the presentation with an outlook on Slide number 10. As I said already, 2019 will be kind of a transition or challenging year with geopolitical uncertainties, with an expected semiconductor rebound in the second half, but nobody knows the exact timing, with technical advanced solution in many new applications, such as the growing extreme ultraviolet use in the lithography and new ALD and CVD processes for 3-dimensional 7 nanometer wafer technology and so on. The current OLED overcapacity in the market reduces the need for new tools. At the same time, new flexible OLED displays will soon be available on new mobile phones. Also the current traditional automotive market is down, the growing e car activities need new and improved batteries and the battery manufacturing capacity is behind the demand, which will generate new leak checking opportunities for Inficon. All in all, we see many growth opportunities. At the same time, we are facing some market risks. Therefore, we do not change our previously published 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. Good morning to everyone to our Q1 2019 conference call. I will start as usual my presentation with the financial performance and then followed by some words to the guidance. My commentary starts with Slide 12 of the PowerPoint on our website. As communicated in our press release this morning, revenues for the Q1 of 2019 came out at $95,700,000 compared with $110,700,000 in our record quarter Q1 of last year. Total sales decreased by $15,000,000 or 13.6 percent. Compared to 1 year ago, the U. S. Dollar did strengthen against some of our major currencies, for example, the euro. Due to that, we had some negative exchange rate effects of 2.6%. Further, we had some positive impacts due to acquisitions of 1.4%, which means we had an organic sales decrease of 12.4%. Looking at the end market development, all markets except refrigeration, air conditioning and automotive decreased. The semi and vacuum coating market had, we are not unexpected, the highest decline and decreased by approximately 25%. The general vacuum market showed a decline of 5.5% and security and energy market had a lower first quarter sales and decreased by 13%. The picture looks a little bit different on a sequential basis. Sales in the Q1 did increase slightly by 1.6% compared to sales level in the previous quarter Q4. This increase was mainly driven by solid growth in general vacuum and the refrigeration air conditioning automotive market, which did grow by 5%, respectively, 16%, while sales to the other 2 end markets, semi and vacuum coating and security and energy, did decrease. Now how does the regional performance look like? On a geographic basis, Europe reached 31 percent, North America 32% and Asia Pacific ended with 36% of total first quarter sales. As you can see in the chart, Asia sales decreased sharply by approximately 33%, which was mainly driven by the semi and vacuum coating market. Europe developed stable and North America did grow by approximately 7%. Compared to previous quarter Q4, sales did decrease in Asia by minus 14%, again mainly semi and vacuum coating, while Europe and North America did grow by 9%, respectively, 18%, and in both regions, all markets showed growth. So let's go to Slide 14. The gross margin for the Q1 of 2019 reached 50.1% compared to 51.1% in the same quarter of last year. The margin percentage decreased by 99 basis points. The absolute margin decreased by €8,600,000 or 15%. Compared to previous quarter Q4, the margin improved from the low 47.5 percent level, thanks to a more favorable shipment mix and less adjustments and reserves we took. Moving on to our operating expenses. R and D expense in the Q1 reached $8,600,000 and increased by 8.9%. The number includes acquisition impacts as well as some favorable foreign currency impacts as a percent of sales, which represents 9% after 7.1% in last year coupon. SG and A expense in the Q1 was $22,600,000 or 23.6 percent of sales, a decrease of 6.2 percent or $1,500,000 The decrease in SG and A 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 Q1 2019, with that, we achieved income from operations of $16,700,000 or 17.5 percent of sales. This compares with last year's figures of figure of $24,600,000 or 22.2%, which means the resulted decline by roughly 32% compared to last year, which was, by the way, our best on record quarter so far. The decrease is mainly 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 Q1 2019, we recorded tax expense of 3,700,000 dollars which represents an average tax rate of about 22.5%, slightly 0.4 percentage points lower due to our profit mix and the different country tax rates. As a result, the net income for this year's Q1 reached $12,800,000 or 13.4 percent, which compares to $18,700,000 or 16.9% in the same quarter last year. The decrease is 31.6 percent. Off 31.6 percent is comparable to the operating income development. First quarter net income also equates to earnings of $5.27 per diluted share compared with net income of $7.70 per diluted share in the same period of last year. Also this decrease is in line with the net income development. Now let's move on to the balance sheet on the next slide. Our net cash position in Q1 was $65,400,000 which represents roughly 21% of our total assets. This compares with $62,300,000 at the end of last year, which means we had a slight increase of about $3,100,000 The operating cash flow, which you can also see on that slide, did increase from previous year's negative level and reached for the Q1 with high payouts and some reductions in accruals, a good $7,300,000 For the Q1, our day sales outstanding slightly improved and reached 50.1 days compared to 51.4 days at the end of last year. Inventory turns did decrease and reached 3.2 turns, while the working capital level was stable and the ratio did end up with 28 0.8%. On the balance sheet graph on the left side, you see the structure and composition of assets and liabilities. The equity ratio reached close to 70% in Q1 after 57 excuse me, 75.9% in Q4. No material long term liabilities and the net cash position of $65,000,000 confirm a solid balance sheet structure. With that, I covered our current quarter results. I conclude my portion with the guidance. Mr. Winkler did already give insights and comments on our view of the various end markets. Based on our assessment, we confirm the previous guidance for the year. We expect sales around 400 $1,000,000 with an operating income level of around 19%. The last slide shows our corporate calendar and the upcoming dates. This concludes now the formal part of the presentation. We are ready to take your questions. Our first question comes from the line of Michael Firth from Fontebo. Please go ahead. Yes. Good morning, Lucas and Matthias. Several questions. The first one is regarding your comments on the semiconductor markets. Actually, a lot of other players talk about very low visibility into the second half of twenty nineteen and feel that it's difficult to call the bottom of the cycle. And you sound much more confident regarding the rebound in the second half. So I was wondering what sort of evidence do you have and that you base your comments on? That's my first question. The second one is also relating to semi and the dynamics in Asia and America. Just trying to understand what the demand levels from the OEMs in the United States are versus what you are shipping to Asia and China. There seems to be a pretty significant discrepancy in terms of the growth dynamics. So if you can comment on that. And then my final question would be regarding the OLED market. The question is whether you're seeing already any concrete capacity expansion plans for flexible OLED, if you see any particular CapEx that will be deployed in the market that will drive revenues for you in the second half of the year? Thank you. Good morning, Michael. A lot of questions. Let me start with the last one. In the OLED market, what we see and what we expect is that there is already some installed capacity for flexible displays in Korea, but it does not look like there is enough capacity in China. And as you know, even the Chinese mobile phone makers will soon launch or start to sell certain products with flexible displays. We do not see a lot of activities on the OLED OEM market, with a few exceptions, as I mentioned, that will go to China. But we also see some increased OLED activities on the end user side, which is an indication that where we sell so called yield enhancement product and monitoring product, which is an indication that the tools are actually used, the displays are manufactured. And obviously, they seem to have some issues with the reaching high productivity on the yield side. Having said that, overall, I mentioned that before, the OLED market for the full year will clearly behind will be behind 2018 figures just for OLED alone. But we see some indications, especially coming from China, that there will be some investments coming for kind of a new type of flexible displays. Now turning to the semi market. Here, we really have to distinguish between at least 2 elements. 1 is the dynamic in the end user side and dynamic on the OEM side. And if I say that we might see the bottom, nobody can give you a perfect guarantee. But from an Infocom point of view, we serve both markets, the end user as well as the equipment manufacturers. And there is always some time lag in between and the drivers are not necessarily almost the same. On the OEM side, we clearly have to distinguish between, let me call it, traditional process equipments for deposition and etching. This market is down. There's no doubt about that. Now you asked about dynamic between U. S. And Asia. I would not like to comment on that because at the end of the day, it depends heavily on where the OEMs actually have their manufacturing location. Even American equipment manufacturers do not make most of the equipments in America anymore. They make them somewhere in Asia. And so we simply see that the equipment manufacturers market for traditional deposition, etching tools are down. On the other hand side, and that's an indication that new technologies are actually growing, the EUV lithography market is clearly growing. That's again, it's an equipment manufacturers market. In that case, it's primarily in Europe. And together with the EUV, we also see some ALD tools and some high end CBD and edge tools are growing as well to make sure that they can make those 7 nanometer or even 5 nanometer chip designs. So you can clearly see that traditional technologies are down, but the kind of the high end side is already showing some growth. And with the EUV, clearly shows a lot of growth. Then coming to the end user side, where we see an increase in the use of advanced sensor solutions as well as software more in the U. S, Europe and a little bit in China, where else the traditional Korean and Taiwanese end users are behind wouldn't say behind, but in a relatively weak phase compared to where they used to be a year ago. But we see increased interest in our solutions for so called manufacturing software to increase the yield and having a better productivity level, especially for 2nd tier chip manufacturers, primarily in U. S. And in Europe. So the end user dynamic is already showing some indications of recovery. I wouldn't call it a perfect recovery yet, but at least all those manufacturers who tried to be in the forefront of the technology using new material, using new small designs with 3 d design and 7 nanometer technology. They are they need to invest in yield enhancement and monitoring solutions, and that's where we have a very good market position, and they are ready to take market share wherever we can. So I would say, if you would summarize it, then I cannot say that we have reached the bottom yet on the traditional semiconductor equipment manufacturer side, but we clearly see a good momentum in the EUV market as well as in the high end end user market. Does it explain your question? Perfect. Thanks a lot. You're welcome. The next question comes from the line of Philippe Saliba, HSBC. Please go ahead. Yes. Hello. Thank you very much. A few questions from my side. Firstly, you say that the book to bill is below 1. Can you shed some light on that? Is it significantly below 1, just a notch below 1, so to have some color there? Then in terms of Q2, are you able to provide an update in terms of how sales have progressed so far as well as orders? And also, in order to see a stronger H2, when would we need to see the orders flowing in? Then in terms of an H2 recovery, is it rather, let's say, a sequential recovery from H1 into H2 or also a year over year increase H2 2019 versus H2 2018? And how strong would that or could that recovery be? And maybe also could you shed some light on I guess that is what you mentioned also with traditional investments. Do you see any signs of in the memory market of recovery? Thank you. Yes. A lot of questions, a lot of very detailed questions. Let me go quickly start with the last one again and then I maybe start with the first one. You're right. Traditionally, the memory market does not require 7 nanometer technology yet. So therefore, they are relying on the large top line width and therefore, they don't require a high end EUV and advanced ALD and ALE processes yet. And that is exactly what I mentioned before. Those memory makers are using more traditional deposition and etching tools and they are clearly down. That's true. Now let me go back to the first question. We do not disclose order intake figures in details. We never did. And so I like to stay with that. You also have to understand that our lead times vary between 2 days and probably 2 months. So we can for certain orders, we can very quickly turn around, others will take some time. And so I don't see the book to bill being below 1 as a big concern for Inficon. As I mentioned, we are very quick in turning around orders into revenue anyway. What do we see Q2? It's 2 weeks old and so far so good. So there's no indication that I have to be worried about. And you're right that if H2 needs to be better than H1, that's probably we might see first indications at the end of Q2. If you don't see something by the end of Q2, then our predictions would be wrong. On the other hand side, if we like to if we have to get to our guidance, then the second half of twenty nineteen needs to be at least at the level of the second half of twenty eighteen or a little bit above, and that's what we expect will happen. And of course, with certain risk as always, but our salespeople around the world work on project lists and they provide us with a monthly forecast. And that's what we give as a guidance is basically the summary of all the inputs that we collect from all the intelligence around the world, and that's what we see currently. But you're right, we need to see some clear indications by the end of Q2 for an improved order intake in order to make our guidance with a better second half than the first half. Thank you very much, Mr. Winkler. Very welcome. We have a follow-up question from Mr. Michael Ford. Please go ahead. Mr. Furth, your line is open. You may ask your question. Yes, thank you. A follow-up on the food packaging market. You talked about breakthrough in commercialization in Europe. I was just wondering if there are any changes since the announcement of your full year results that you want to mention or if it's just a reiteration of what you said earlier in the year? It's a reiteration of what we said because we said that basically a month ago. It's basically just confirming that we are on the way of clearly growing that business, still a low level, but with huge growth rates and we expect a couple of new orders now coming soon also from the U. S. Market. But it's a reiteration. Okay. So in terms of contribution to sales in 2019 still expected in the single digit €1,000,000 range or already above that? That's true, single digit. Okay. Very good. Thank you. You're welcome. Gentlemen, there are no more questions at this time. If there are no more questions, then I simply like to thank you for your patience listening to our earnings calls. And since you are in the middle of the week and expecting a long weekend, I all wish you a nice Easter break, hopefully with some good weather and not too much traffic on the street. Thank you and talk to you in 3 months. Bye bye. 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.