Earnings Call: Q1 2018

Apr 20, 2018

Ladies and gentlemen, good morning or good afternoon. Welcome to the Insicom First Quarter Results Conference Call. I'm Myra, the Chorus Call operator. I would like to remind that all participants will be in listen only mode and the conference has been 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 Mr. Lucas Vinkler, Chief Executive Officer of Insecon. Please go ahead, sir. Thank you, Maja. Great and good morning, everyone, and thanks for joining us today to review our results for the Q1 of 2018. After finishing a good year 2017 with record sales and net income, we had a pleasant start into 2018 with a very active customer base in most of the target markets around the world. As always, you can find the PowerPoint presentation on the Investor Relations tab on our website, which supports you with additional information and some graphics. Please turn to slide number 4, where we start with the key figures for the current reporting quarter. In total, our revenues were 25% above last year's Q1 and we finished with sales above $110,000,000 If you adjust the number for foreign exchange currency fluctuations, the organic growth was slightly below 20%. Sales increased sequentially compared with a strong last quarter of 2017 at 8%, heavily influenced mainly by lower sales to customers in the security and energy market. With higher sales and improved gross profit margin above 51%, as well as increased overhead costs, we finished the quarter with operating income of US24.6 million dollars or more than 22% of sales compared to US17.8 million dollars or 20% of sales of the same quarter 1 year ago. Net income reached US18.7 million dollars Matthias Trende will review the numbers with you in more details later, while I now highlight some important developments in our target markets first. Please turn to the next slide, number 5, where you see the sales breakdown into the 4 key markets that we serve. The pie chart shows almost the same contribution from the different markets as a year ago. Only the percentage from Refrigeration Automotive market did increase slightly and represents now more than 20% of total Inficon sales. Now, let's do a quick analysis market by market. I'll start with the most prominent one, the semi and vacuum coating market on Slide number 6, which includes following applications, solar, display, optics and all semiconductor activities. Sales to customers in this market increased 29% year over year and 20% sequentially versus an already strong last quarter of 2017 and ended with a new quarterly record over US52 $1,000,000 There are 4 main developments that I'd like to talk a little bit. First of all, thanks to many design wins over the last couple of years and an improving business environment, we have been able to increase our exposure at semi and vacuum coating equipment manufacturers during the reporting quarter and we expect that that level of business will remain high over the next few months. Secondly, the semiconductor chip manufacturers itself continue to invest in additional capacity in line with the increased demand for their products to cover the need for big data, artificial intelligence, Internet of Things and more and more autonomous driving. On top of that, China's initiative become one of the top chip manufacturers as well as some new process technologies creates an additional boost for our advanced process control instruments and software. 3rd point, investments in the OLED flat panel display production capacity continue to be high and here our products are used for 4 different purposes. As a critical measurement component shipped to the equipment manufacturer, as a sensitive process monitoring instrument shipped to the display makers. Then we have a line of leak detectors for maintenance and quality assurance purposes shipped to both the equipment as well as the display manufacturers. And finally, we even sell 100,000 of inexpensive consumables that need to be replaced once a week, sold and shipped to the display makers directly. My last remark, we also see a renewed interest in additional capacity to produce photovoltaic solar panels, primarily from equipment manufacturers in China. Now, let's go to our smallest served market, the security and energy market on Slide number 7, where sales increased 26% year over year, but dropped 36% compared to the last quarter in 2017, which was the strongest one in 2017. Security applications are primarily sold to government agencies continue to represent the majority of sales in this market. The current level of business is much better than a year ago, but although the level of geopolitical uncertainty did not go down, we did not yet see any specific large increased interest in our flagship security product, the Hebside. This man portable on-site detection instrument is still the main product to detect unknown chemicals to protect people, soldiers, firefighters, scientists for all kinds of different, mostly dangerous applications. Sales of additional products used for petrochemical, analytical, environmental and public utility applications slowly grow to a growing number of smaller accounts around the world. Now moving to the refrigeration, air conditioning and automotive market on Slide number 8, where we had sales of 20.8 $1,000,000 which represents an increase of 13% year over year and 10% sequentially. The growth can be allocated to Asian and European customers primarily, while sales in Americas remained at a high level. Last year, we experienced some indication of saturation in the market for refrigeration and air conditioner manufacturers, especially in China. That is not the case anymore at the beginning of this year. Together with the ongoing success of our instruments in the automotive industry as well as the growth in the e car market, again driven by large investments in China for new battery manufacturing capacities, we reached new quarterly record revenues. Additionally, we continue to expand our distribution network for our line of after sales products around the world. All in all, we have been able to expand our leading market share position and expect to continue to grow this year again. Finally, we had a positive Q1 in 2018 in the channel vacuum market on Slide number 9, with sales of US31 $1,000,000 which results in a year over year increase of 27% and 6% sequentially. As you know, we sell our analysis, measurements and control products for many different industrial applications through private label partners, primarily vacuum pump manufacturers and via direct sales channels to industrial OEMs and distributors. A positive economic environment around the world, together with an increased market share for private label products in Europe and direct market share gains in Asia, again, primarily in China, contributed to this pleasant start into 2018. We expect that this business remain at a high level throughout the next 9 months. Before I turn to Matthias, I'd like to close my part of the presentation with an outlook on Slide number 10. With the exception of security market, where we do not have clear indications how the market will behave over the next 9 months. For all other target markets, we are quite positive for the rest of the year. And therefore, we expect to finish 2018 on new record levels top and bottom line wise. So, we reaffirm the previously given 2018 guidance of sales around €400,000,000 and an operating income clearly above 19% of sales. With that, I'd like to turn over to Matthias Freundlich, who will give you more details about our financial performance. Matthias, please? Thank you, Lukas, and good morning to everybody on our Q1 Q1 2018 conference call. I will cover Q1 results and also quickly comment our guidance for the year. My commentary starts with slide number 12 on the of the PowerPoint on our website. As communicated in our press release, we had another very good quarter, where we reached new highs in sales and profitability. Revenues for the Q1 of 2018 came out at $110,700,000 compared with $88,500,000 in the Q1 of last year. Total sales increased by $22,200,000 or 25.1%. Compared to 1 year ago, the U. S. Dollar did weaken against some of our major currencies. Due to that, we had a high relatively high positive exchange rate effect of plus 5.7%, which means we had an organic sales increase of 19.3%. Looking at the end market development, all markets increased and 3 out of 4 markets reached also new record levels. The semi and vacuum coating markets had another very good quarter and increased by 29%. Refrigeration, air conditioning and automotive market increased by 13%. And both the general vacuum and the security and energy market increased by 27%. On a sequential basis, sales in the Q1 were higher by 8.6% compared to the sales recorded in previous quarter Q4. This was driven by the growth in 3 out of 4 end markets, only security and energy felt a little bit short and compared to the strong and very good quarter 4. So how does the regional performance look like? Sales performance looks like? On a geographic basis, Europe reached 27%, North America 26% and Asia Pacific ended with 47% of total first quarter sales. As you can see from the chart, Asia sales did increase by 21%, mainly due to higher semi and vacuum coating sales. Europe did grow very strong by 34% and North America did grow by 25%. Let's go to Slide number 14. The gross margin for the Q1 of 2018 ended or reached 51.1% compared to 51.0% in the same quarter of last year. The margin percentage increased minimal by 12 basis points and the absolute margin increased by $11,400,000 or 25%. Moving on to our operating expenses. R and D expense in the Q1 reached $7,900,000 and increased by 14.9%. As a percent of sales, this represents 7.1 percent after 7.7% last year. SG and A expense in the first quarter ended at $24,100,000 or 21.7 percent of sales, an increase of $3,600,000 or 17.5%. The increase in both R and D and SG and A is influenced by some unfavorable foreign currency impacts, further driven by development projects, headcount additions in various functions and higher variable compensation and commission spend. Now turning to the bottom line. For the Q1 of 2018, we achieved income from operation of $24,600,000 or 22.2 percent of sales. This compares with income from operations of $17,800,000 or 20.1 percent in last year's Q1, which means the resulted improve around $6,800,000 or 38.5 percent compared to last year. The increase is due to the higher sales volume, a solid gross margin, while cost did increase under proportionally. Let's go to the next slide. For the Q1 2018, we recorded tax expense of $5,600,000 which represents an average tax rate of about 22.9 percent. Due to our profit mix in the different entities and countries a little bit lower than the 25.6% recorded in the 2017 period. The net income for this year's Q1 reached $18,700,000 or 16.9 percent compared to $13,000,000 or 14.7 percent in the same quarter of last year. The increase of 43.9% compared to last year is driven by the higher operating income with a slightly lower tax rate. The first quarter net income equates to earnings of 7.7 dollars per diluted share compared with net income of $5.41 per diluted share in the same period last year. This represents an increase of 42.3 percent, which is more or less in line also with the net income development. Now let's move to the balance sheet highlights on the next slide. Our net cash position was $81,400,000 which represents roughly 33 percent of our total assets. This compares with $85,000,000 at the end of last year, which means decrease of about $3,600,000 So why did the cash decrease? Typically, the 1st quarter of the year is a quarter where we have high cash outflow and the lowest cash generation in the year due to this is due to payments for variable compensation components like commissions and bonuses and also some other liabilities. In combination to that, this quarter had extraordinary high sales in the last 4 to 6 weeks of the quarter and therefore AR, which accounts receivables and working capital did go up substantially. And as a consequence of the operating cash flow, which you can also see on this slide on the top on the bottom corner, for quarter 1 ended at negative minus $2,000,000 We are confident that the cash generation will improve again in the next quarters, of course. For the Q1, our DSO day sales outstanding slightly increased and reached 51.3 days compared to 50.3 days at the end of last year. Inventory turns developed stable and reached 4.2 turns, while the working capital ratio, as just mentioned, did increase to 24.6% due to the just explained circumstances. On the balance sheet graph on the left side, you can see the structure and composition of assets and liabilities. The equity ratio reached 74.3% in Q1 after 77.1% in Q4. We have no material long term liabilities and the cash position of $81,000,000 which confirm a solid balance sheet structure. With that, I covered our current quarter results. I conclude my portion of this call with the guidance. Mr. Wingler did already discuss in detail and explain in detail our assessment of the various end markets. After this remarkably strong quarter, strong start into the New Year, we can affirm our guidance for the full year of 2018. Sales are expected around €400,000,000 and the operating income margin should exceed 19% clearly. And on the last slide, you can see our corporate calendar and the upcoming dates in the next quarters as you can see here. This concludes now the formal part of the presentation. We are now ready to take your questions. We will now begin the question and answer session. The first question is from Ritu Amstaltin from Baader Helvea. Please go ahead. Yes, good morning. A question regarding your guidance, which looks to me pretty conservative given your comments and how you started the year. You also mentioned that the book to bill ratio was around one times and you have a good visibility for the Q2. The question is why do you keep here the guidance? Do you include here a certain safety margin for the second half as it's still not that clear if the investment cycle, let's say, in the semiconductor area is potentially cooling a bit down in the second half. How do you assess this? This is Lucas speaking. Yes, Sareto, you almost answered the question yourself. And yes, it's only at the beginning of the year. We have a relatively good visibility into Q2, but beyond Q2, it's still based on projects, still based on forecast, still based on some assumptions, which at this point in time, middle of April, we and only 1 month after we provided the first round of guidance, we didn't want to change already. And I think the one element that you did not hit from an uncertainty point of view is the OLED market. And I in contrary to the semi market, where I do not foresee any midterm turbulences in the OLED market, which is still a very cyclical market. Eventually, there could be some elements of reaching enough capacity to make all those additional TV sets, mobile phones and so on. And if you recently just listened to where the most prominent phone maker who switched to the OLED display had not a very successful revenue stream. So, some of the suppliers of this prominent mobile maker actually reduced the forecast for their components. We don't see that yet, because all the other mobile makers are using OLED displays for quite a long time already. But nevertheless, I think if you want to chart a little bit where the risk is higher on the semi or the OLED side, the risk is clearly higher on the OLED side than on the semi side. Okay. Could you give some indication how much of your business you do now in the OLED market? I don't know the exact figure, but it's if you look at our semi and vacuum coating market in total, which almost reached 50% of inficone overall sales, about 1 third of that volume goes into more vacuum coating related markets and the majority of that 1 third is clearly coming from OLED. Okay. Okay. Thank you. Yes, Morgan, again, a question regarding the semiconductor business development in the Q1. You mentioned there or you reported now a strong also sequential growth quarter on quarter. Could you give some maybe more detailed answer? What has driven this? Is it more at the end the OEM part? Is it more on the side of the end users? And or is it at the end more related to the OLED overall business development? Although I have to say, I would have expected rather a bit and weaker performance on the OLED side. As we know, the biggest spender, Amazon is already becoming a bit more cautious, right, and rather postponing 1 or the other big project there. If you break it down, let's say, in 3 big pieces, the equipment manufacturers market, the semi chip makers and the whole OLED market, all three actually contributed very nicely to that growth. I would have a hard time right now to pick 1 of the 3. And even OLED did not show any weaknesses yet. So for in the Q1, I think all three contributors were on a pretty high level. Okay, okay, good. A last question, you mentioned some market share gains in the private label business. Is this more related to that you have now also Edwards on the coverage? Or have you made share gains at the existing top 2 private label customers? We do not disclose the names here, but the number of potential candidates in that world is not that big. But yes, we did gain a little bit more from the share that we had already, but also did gain another part of the business of another vacuum pump manufacturers to cover with our product. Thank you. The next question is from Jurgen Eifert from UBS. Please go ahead. Thanks for taking my questions. The first one is, can you clarify what was the recent FX movement and the impact on the gross profit margin? And second question would be with the full year results, you mentioned you are working on a new product range, which has sales potential, I think, up to $25,000,000 to $50,000,000 where you already invested something in CapEx. Can you already share some more news with us about this new product range? And the third question would be please, can you give us an update on the employment of atomic layer deposition in the end markets because this seems quite favorable for the WACCME applications including and also for Inficon in the semi end market? Thank you. Let me start with question 23 and then I will go hand over to Matthias for the foreign exchange fluctuation. Start with the last one, ALD market. Our exposure to the ALD market is now primarily in the equipment part or the equipment manufacturer part of the semiconductor world, not yet dramatically on the end user, because for the end user, Markus, you need different set of instruments. We have 1 or 2 that actually fits into that. But if you would assume that ALD eventually will replace the PVD market traditionally, and we have not yet reached the same exposure in the ALD market than we have in the PVD market at the chip manufacturer site. But we're working on that. The good news is that ALD is a much slower process compared with PVD. So therefore, you need more process chambers to get to the same throughput compared with the traditional PVD process technology. Now, I think your second question was regarding are there any news updates on some interesting projects that we work on? No, I cannot give you any update yet because it's too early to disclose anything and it's not 100% sure yet if we really if we are perfectly positioned to get to that potential that you mentioned, which is quite accurate, but it's too early to disclose anything because it's in a stage where would refer it to more like a start up if it would be a stand alone company. So therefore, we do not disclose anything yet. And with that, I'd like to turn to Matthias for the FX fluctuation explanations. Yes. So from FX point of view, what we experienced and what I meant is basically the weakening of the U. S. Dollar and the weakening of the U. S. Dollar, especially against the euro. So 1 year ago, roughly, we had exchange rate in the Q1 between 108 and 110. And as we know and as you know, we are currently more in the 123, 125 range. So this is one of the main drivers of our also some Asian currencies, which are impacted a little bit. But the main driver comes from euro, right? And the other question, the other part of your question, I think was regarding the gross margin. So yes, we had a a positive impact on the sales side. We also had a slightly positive impact in absolute terms on the gross margin side. It's more negative on the relative terms. So as a percent, it's a little bit lower FX without seeing or reflecting the FX impact, it's a little bit lower. All right. Thanks very much. And Lucas, if I may come back please to the question on LED and PVD. As you stated, with the end users, you're not so strong in LED yet. Is, for example, your competitors are stronger there? And is there a risk if they're more and more changing from PVD to LED that you're losing the train? No. No, this is not a question of technology not a question of the current technology, it's a question of some new sensors that would fit into that environment. Now we are not losing there. It's a race who wins. Understand. All right. Thanks very much. You're welcome. The next question is from Joerg Rune from AWP. Please go ahead. Yes. Good morning. This is Joerg Rune from AWP. Can you give us a little bit an idea about your plans on investments and costs for 2018 for the year planned? Okay. I mean, if you are looking where we do invest right now, the majority of our money, I think it goes in 2 directions. 1 is capacity enlargements, because in line with increased demand, we have to invest some money in especially calibration capacity. We're not talking about expanding buildings. We are not talking about buying new buildings. It's really just adding capacity to make sure that our calibration and test capacity is in line with the increased demand. A second part of our investments, if you talk about CapEx, clearly goes into some developments of new products that require a certain type of equipment that we invested. There was a part also of the increase that we showed in 2017. And the 3rd level of investment, which is not necessarily CapEx driven, it's more cost driven with the addition or going into new markets require also new sales and dedicated service infrastructure. So whenever we enter new markets or new regions, you will see an increase in sales and marketing costs. And I think this is the majority of the increased cost level that you might see over the course of 2019 because we are expanding in our public utility as well in our food packaging test market, we are now expanding into the U. S. And therefore, we are going to have a dedicated small sales team in the U. S. Just covering those new customers that require some investments. And last but not least, with China becoming very, very strong in almost all markets in the meantime, including semiconductor market, we clearly have to add people and service and know how into our Chinese sales organization. If you look on cost side more on the cost of goods sold, here we continue our, I would say, well established, in the meantime, even accepted model of design for manufacturability. So we try to have the right cost structure right from the beginning with new products, not necessarily try to squeeze out every single penny on it on the market. So we really push on getting the right design right from the beginning, so that we can have and enjoy a nice gross profit margin right from the start and not wait until we have we found some cost savings potentials around the world. Does it explain your answer your question? Thank you. You're welcome. The next question is from Michael Firth from Vontobel. Please go ahead. Yes. Hi. Good morning. Two questions from my side. First of all, you said that visibility into the Q2 is relatively high and you also said that basically you're not seeing any particular change in the trends in your main segment. So is there any reason to why the second quarter should be weaker than the Q1? Or should we expect something similar in the Q2 than Q1 in terms of revenue levels? And the second question would be, if you can give us an update on the contributions from your new businesses, basically the food packaging and also the Irwin leak detectors, how that is developing and contributing to sales? Thank you. To your first question, Michael, if we say visibility is high, that is clearly because we have a certain backlog and our backlog varies from business to business. But overall, it's probably in the neighborhood of 6 to 8 weeks. So we know roughly or we can speculate better than the rest of the year where we might end up with. Now if you ask exactly the figures compared to Q1, that's a little bit more tricky because it's always a question of the timing of the revenue recognition. And just let me give you and actually, Matthias already hinted a little bit to that. We had a very strong last few weeks in Q1. And so, if 1 or 2 larger orders slip into Q1 or Q2, you don't know at the beginning of the quarter. You know only the last week. And so, therefore, it's if you would take the average of Q1 and Q2, you can assume a similar average, but exactly where we land with, we don't know yet. And therefore, Q1 assuming exactly like Q2 being very similar to Q1, that's a stretch because as I mentioned, we had some how you call it kind of strong last 1, 2 weeks in Q1. Can we expect that in Q2? Probably not. So therefore, business activities are at about the same level of the exact timing of shipments that's hard to predict. Now the second question regarding how does new businesses look like. If you're asking about real numbers, they are not huge yet, but the feedback from customers are very good. We have more and more projects around the world and that was actually the basis why we decided now to actually go earlier to the U. S. Than we originally planned to do for the food packaging market. And the peak season for the public utility market will start soon. And again, here we decided to go in 2 directions. 1 side, we go into U. S. Right now. And secondly, we hired somebody, Chinese people, of course, in China to help us establishing a sales distribution network in China to cover the gas distribution market. So we are convinced about both applications. You ask about real figures, they are still in a small single digit $1,000,000 range. Very clear. Thank you. You're welcome. The next question is a follow-up question from Jern Heiford. Please go ahead. Thanks. Just to follow-up on your statement, if I understood this correctly that you have won a new OEM customer in General vacuum. If I understood this correctly, can you please help us what is roughly the annual sales contribution? Are you speaking about €2,000,000, €3,000,000 Are you speaking about €4,000,000, €5,000,000? Just a rough indication. Single digit €1,000,000. And this is a European customer? There are not that many how should I say that, there are not that many other vacuum pump companies anymore than Europeans, either European or Japanese, but nobody outside of those two areas. All right. Thanks very much. You're welcome. There are no more questions at this time. If there are no more questions, I simply like to thank you for your patience, for your good questions. I hope I've been able to answer all of them, of Matthias and myself, and I'm looking forward to see you at certain events. And if not, then I talk to you next time when we disclose our half year figures, which I believe is around the beginning of August. Is that correct, Matthias? That's in end of July. Oh, end of July. So we are early. Okay. Thank you. So in that case, thank you very much. Have a good day and enjoy the nice weather in Europe. Here in the U. S, it's terrible. Thank you.