BE Semiconductor Industries NV

AEX:BESI

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, good afternoon, ladies and gentlemen, and welcome to the Besi's quarterly conference call, an audio webcast to discuss the company's 2018 first quarter results. You can look into the audio webcast via Besi's website, www.besi.com.Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Mr. J. Cor te Hennepe, Senior Vice President, Finance. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced, in whole or in part, without reconfirmation from the company.I would now like to turn the call over to Mr. Richard Blickman. Go ahead, please, sir.

[Richard W. Blickman, Chairman of Management Board & CEO]

Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release we issued earlier today and then take your questions.I would like to remind you that some of the comments made during this call and some of the answers in response to your questions by management may contain forward-looking statements. Such statements may involve uncertainties and risks, as described in the earnings release and other reports filed with the AFM.For today's call, we'd like to review the key highlights for our first quarter ended March 31 and also spend time updating you on the market, our strategy and outlook.First, some overall thoughts on the year and Q1 results. Besi's Q1 2018 results were in line with guidance and were positively influenced by continuation of many favorable trends from 2017. Our financial performance benefited from an extended industry upturn, ongoing customer investments in advanced packaging applications and Besi's strong market position with key customers and supply chains. As such, revenue and net income increased by 40.5% and 52.7%, respectively, versus the first quarter of last year.Q1 2018 orders also grew by a strong 37.8% versus Q4 2017 to reach EUR 205.8 million, due primarily to capacity additions for smartphone applications, both IDMs and Asian subcontractors. First quarter 2018 orders declined by 14.2%, however, versus exceptionally strong levels recorded in the first quarter of last year.In addition, Q1 '18 gross and net margins showed further steady improvement due to increased production efficiencies and strategic execution of cost reduction initiatives despite adverse influences from the 13.5% average year-over-year decline of the U.S. dollar versus the euro. Besi's strong year-over-year revenue growth reflected broad-based demand across our die bonding and packaging portfolio and was slightly above the midpoint of guidance. In addition, it reflected increased demand by Asian customers for smartphone and high-performance computing applications and by North American and European IDMs for automotive and cloud server applications.Similarly, net income increased by EUR 12.8 million or 52.7%, and net margins rose 1.9% to 23.9% as continued revenue and gross margin improvement more than offset higher operating expenses related to variable compensation and build-out of our Asian infrastructure. In fact, baseline OpEx increased by only 1.6% sequentially, highlighting our careful overhead management.Quarterly sequential profit comparisons versus Q1 are highly influenced by the level of variable compensation in each quarter. As such, reported first quarter '18 profit levels declined by EUR 6.5 million versus Q4 2017 due to a EUR 5.6 million sequential increase in variable compensation as well as a 5.7 point increase in our effective tax rate to 16.3% as the majority of such expenses are not tax deductible. Excluding such efforts, net income declined by less than EUR 1 million between the 2 quarters.Similarly, net margins on this basis declined slightly from 31% to 30.1% sequentially and have exceeded 30% net for the past 4 quarters, underscoring the successful execution of our business strategy.Besi's cash generation was again strong in the first quarter of '18 with net cash and deposits expanding to EUR 290.1 million, an increase of EUR 42.5 million or 17.2% versus the fourth quarter of last year and EUR 114.4 million or 65.1% versus the first quarter of last year.We utilized EUR 6 million of excess cash flow this quarter to enhance shareholder value via regular share repurchase activities. At quarter-end, the current EUR 1 million buyback share program was about 70% complete with cumulative purchases totaling EUR 32.4 million at an average price of EUR 47.78.Besi's capital allocation policy seeks to provide a current return to shareholders in form of cash dividends and share repurchases while retaining a capital base sufficient to fund future growth opportunities. Since 2011, we have made distribution of EUR 454.9 million, including the 2017 dividend and share purchases to date in 2018. Further, our dividend yield continues to greatly exceed those of our peers and you see in the accompanying chart.Earlier today, we hosted our 2017 AGM, at which all agenda items were approved, including a 2-for-1 stock split of Besi's ordinary shares in light of the almost 1,400% increase in our stock price since 2013. In this way, we hope to increase the liquidity and affordability of Besi's stock for both retail and institutional investors.In addition, Mr. Niek Hoek and Mr. Carlo Bozotti were appointed as new members of the supervisory board. Niek will replace Jan Vaandrager, whom is retiring after 9 years of service. Post his retirement from STMicroelectronics, Carlo will join in July, and the board will temporarily exceed -- temporarily expand to 6 members for this year.Now I'd like to update you on our strategy, the market guidance for the second quarter. One of the keys to Besi's success in recent years has been a disciplined focus on executing strategic initiatives to increase our technological advantage, addressable market and market penetration, all while continuing to reduce structural cost and increase efficiency in a cyclical industry.Our 2018 strategic focus centers on the further build-out of our Asian infrastructure with a particular emphasis on Singapore sales and development support and the expansion of Besi's China production facilities. Towards these ends, we will continue to transfer certain developments, sales, service and admin personnel functions from Europe to Singapore this year.Similarly, we have started initial production of packaging systems and additional die bonder systems in China and have recently completed the Leshan capacity expansion, which we highlighted last quarter. In this way, we aim to further optimize our Asian production and supply chain models and increase Besi's penetration of the emerging Chinese semiconductor market.Now a couple of words about the assembly equipment market and our second quarter guidance. As seen on this next chart, industry analysts continue to expect assembly equipment market growth into 2018. However, subsequent to quarter-end, VLSI Research downwardly revised 2018 market growth estimates from 18.1% in January to 12.5% based on announcements by several semiconductor manufacturers indicating a softening of demand trends for 2017.For the second quarter 2018, we estimate that Besi's revenue will grow by 10% to 15% versus the first quarter and that H1 '18 revenue will rise by approximately 17% versus H1 2017, at the midpoint of the second quarter '18 revenue guidance.We also anticipate that gross margins should remain strong with a range of 55% to 57% in the second quarter. Such guidance implies a gross margin range of approximately 56% to 57% for the first half year '18 versus 56.7% for the first half of 2017.Further, we guide that Q2 OpEx should decrease by 5% to 10% versus the first quarter levels due primarily to reduced variable compensation expense. As a result, we expect significantly higher operating profits, both on a sequential quarterly and also half year comparable basis.That ends my prepared remarks. I would like to open the call now for some questions. Operator?

[Operator]

[Operator Instructions] The first question is from Mr. Peter Olofsen, Kepler Cheuvreux.

[Peter Olofsen, Analyst]

A couple of questions from my side. Maybe best if you take them one by one, starting with the sales outlook. When I look at your sales guidance for Q2, it's a bit lower than the backlog at the start of the quarter. Is that because some of the capacity expansion in smartphone will take place later in the year than what we typically see? Or is it in other markets where you see some clients asking for shipment in H2 rather than in Q2?

[Richard W. Blickman, Chairman of Management Board & CEO]

Well, there's no quarter ever that all the backlog is delivered in the next quarter. So it is a mix of partly orders out of backlog plus new orders received in the first part of the quarter. So yes, we have orders for Q3 already. So that is what it is.

[Peter Olofsen, Analyst]

But there's no specific end markets where these orders for H2 relate to? It's for several end markets?

[Richard W. Blickman, Chairman of Management Board & CEO]

Yes, across the board.

[Peter Olofsen, Analyst]

Okay, that's fair. And then a follow-up on the VLSI forecast and the reduction to that forecast that you referred to. Based on the discussions you have with clients, do you also sense that they had become a bit more cautious on their spending intention? Therefore, you agree with the more cautious outlook of VLSI? Or do you sense that clients are still optimistic and have not really changed their minds?

[Richard W. Blickman, Chairman of Management Board & CEO]

In this world, you can look forward about 1-quarter, 3-month visibility. And that has not changed. So none of our customers are able to give you a precise forecast further out. If you look back to VLSI's reliability in forecasting, that also reflects the uncertainties in the end markets. They have been both adjusting upwards or downwards during every year. So today, we see many companies reporting. Some are reporting cautiously. Others are reporting very positively. It's a mixed landscape. But still, how many years have we had growth over 10% in 2 years sequentially? So a better question is, how far will this upturn last? And the stock market is right. Besi's value evaporated nearly by 20% today; in the past 4 days, close to 30%. So shareholders are always right. So who are we to say that it is not right?

[Peter Olofsen, Analyst]

Well, I'm not suggesting you should say so. I was just wondering whether you recognize what VLSI says. It seems your views are aligned with theirs in that sense.

[Richard W. Blickman, Chairman of Management Board & CEO]

No. Our views are irrelevant. We live by orders day by day, and the best we can forecast for Q2 is what we have guided, and that's it.

[Peter Olofsen, Analyst]

Okay. Then maybe, specific question on your exposure to the smartphone market. I think in the Q4 goal, you indicated that the expectation was that additional players beyond Apple would adopt 3D sensing. Do you still see other players adopting 3D sensing this year? And to what extent has the timing and the potential size of that adoption changed since the beginning of the year?

[Richard W. Blickman, Chairman of Management Board & CEO]

We have not released any specific guidance about any component in smartphones. Also, if you look back in 2017, but that is true for every year, the most difficult product to forecast are the smartphones since the first phones because it's highly dependent upon retail end markets. So also last year, if you look at all of our quarterly press releases and conference calls, we have not been able to give you any stronger guidance than what we have done per quarter, and we are able to adjust to any change in the amount. Whether that is up or whether that is down, we have demonstrated 60% increase quarter-over-quarter. But also, we've had slower quarters. So if you simply look at the revenue per quarter, it is fluctuating. Last year's peak was Q2. In revenue, this year, we may well exceed second quarter revenue compared to second quarter last year. What will happen in Q3 and Q4? Nobody knows. Last year also, the orders for Q3 and Q4 mostly come in, in the quarter preceding that quarter. And that's as good as it gets.

[Peter Olofsen, Analyst]

Okay, that's helpful. And then final question for me. One of your competitors, [ Asia Pacific ], last week talks about, I think, issues with component supply. Is that also something you'd be facing? Or have you been well able to secure components?

[Richard W. Blickman, Chairman of Management Board & CEO]

So far, we are certainly able to secure components. If that would have been the case, a shortage, we would have mentioned it.

[Operator]

The next question is from Mr. Nigel Van Putten, Kempen.

[Nigel Van Putten, Analyst]

I wanted to discuss maybe some other parts of the business. Specifically, if you take the pie chart, there's also typically a huge server and computing part and the automotive. Could you maybe give us a bit more indication or an impression on how those markets are evolving this year, at least qualitatively?

[Richard W. Blickman, Chairman of Management Board & CEO]

So far, they are developing above expectation, and that's difficult to imagine. If you look at the first half year '17, first half year '18 guidance, then you will see a growth. And if the other data points of the smartphone worlds are correct, you can easily understand that the other 2 are doing very well.

[Nigel Van Putten, Analyst]

Got it. And then maybe a follow-up on this. If I remember correctly, these businesses are a bit less seasonal. Does that imply, and again without quantifying it, that also for the second half of the year, we should perhaps see continued order activity?

[Richard W. Blickman, Chairman of Management Board & CEO]

Well, so far, that looks intact. And if you follow the major end customers and their releases, that should be the case. But also here, the market is volatile and it's too early to tell. You have 1-quarter visibility, but you may derive from VLSI's still double-digit forecast growth that certainly those end markets are in good shape.

[Nigel Van Putten, Analyst]

And then perhaps more geographically, you talked about the China infrastructure being built up again this year further. Just in terms of the sales outlook or penetration or your activities there, do you see continued growth there? Is there anything specific -- or not specific but just the general sentiments you can share with us?

[Richard W. Blickman, Chairman of Management Board & CEO]

Well, first of all, as a point of note, Q1 revenue, 40% was directly to China. And if you remember, in the past 3, 4 years, that came from below 30% to now 40%. So Besi's position in the major higher-end Chinese customers is increasing step by step, year by year. We've indicated that some of our peers, competitors, it's about 50-50 but more towards the low end. Besi is very successful in the higher end -- in the high end. So our strategy in building our infrastructure has worked so far very well. Look at our margins, also very well, and that trend will continue.

[Operator]

[Operator Instructions] There are no further questions. I hand over the conference to you Mr. Blickman. Go ahead, please, sir.

[Richard W. Blickman, Chairman of Management Board & CEO]

Well, thank you all for taking the time to listen to this call. And if you have any further questions, don't hesitate to contact us. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes the Besi conference call. You may now disconnect your lines. Have a nice day.