BE Semiconductor Industries NV

AEX:BESI

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Besi's quarterly conference call and audio webcast to discuss the company's 2019 first quarter results. You can log into the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Mr. 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 written permission from the company. I would now like to turn the call over to Mr. Richard Blickman. Please go ahead, 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 update you on the market, our strategy and the outlook. First, some overall thoughts on the first quarter. Besi reported solid results for the first quarter 2019, with revenue and operating profit exceeding expectations. After 3 consecutive quarters of sequential revenue decreases, customers' demand appeared to stabilize. As such, orders were up by 0.4% versus the fourth quarter last year as we saw a modest uptick in bookings by Asian subcontractors and for orders in certain multichip die bonding applications. Cash flow generation was also strong, with net cash increasing by EUR 30.3 million or 15.2% versus the fourth quarter of last year, even after share repurchases of EUR 12.8 million during the quarter.First quarter profit metrics remained healthy in this difficult market environment. Besi's gross margin held up well at 55.9% in the first quarter versus 56.4% in the fourth quarter and 56.5% in the first quarter last year, in face of the revenue decreases of 12% and 47.4%, respectively. The maintenance of gross margin levels above 55% during this down cycle has been accomplished by tight controls of production labor, materials and supply chain activities in alignment with order activity. In addition, we've made significant progress in reducing SG&A to aid profitability both in headcount and fixed overhead. As a result, baseline operating expenses declined to EUR 25.3 million in the first quarter, a 1.6% decrease versus the fourth quarter and a 20.2% decrease as compared to the last peak in Q1 2018. Management has made the rapid realignment of production, supply chain and overhead activities a priority since the downturn began in late spring last year. As you can see in this next chart, both temporary and fixed headcount have been decreased significantly over the past 3 quarters in parallel with revenue trends. In total, we've reduced headcount by 21% since the first quarter '18 and by almost 4% since year-end, demonstrating the flexibility and scalability of our business model. Given continued profit generation and reduced working capital needs, Besi's net cash rose to EUR 229.7 million at the end of the first quarter versus EUR 199.4 million at year-end. The liquidity base continues to be very strong, with total cash and deposits reaching EUR 507.5 million at quarter end.Now just a brief update on the status of Besi's share repurchase program. Through consistent daily activity, we've repurchased a cumulative total of 1.8 million shares through quarter end under the current EUR 75 million program. We purchased the shares at an average price of EUR 19.36 per share for a total of EUR 35.3 million. Of note, since we first started share repurchase in 2011, we've accumulated a total of 7.1 million basic shares in treasury by the end of Q1 at an average price of EUR 14.40 per share. In addition, Besi will have distributed almost EUR 620 million to shareholders since 2011, including dividends paid and payable this year.As Besi has become a larger, more profitable player in the advanced packaging space, we've seen a corresponding shift in our shareholder base. Notably, shares owned in the U.S. and U.K. now represent almost half of our shareholders this year versus 32% 2 years ago. We've also noticed increased volume and market liquidity in the stock, which have facilitated share purchases by institutional investors.We held our AGM this morning in Duiven, at which all agenda items were approved. In particular, shareholders approved a proposed dividend of EUR 1.67 per share over the fiscal 2018, payable starting May 6. The ex-dividend date for the distribution is April 30, and the record date is May 2. In addition, there were some changes to the composition of our Supervisory Board. Our Chairman, Mr. Tom de Waard, retired after 19 years of service; and Mr. Kin Wah Loh retired after having served for 2 4-year terms. Mr. Lodewijk Hijmans van den Bergh joined the board to replace Tom, and the board will revert back to 5 members. Mr. van den Bergh is a well-known Dutch and international lawyer, currently working at De Brauw Blackstone Westbroek. He also served previously as Chief Corporate Governance Counsel and member of the Executive Board of the Royal Ahold.Next, I'd like to speak a little bit about the current market environment and Besi's strategy. Recent announcements by customers in our mobile, computing and automotive markets indicate a continuation of weak industry conditions. Similarly, VLSIresearch recently revised downwards their assembly equipment forecast for 2019 to minus 18.3%. They expect a market rebound each in 2020 and '21 as capacity utilization rates increase in a favorable GDP environment. From our perspective, semiconductor inventories have not yet reduced sufficiently to generate large additions to assembly capacity. As such, we remain cautious as to the industry trajectory in the near term.We are hopeful that the stabilization of Besi's order rates this quarter represents a trough level for the month. With this in mind, Besi's strategies -- strategic agenda for 2019 focuses primarily on maintaining attractive levels of profitability and cash flow generation. We continue to push structural overhead cost reduction while increasing development spending and headcounts targeted to customer road maps. In this way, we seek to extend our revenue and market share potential in the next up cycle. Particularly areas of R&D focus currently include TCB, wafer-level processing and 5G-enabled devices for next-generation applications in our principal end-user markets.Now a few words about Q2 guidance. For Q2 2019, we expect Besi's revenue will grow by approximately 5% versus the EUR 81.4 million reported in the first quarter. Gross margin is anticipated to remain in the range of 55% to 57% versus the 55.9% realized in the prior quarter. In addition, operating expenses are forecasted to decrease by approximately 5% versus the EUR 30.7 million reported in the first quarter.Summing it up, we expect a modest uptick in sequential revenue and operating profit in Q2 in a market that remains challenging. However, if the cycle turns, Besi is well-positioned to capitalize on upside opportunities from its advanced packaging portfolio to achieve attractive levels of financial performance from its highly scalable business model. That ends my prepared remarks. I would like to open the call for some questions. Operator?

[Operator]

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

[Peter Olofsen, Analyst]

A couple of questions from my side, maybe taking them one by one. Starting with the sales guidance for the second quarter, so the 5% uptick that you are expecting, could you shed some light on what you're seeing in the various end markets? I mean is this driven by seasonal pickup in mobile while automotive and computing are more flattish? Or could you shed some light on that, please?

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

Well, it's a bit as you said. Automotive is somewhat slower. On the other hand, it should pick up at some point. We see, in the space of mobile communication, some new features, some capacity adjustments, but not a big volume rise. On the computer space, we also still see, on the high-end cloud server, business continuing. But again, as said, it's not a big ramp we have enjoyed in the previous years.

[Peter Olofsen, Analyst]

And when it comes to mobile, that is just the end market weakness and the lack of features. It's not timing, and it's coming later this year. That is not the case.

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

We don't know. As we've said many times, until about early June, the final cutoff in new feature content in next-generation phones will only be visible. So we have to be a bit patient. A month away will give us some better feeling, whether there's more needed or not. The current market environment is very short term, but we're ready for that. So if more orders come, wonderful. If the new models for next year will only be rolled out next year, also fine. So at the current run rate, again, our margins are very sound and their adjusted to current levels. So concluding, Peter, time will tell.

[Peter Olofsen, Analyst]

Okay. Maybe a more technical question related to memory. In earlier calls, we touched on the potential for increasing use of flip chip technology in the memory market. And -- well, there have been fresh reports that big -- one of the big Korean memory makers is looking to ramp 60-nanometer DRAM production next year, also using EUV technology. Could this technology transition provide a boost to the adoption of flip chip? Or is that not directly linked to the geometry that they use? And is it more linked to specific applications or end markets like mobile or server?

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

The latter. So don't expect that the big Korean memory will all of a sudden switch from wire bond to flip chip. We are excellently positioned for the transition of those applications using flip chip. But it's fair to say that in the current market environment, where memory is again hit probably the most, major CapEx is not expected to ramp quickly. But it could well be that in 2020, we will see that next generation with tighter design criteria forcing some of the applications into flip chip, which, in a positive effect, gives us somewhat more time to further improve and qualify our absolute industry-leading solution for high-speed, low-cost flip chip for memory.

[Peter Olofsen, Analyst]

Okay. And then my final question, on your exposure to IDM customers. When listening to some of your front-end peers here in the Netherlands, it seems they are quite confident that spending by your large U.S. logic customer will continue throughout the year. Are you expecting something similar? And do you share their, yes, positive view? Or is this -- or is there a likelihood that spending by this customer on die attach and die sorting could slow in the second half?

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

Well, that's -- again, that's hard to -- yes, we have a quarterly visibility. But mentioning that customer, yes, they have ambitious CapEx plans. They made some shifts recently, moving out of certain 5G modules, modems, because of patent settlement between Apple and Qualcomm. But it's fair to say that the investment rounds, we benefited a lot from that, our focus on high-end server market, also some unexpected recovery in the laptop, desktop arena. So yes, they are still, for many, many, years, as long as I can remember, a major customer.

[Operator]

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

[Nigel Van Putten, Analyst]

First, just to follow up on the patent settlement. I know it's early days today, but does that settlement make you incrementally more positive on the sort of 1-year, 2-year outlook for mobile?

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

Well, I think that market is not driven by a patent settlement. The question is more relevant will the next-generation product with partly new content, partly further innovative, better-functioning content, will that ignite a major next market route?We have seen in the past, every 3, 4 years' cycles. 2020, '21 will be the logic next up cycle after the peak 2017. So we do see many programs being development -- being under development for introduction into the versions in '20 and '21. And that could certainly, with the 5G infrastructure coming along as projected, meaning that all phones should be 5G compatible at the minimum, that bodes well for recovery of that part in 2021. And we've seen in the past, even with moderate GDP, high-end smartphones outperformed the market trend.

[Nigel Van Putten, Analyst]

Yes, that's clear. And maybe then on -- also a follow-up on the questions around foundries and IDMs. Both seem to accelerate node transition and also move towards integrated chiplet designs. In your press release, you stated particular areas of R&D include TCB and wafer-level processing. So just on -- not to quantify the outlook, but when should we expect these road maps to come to fruition for you? Is that 2020 or maybe more 2021?

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

Well, 2020, to some extent, maybe -- and likely even more in 2021. So that rollout is happening. The only thing, the extent to which, because it's all driven by, yes, performance on the one hand, but cost on the other hand. So all the wafer-level solutions are factors 3, 4, depends a bit on what, even 5, 6x more expensive than using, still, certain substrate solutions. Although in today's high-end smartphones, already 30% of the content uses some sort of wafer-level technology and that will further increase. So that transition is one of the growth drivers.

[Nigel Van Putten, Analyst]

That's clear. And maybe just a quick clarification on the end market application for the multichip bonders. I assume that, that will be mobile then in the quarter?

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

Mobile and automotive.

[Nigel Van Putten, Analyst]

Automotive. That's very clear.

[Operator]

And next question is from Mr. Robert Sanders, Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

Yes. My first question is just on your order number in Q1. I mean traditionally, your Q1 was the strongest quarter of the year for bookings, I mean going back quite a way. But I'm assuming that's not the case this year, but I'd love to get some clarity on that. And related to that, since Chinese New Year, what have you actually seen? Because part of the reason I think Q1 was strong was because of the post-Chinese New Year effect and smartphone cycles. So what are you actually seeing out of China? And I have one follow-up.

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

Well, first of all, your assumption is only partly the case. I can say even more specific, usually, after Chinese New Year, there's a ramp, mostly significant ramp. That didn't happen this year. Yes, there were some orders as we also explained, but not to the extent what we're used to. Q2 looks somewhat better. Q2 should be -- order intake should be higher than Q1, so a careful recovery, but still early days. We're only in April. It depends what happens in May -- May, June. And in line with the answer to one of your colleagues earlier, caution is the name of the game.

[Robert Duncan Cobban Sanders, Director]

Got it. And on the whole companies transitioning out of China into Philippines and Thailand, have you seen that accelerate or slow down since the discussions of Trump, et cetera? Because I remember you talking about how that could actually create overcapacity in the industry. So have you seen people changing their plans? What are you seeing at the moment?

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

Well, what always has to happen, you first need the infrastructure in place before you can install new equipment. And even more important, you need to hire staff, which can operate these facilities.So given that, it is a transition, or let's say, a restructuring of the whole supply chain base in the Far East. And certainly, you see continued efforts in expanding and planning new operations in the Asia Pacific Rim. You can also see that, by the way, interesting, the development of the Malaysian ringgit, the currency. So people anticipate growth in that country, but that trend is continuing. With the, let's say, new or new -- with the agreement still pending between the U.S. and China, the uncertainty is growing rather than decreasing. But that may have a positive effect for us, certainly, for more equipment. But then it will take a while that it will lead to overcapacity. We're not at that stage by no means. We're seeing, overall for the industry, a healthy correction after 2 years of major capacity expansions. So we're now in a digestion phase, plus preparation for a new technology phase, cycle, however you want to call it.

[Robert Duncan Cobban Sanders, Director]

Got it. And just related to what you just said about Q2 orders being up from Q1, I think your major peer talked about being double digit up sequentially. And what they were talking about there was Android smartphone ramps for CMOS sensor, where I think they claim to be the leader in Android, whereas I think they would admit you are the leader in the Apple supply chain. So is -- are you -- do you see the Android guys starting to build up capacity for [ trio cam ] and all of this sort of thing? Is that actually starting to kick off again?

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

So you have to be a bit more precise, you -- it's not all the Android people, but there's a certain part of that market which is trying to distinguish itself by adding new features onto their devices to gain some share in that highly competitive market. How large that volume will be remains to be seen. But we all know that only 1 or maybe 2, the very high-end suppliers are earning any money in that business, and the others are struggling to maintain a certain market share and maybe expand that by introducing new features which have already been introduced on the high-end phones. We're also part of that, we're also benefiting from that. So that's part of the story. I also mentioned there's some recovery in the auto space. Where that is directly tied to is still difficult to retrieve. But there are some small bright spots, I would say. But again, caution, don't expect that you will see a V-shaped recovery.

[Operator]

The next question is from Mr. Marc Hesselink, ING.

[Marc Hesselink, Research Analyst]

Yes. My first question, actually a follow-up on the TCB and the wafer-level processing one. Could you indicate what is then would be the magnitude of that one in the total revenues compared to the flip chip? Is it then still relatively small or it's getting significant size versus the flip chip business?

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

No, it's still, let's say, in the 5% max arena for the next 2 years, maybe 3 years. It is still only for very unique applications, no mainstream yet. But that's not unusual. I mean simply look at it, what you can solve with wire bond is the lowest cost. Step up is flip chip. The step up from that is wafer-level. So the industry will only move to those technologies if the others are not feasible.

[Marc Hesselink, Research Analyst]

Okay, clear. And then maybe the second question that I have is on the [ SOE ], been very good cost control, both the gross margin ticking up well and OpEx down. If the market turns, is it -- should we expect that completely goes the other way around, that is you also have to ramp up those costs pretty quickly? Or might there be an opportunity to keep a bit of that and move towards higher margins?

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

Well, there's a very interesting slide, I think it's 47, Cor, or 46, which shows you the historical development of revenues since 2006, but also the gross margins for that matter. And you see every cycle further increase, and that is due to product positioning. So our system are a much improved choice cycle over cycle, and that gives us certain pricing power. And at the same time, the ongoing reduction of cost and our -- improving our supply chain model, and we are continuing with that. So unless the whole situation changes, and if you look at our direct competitors, peers for that matter, there's not a picture, I haven't seen it, where their margin development currently is better than ours. So it's not only the cost-cutting element then, certainly not. It is definitely, first, the market product position which determines your price competitive strengths versus customers' other choices. So when the tide turns, that should look positive. Also for point of note, also very important, is the dollar. The dollar is more stronger, which gives us, with still major cost in euros, a competitive advantage.

[Marc Hesselink, Research Analyst]

Okay, that's clear. And final one then, we've seen, obviously, with large inflows from working capital, which is, I think, are logical in a downturn. What's the timing like? So if the market now turns up, for how many quarters you will still have that inflow working capital before it's -- will move the other way around?

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

Well, if you look at the working capital development, '17 versus '16 and '18 versus '17, you can clearly see, quarter-by-quarter, how much working capital is needed versus revenue growth. And you have to pick, yes, which part of the cycle you want to look at. But I would say there's about a quarter lag in working capital needs and revenue and then customer cash back. So you can witness those trends, but they are, with our cash structure, easily manageable, and also our supply chain. So that's least of our concerns.

[Operator]

There is an additional question from Mr. Peter Olofsen, Kepler.

[Peter Olofsen, Analyst]

Yes, so I understand it's of course difficult to predict when the cycle will turn. But when it turns, on which side of the business do you expect to see the first pickup? Is it on the IDM side? Or is it on the subcontractor side? And would that also affect the gross margin profile?

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

Well, you've seen that turn already a little at the subcontractors in the past quarter. You may also see that it's a typical pattern. In the first signs of, again, capacity turns is at the subcons. They are the most vulnerable. And those are for well-established products. For new products, it's always the IDM. So IDMs drive the bus on new product features and ever more so, because the complexity is increasing. So in the past, there were some thoughts that, that would also be off-loaded to high-end subcontractors. But the IDMs have pulled that back, and there is no change to that model at this moment. So you see capacity adjustments, maybe some shortages, in the mainstream volume products at subcons, and you see new features at IDMs. Your next question, what's the margin impact? We have the same prices for everyone. So the subcontracting world is not a lower pricing world. And it's very simple. If they need our equipment, they pay the price, because it's very transparent. IDMs know our prices and IDMs load certain subcontractors and dictate the equipment and the price. So lowering the price is not an option.

[Operator]

There is an additional question from Mr. Robert Sanders, Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

Yes, I was just wondering, given the whole move towards chiplets and more interest in packaging, if you could just give us an idea of what revenue contribution roughly would, let's say, just the leading U.S. logic company adopting EMIB across its entire product line, would that be equivalent to an Apple big iPhone cycle for you in terms of size? Or would it be bigger or smaller? I mean just in terms...

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

Smaller.

[Robert Duncan Cobban Sanders, Director]

It would be smaller, okay.

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

Right, because -- yes, it's very simple to explain. A smartphone product, as such, is a consumer product. And the high-end logic devices are going into server and maybe high-end laptops, desktops. The volume of those products have always been lower than consumer market end products. But that doesn't matter. The pricing, and that's very important, is of course higher on the high-end logic than, and we discussed that before, is on the consumer high-end smartphone world. That's a tougher pricing world. So with us, when revenues go down and the percentage of mobile goes down, the margins go up, regardless of this change.

[Operator]

Mr. Blickman, there are no further questions. Please continue.

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

Well, thank you all very much, and in case there are any other questions, don't hesitate to contact us. Have a good weekend. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's call. [indiscernible] disconnect your line. Thank you for your participation, and have a nice weekend.