BE Semiconductor Industries NV

AEX:BESI

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's quarterly conference call and audio webcast to discuss the company's 2019 second quarter results. You can log in on 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 it cannot be reproduced in whole or in part without written permission of 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 second quarter and 6 months ended June 30 and also update you on the market, our strategy and the outlook.First, some overall thoughts on our results. Besi reported solid results in Q2 with revenue of EUR 92.7 million and a net income of EUR 18.9 million, increasing sequentially by 13.9% and 98.9%, respectively, versus the first quarter of this year. Gross margin of 56% was at the midpoint of guidance; and sequential operating expenses declined by 13%, a bit better than anticipated. Bookings of EUR 82.7 million in the second quarter confirmed an order book which has stabilized over the past 3 quarters after falling significantly from peak 2017 and the first quarter 2018 levels. The current order book reflects continued softness in the high-end mobile and automotive applications this year, partially offset by a more stable demand for logic applications in cloud-computing end markets. We also returned EUR 135.1 million to shareholders during the quarter in the form of dividends and share repurchases, underscoring our ongoing commitment to enhance shareholder value. Our better-than-anticipated performance in Q2 this year resulted primarily from higher-than-anticipated shipments of die bonding systems to Chinese and Asian subcontractors, along with tight controls of production and personnel overhead. As such, we were able to double net income sequentially in the second quarter on a 14% revenue increase. In addition, we reached a net margin in excess of 20% during the quarter in the face of a significant market downturn. Headcount was up slightly sequentially due to production-type workers needed for higher-than-anticipated shipments.As seen in this next chart, Besi has maintained remarkably consistent gross margins, both in good markets and bad. We have been able to achieve attractive returns on revenue and equity in various environments by means of our flexible production and supply chain model, pricing discipline and timely execution of headcount and cost-reduction initiatives. Our customer alignment and profit-versus-market-share strategy have further contributed to our performance. When the tide ultimately turns, we have the organizational structure in place to ramp production rapidly to meet customer demand.The next chart shows the second quarter '19 OpEx levels have been brought down to 2015, '16 levels during this downturn. The anticipated headcount will continue trending lower for the balance of the year based on work we're doing to streamline SG&A functions across the organization and cutting back some fixed Asian overhead after a significant ramp between '15 and '18. However, it's expected that European R&D headcount will be increased in the coming quarters as we support customer road maps for the next investment drought. In terms of liquidity, we ended the second quarter with cash and deposits of EUR 361.7 million and a net cash of EUR 86.1 million. The EUR 143.6 million sequential decrease from end of Q1 '19 was mostly due to dividends paid and shares repurchased in the quarter, a typical Q1, Q2 pattern in recent years based on our dividend policy. A small EUR 2.7 million cash flow deficit in Q2 '19 was mostly due to the timing of tax payments and higher receivables outstanding. We expect to be cash flow positive again next quarter.Finally, Besi bought about 550,000 shares in the second quarter for a total of EUR 12.7 million under our current EUR 75 million program. Cumulatively, since program inception last July, we bought a total of 2.4 million shares at an average price of EUR 20.23 per share for a total of EUR 48 million. In addition, Besi entered into an EUR 80 million 5-year revolving credit facility at month's end, which can be expanded to EUR 136 million, and its maturity extended to 7 years. The terms and conditions of the facility provides significant operating flexibility to the company and can be used for working capital and other corporate purposes. We are very pleased to add this flexible financing layer to our capital structure, replacing and centralizing various credit facilities at subsidiary levels, which has been our long-term objective.Next, I'd like to speak a little bit about the current market environment. The market downturn, which started for us in the second quarter last year, has extended now for 5 quarters after an extended super cycle in the 2016, '18 period. At present, VLSI has taken down the 2019 assembly equipment forecast to minus 21% from minus 17% in June. Clearly, we are now in a canoe-shaped recovery versus prior expectations of initially a V and later, a U shape. Excess inventory persists, but fortunately, global GDP growth is still favorable. Looking forward, VLSI now forecasts a more modest rebound in 2020 of 6.6%, growing to 19.1% in 2021. The assembly equipment industry has also been negatively impacted in 2019 by uncertainty created by U.S.-China trade tensions. During the quarter, we noted significant order weakness from foreign IDMs with operations in China as they reconsider their Asian supply chain strategies and production footprints. Many are now considering or have already acted to move some of their operations out of the country. For us, the second quarter '19 or the decline by foreign IDMs in China was offset by increased business from Chinese and Taiwanese subcontractors adding capacity to satisfy Chinese domestic production requirements. As a result of shifting Asian supply chain dynamics, we decided in Q2 to move some production for Besi's China operations to our principal manufacturing facility in Malaysia. At present, production from our Lushan facility will be used only for Chinese end customers.And now a few words about the outlook for the third quarter. Besi estimates that revenue will decrease by approximately 10% versus the second quarter as market weakness extends into the second half of this year, for gross margins to remain in the 55% to 57% range and for operating expenses to reduce further sequentially. We are very excited about our prospects for the next industry upturn given Besi's performance in the current downturn and a highly scalable production model. In addition, we recognize the strong secular trends driving our business as advanced packaging becomes an ever more important process that -- in the semiconductor equipment industry. As such, Besi is increasing R&D investment this year for the next-generation customer road maps and applications to enhance its leadership position.That ends my prepared remarks. I would like to open the call for some questions. Operator?

[Operator]

[Operator Instructions] The first question is coming from Mr. Marc Hesselink, ING.

[Marc Hesselink, Research Analyst]

Firstly, on your increased R&D investments, what you're guiding for -- and you also mentioned in the press release the promising future for 5G and on 3D facial recognition, artificial intelligence and a few more. Could you maybe explain a bit, like in which of these areas where you see most of the strength coming in the medium term and where you have those extra R&D spending? And my second question would be on the impact from the small shift that you see from your Chinese production towards Malaysia. What kind of impact will it have for you? If I'm correct, your Malaysian facility -- I mean if they're in a little bit stronger position outside China than you have relative inside China. So what will that do for the overall company?

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

Well, excellent. First of all, R&D investments. The major investments in any cycle is to further improve the performance of our systems. So every system has a certain cost of ownership and that has to be improved. And you can achieve that by higher speeds, lower costs. So in the end, roughly 50% of the R&D spend is investment in our current product portfolio. We have 18 platforms, which all need for the next-generation better performance, lower costs. The other part is for new developments for new applications, which have not been done in the previous round. In a few buzzwords, number one, smaller geometries, new materials, and they all require smaller geometries, more accurate machines than in the past. And you have to think in different ways, in flip chip, in TCB, in hybrid, in system and package, all products used for next-generation end applications, partly in the logic arena. So for the high-end processors, cloud server world, and think about moving from 40-nanometer to 10-nanometer. And that has great implications for the interconnect for advanced packaging. And at the same time, if you look at the communication devices, all kinds of improvements, whether that's in the 3D face recognition, whether that is in the screen technology, whether the processors. So in all of our major end markets, and not to forget automotive, there's a whole program moving partly the existing portfolios, but at the same time, new developments. And that significantly has increased from the last round, which gives us unique opportunities to further expand our business in the next round. So summarizing abrupt, it's not just one application. And I could add to that, the success of the last cycle has given us even better opportunities than what we've had in the previous cycle. So customers have probably some more confidence that we will meet those new specs than they did have in the previous round, back in '14, '15, '16. Next question about China to Malaysia. In the past, upcycle last peak, roughly 80% of all our systems were built in Malaysia. And the excess of certain systems, and that added to about 20%, was built in China for mainly Chinese production facilities of non-Chinese companies: U.S. companies, European companies. So China is a satellite of Malaysia. With the current developments in the world, we have organized to be less dependent upon China if a next round is coming. So when restrictions will be more tight in the years to come, we will be able to support the ramp more out of Malaysia than we did in the last cycle. China is still very key for the Chinese market.

[Marc Hesselink, Research Analyst]

Okay. Can I have maybe a small follow-up on the first part? The fact that you're now increasing the R&D spend right now, can I see that as a bit of an indication that your clients get a bit more comfortable on those -- on the new application that they want to speed up that process?

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

Well, some are being accelerated there because -- it's a very good question. Technology steps are becoming more and more complicated, so the timing is usually somewhat longer. We've seen that with EUV developments, in particular, and the same is then for advanced packaging requirements. And some have an -- current acceleration. Others are, according to existing road maps, related to next-technology branch. So it's a mix.

[Operator]

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

[Nigel Van Putten, Analyst]

Maybe just a quick follow-on on the order patterns of IDMs and the situation in China, et cetera. I understand that this part of the weakness is obviously utilization, et cetera, and in your press release, you've alluded to this. But could you provide a bit more color in terms of what is maybe driven by market weakness and what is driven in terms of uncertainty because of the trade tensions? And do you see any pent-up demand as the dust begins to settle?

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

Well, that's not an easy question to answer. What we experienced in the past 6 months is that customers are more and more developing plans to be less dependent upon production capacities in China. So there's a natural segregation, you could say, in China for China and more building capacity outside China. However, that takes time because it's not an overnight change. You need people. You need locations. Of course, you need a whole production process in place. But at the same time, we have enjoyed 2 years of upcycle, and it's become very clear that there are, in many areas, significant overcapacities, in the first place, memory, but also for other products. So at this moment, there's a landscape with different developments. And how much is what is hard to tell. At the same time, I should add, China is continuing to invest in China for China. And that also offers opportunities. When the world -- and that's -- we mentioned that in the call, the latest VLSI data, but also Gartner has expressed recently their views, this situation is not something you can expect to be resolved in the next quarter. It should lead to a gradual improvement next year, and then leading into a stronger development, double-digit expansion in the year thereafter. Those are the models you hear from our key customers who we visit regularly. And also, 2 weeks ago, we had the SEMICON West in San Francisco. After that, we visited several of our major customers as well. So that model is adopted by many at this moment. Automotive is a bit of a surprise. The weakness in automotive, that was not expected in that sense. Some compared it to the situation in 2009. But on the other hand, the cutback in CapEx in the end will always result in again an upcycle. Did that answer your question?

[Marc Hesselink, Research Analyst]

Yes. Very much.

[Operator]

And the next question comes from Mr. Robert Sanders, Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

When you look at the landscape of the micro-LED players, whether it is Apple on the one hand with their internal development or all the Koreans, how soon do you think this could be ready in terms of going into production I guess with -- initially, with smartwatches, but then with smartphones? And I guess how large a market do you think this could be for you were it to get into smartphones? I've got a follow-up.

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

Well, the first -- and your picture is published broadly. So it's intended that the first application, if micro LED flourish, should be in smartwatches. And it's expected that, that is 2021 if you read the press articles. So preparation, 2020; and rollout, 2021; and immediately thereafter, then follows the smartphone, high-end smartphone market, so 2022. Numbers are always numbers. But this could be a significant additional, let's say, active component in the highest-end smartphones for advanced packaging suppliers like ourselves because it requires high-precision placement, 0.5 micron. And with certain devices needed to connect the micro LEDs, you need even to go down to 300, 400 nanometer, that's point 0.2, 0.3. So highly specialized. But there is still a long development program, but that's not unusual. So in a long answer, a huge potential. If that flourish, you can expect higher revenue numbers to satisfy those demands than what has happened in the past. Simply think of an additional component, the component, 25% of the cost now of a smartphone, which today advanced packaging is not involved.

[Robert Duncan Cobban Sanders, Director]

Got it. And is it possible then this technology may not use a kind of pick-and-place approach? Could be -- could you use kind of like a silicon stamp? Is there other ways you think? Or is it more likely just a play into your kind of core expertise on that? And then I guess my other question would just be on the order run rate. Are we kind of at the bottom for orders? Is this really just replacement demand plus a few technology buys? If it's really the EUR 80 million a quarter, is that really the kind of bare minimum? Or is it possible that you could see this order number go lower?

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

Well, there are two questions in the first. As I mentioned in the beginning, with development, there's always risk. And it's not only our placement, but there's other technologies involved, which also still have to be proven in production environment. So that -- that's always a risk in R&D. Your second question, are we at the bottom? Well, it looks right now for 3 quarters that this is sort of between the EUR 85 million and EUR 95 million per quarter, for us, sort of a bottom. Could it go lower? Of course. Because we still -- as we mentioned, we are in a positive GDP environment. But if that starts to crumble or to stumble, however you want to call it, life can become much worse. Our breakeven levels are at around EUR 50 million, EUR 52 million per quarter. We certainly have additional cost-cutting measures, which we can quickly, quickly, let's say, put into progress. So we're well prepared for any further letdown. So -- and the last to say, this is the start of a next upcycle. It is pretty uncertain.

[Operator]

[Operator Instructions] Mr. Blickman, there seems to be no further questions.

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

Then I thank everyone to attend this call. And in case you have any further questions, don't hesitate to contact us. Buh-bye.

[Operator]

Ladies and gentlemen, this will conclude the conference call and audio webcast. You may now disconnect your line. Have a nice day.