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BE Semiconductor Industries NV
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The conference is now being recorded. Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's quarterly conference call and audio webcast to discuss the company's 2019 third 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.
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 third quarter and 9 months ended September 30 this year and also update you on the market, our strategy and the outlook.First, some overall thoughts on our results. Besi reported another solid quarter in this challenging market environment with third quarter revenue of EUR 89.7 million and a net income of EUR 19.2 million. The better-than-anticipated performance was due primarily to fast turnaround shipments of epoxy die bonding systems to Chinese subcontractors as they seek to upgrade capacity in light of U.S.-China trade tensions.Orders of EUR 82.2 million in the third quarter were roughly flat with orders in the second quarter, in a quarter traditionally weaker on a sequential basis due to seasonality. Similar to last quarter, order rates reflected continued softness in high-end mobile and automotive applications, partially offset by more stable demand for logic applications and cloud computing end markets.Profit levels this quarter also benefited from the continuation of 55%-plus gross margins and a 9.7% reduction in sequential operating expenses. In fact, baseline operating expenses declined to EUR 23.3 million, the lowest level in 4 years as the benefits of our strategic initiatives and operational realignment are realized. As such, we reached a net margin in excess of 20% for the second consecutive quarter in the face of an extended market downturn.For the 9 months ended September 30, Besi's revenue declined by 39% versus the comparable period of the prior year. The decrease was broad-based across Besi's product portfolio and end markets in an ongoing industry downturn. Gross margins of 55.7% were achieved in the current 9 months period as management was able to rapidly align production overhead and supply chain activities in response to weaker market conditions.In addition, personnel levels were significantly reduced with total head count declining by 280 people or 14.6% between the end of the third quarter last year and the end of the third quarter this year. Besi generated net income of EUR 47.6 million year-to-date, resulting in a net margin of 18% and cash flow from operations of EUR 83.8 million or 32% of revenue. This highlights the profit and cash flow generation of our business model even in a difficult year.Besi's liquidity also improved in the third quarter with net cash of EUR 106.9 million, increasing by EUR 20.8 million or 24.2% versus the second quarter of this year despite share repurchases totaling EUR 13.1 million during the quarter. Strong cash generation this quarter resulted primarily from the absence of seasonal tax payments, which we paid in the second quarter and to a lesser extent, reduced working capital requirements.Year-to-date, we've made EUR 161.3 million of distributions to shareholders in the form of dividends and share repurchases, continuing our strong commitment to enhance shareholder value. During the quarter, Besi repurchased 504,337 of its ordinary shares for a total of EUR 13.3 million. Cumulatively, as of September 30 this year, a total of 2.9 million shares have been purchased under the current EUR 75 million share repurchase program, which started July 26, 2018, at an average price of EUR 21.31 per share for a total of EUR 61.3 million.As of September 30, 2019, Besi held approximately 7.7 million shares in treasury at an average cost of EUR 16.57, equivalent to 9.7% of its total shares outstanding. The company will extend its current program until October 26, 2020, but reduce its daily share repurchase activity over the next quarters in accordance with restrictions on its ability to purchase more than 10% of shares outstanding without AGM approval.Next, I'd like to speak a little bit about the current market environment. VLSIresearch has recently adjusted its assembly equipment forecast now looking at 20% for 2019. VLSI see a gradual recovery in 2020 of 2.4%, which accelerates in the second half of the year, followed by a larger rebound of 17.9% in 2021. VLSI's climate change index presented on this next slide shows the beginnings of an upturn, which began late this summer.From our perspective, we see mixed signals coming from the marketplace. Positive indications of renewed customer interest in advanced packaging applications and capacity purchases by Chinese subcontractors are balanced by continued overcapacity at many customers, shifting supply chain dynamics and global trade tensions. Although we realized better-than-anticipated third quarter revenue and order activity to date in the fourth quarter, we maintain a cautious outlook.This year, we've seen an increased focus on the assembly interconnect function as part of the front-end design process as producers move to below-14-nanometer geometries with ever-increasing functionality, density and complexity. At present, Besi is actively involved with leading customers to develop new assembly solutions for the next investment round. Areas include 5G antennas, micro LED screens, hybrid bonding interconnects for below-10-nanometer smartphone devices, high-volume TCB systems for advanced memory and logic applications and high-speed flip chip systems for the assembly of below-5-micron accuracy microprocessors. As such, R&D activity has been increasing in recent quarters with technical head count added in Europe to support customer-focused efforts.And now a few words about our outlook. For the fourth quarter, Besi estimates that revenue will be equal to the third quarter plus or minus 5%. The sequential revenue trend is of note and that the typical Q3/Q4 progression is usually down an average of 10%. Further, we anticipate that gross margins will be in the range of 54% to 56% due to our anticipated product and customer mix.Finally, operating expenses are forecasted to increase by between 5% and 10% sequentially versus the third quarter, primarily due to higher R&D spending and seasonal influences.In summary, we are very excited about our prospects for the next industry upturn given Besi's performance in the current downturn, leading-edge advanced packaging technology, engagement with customers and a highly scalable production model.That ends my prepared remarks. I would like to open the call now for some questions. Operator?
[Operator Instructions] The first question is from Mr. Peter Olofsen, Kepler.
I have a couple of questions. So maybe best to do it one by one. The first question I have is on the demand from the Chinese subcontractors, which seems to have been a bit stronger both in Q2 and Q3 than what you initially expected. In press release, you referred to the trade tensions. So I assume it's related to the relocation of certain supply chains.The question I have is, how much visibility do you have on this demand relative to maybe some other parts of your business? And how sustainable do you think the demand is also in light of China's ambitions to grow its domestic semiconductor industry?
Well, first of all, in the current environment, everyone is clearly cautious. So any strategic capacity expansions are, let's say, planned in the last moment. So we have witnessed, in Q2 and Q3, favorable orders from Chinese subcontractors. And apparently, this trend is to continue. And what we read is that the dependency on imports from outside of China has to be reduced.So our product offering is the #1 choice, and at the same time, producing this equipment in China has put us in a very good position to benefit from the strategic investments in China. How long that will last is a very difficult question to answer.
Okay. But it's not driven by one particular end market or application? It's across a number of markets?
It's across a number of markets, but of course, the high-end smartphone market is a big driver.
Okay. Which brings me to...
Also, preparation for the next infrastructure in the world but also automotive, although automotive is a bit slower at this moment. But your question is a very good one. It's across the board.
Okay. Which basically brings me to my next question, which is around 5G. We originally heard from TSMC that they have become more positive on 5G-related demand compared with 6 months ago, and that was also one of the main drivers for them to increase their CapEx budget for this year. Based on the discussions that you have with your customers, do you also sense that prospects have improved and that maybe your customers have become a bit more optimistic there on the 5G demand also for next year?
Yes. But you have to be a bit more precise. There will be several technology ramps in 5G. The first ramp, and it's primarily related to bandwidth, is the first, let's say, enabler. That needs certain devices but also antennas to be able to be compatible for that first bandwidth generation.And followed in a year or 2, we should see a higher bandwidth, which needs significantly more technology into the high-end smartphones. And also, instead of 1 antenna, they need 3 antennas, which -- the basic message is we're only at the beginning. But it is coming, but don't expect everything to come at once. But that's also a very, very good sign.
Okay. But to understand correctly then, the chip content or the antenna content per device will increase over time with...
Yes.
Okay. And maybe it's a little bit early, but the -- your customers, did they give you already some -- give any -- give you some indication of how many 5G smartphone shipments they expect for next year?
No. They -- like with every generation so far, that is because there are many participants in that market, which we all know. And they're struggling for their share of that demand and they will only tell us at the very last moment. But we're qualified with all of them. So that gives us unique opportunities.
Okay. Then maybe a question on R&D, where you mentioned in your outlook that R&D spending will be higher in Q4. Is that something you had already been planning for? Or have you recently decided to step up your R&D efforts in certain areas?
Well, we've shared all along that, let's say, over the past decade, you see R&D spending grow from mid-20s, EUR 20 million per year, EUR 25 million to EUR 35 million, EUR 36 million and it will move gradually to EUR 40 million and beyond that, in the next 2 years, to EUR 45 million, simply because, number one, further miniaturization requires more complex interconnect technologies. At the same time, our market position, with the leaders in this industry, that market position has improved, increased, and that requires more development. So gradually, you will see that increase and hopefully, it will lead to more revenue with higher margins.
Okay. And then...
It's not a sudden change.
No, no, no. As you pointed out, we have seen it increasing over time, but you did specifically mention it in the outlook. So I was just curious whether there was maybe some pull-in or acceleration or something. But it's basically continuation of the trend that you had in mind previously.
Yes. Compared to a year ago, the scope has definitely increased. And we've added more head count. In R&D, this year, we will add -- but we mentioned that in the previous call as well, now close to 40 people. And if you simply do a quick math, what an engineer costs per year and you multiply that by 40, you also know how much the spending increased.
Okay, that's helpful. And then lastly, on 3D sensing in mobile. 2017 was a very strong year for you, also helped by the introduction of front-facing 3D sensing by one of your major customers. This customer is expected to also introduce 3D sensing on the back of the phone next year. Could this be an opportunity of roughly similar size of what we saw in 2017? Or is it really different?
Well, it's fair to say that the -- and also there, we mentioned this in several calls, in '17, an enormous capacity was installed, you could say overcapacity, which is gradually absorbed. And part of that is used for further development of this face recognition technology. And it's expected in next year that certain limitations will need expansion to be added onto those capacities. How much? It's hard to tell.But it will not be, in my view, a similar size because it's not a brand-new feature. All these features at the beginning, when they're brand-new, they offer a spike. And when they're further development -- when they're further developed over time, it's more capacity to be added, but not from scratch. That's the message.
Okay. And you...
You have to wait. Like 5G, those 5G antennas are brand-new. So that's a wonderful new feature, if you could call it that. And there are many others to be expected.
But if you look at the 3D sensing technology, it seems that the technology will be slightly different, i.e., time-of-flight instead of structured light. Does it really matter for you? Can they basically use the same type of equipment that they have been using since 2017? Or will those sort of require maybe some new type of assembly technology?
Yes. They would also need some new type -- new features on equipment, different equipment. But again, the volumes are hard to predict.
The next question is from Mr. Marc Hesselink, ING.
First question is on -- so this new -- the R&D that you spent on the new applications. We have to wait until this -- if this becomes successful if these are being used. When can -- do -- can we see that? Is that going to be in the first quarter of next year?
No. It's program by program. And don't forget, we are just a little link in the total supply chain. So we -- all of us in that supply chain are dependent upon the success of the development of each individual step, plus markup, introduction, timing, decision.So to give precise -- of course, these customers have road maps, but those road maps change because of the reasons just mentioned. What you will see in the course of next year and also longer [ out term ] because developments take more than a year, some developments even 3, 4 years ahead, they will kick in at certain points. And usually, what happens when they kick in, it's a first ramp, but then it takes some time before you have a second ramp. It's very unique that it all of a sudden ramps in big volumes.So my answer to your question is that the timing is hard to forecast based on technology solutions and not just from our part of the game, but also from many others in the supply chain.
Okay, clear. And then the second question is on the -- your positioning in the Android supply chain. You've gradually been moving deeper in that one. What are you seeing there now? Is that gradual movement into that supply chain still continuing? Or is it accelerating or...
It's still continuing. As a matter of fact, the 5G antennas, the first qualifications were in the Android world, which is not surprising if you follow the news. So in any case, Android is very important for us.
Okay, clear. And then the final question is on the micro LED that you mentioned. It seems that, that can be quite a big one for you. So could you tell a bit more about it? What -- how your positioning would be in that? And when it would come? And how it would come over time?
Well, that's longer. If you follow the general applications about moving from OLED to micro LED, that's a big, broadly publicized development in this world because it offers many advantages but there are also many versions to be expected. If you look at timing, that's typically -- timing, 2, 3 years out, but many developments are currently ongoing with multiple companies in this world. So yes, it offers a unique new world, but still, a lot has to happen. So that also won't materialize in the first quarter next year. But potentially, it has an enormous impact on our sector.
And then from your perspective, you're now better positioned for that product than your competition?
Well, that's also hard to tell. We are very well positioned because we have a unique technology in the most accurate placements, which is required for these applications, but at the same time, accuracy and speed. So our systems are very well positioned to benefit from this development. But are we better positioned than competitors? Who am I to say that?
The next question is from Mr. Wim Gille, ABN AMRO.
My first question would be on the headcounts that you mentioned in relation to the R&D, so the head count in Europe. The overall head count in Europe has not moved up yet, yet you are kind of adding head count to the R&D base. So how should I look at it? Is it more a shift from, let's say, general functions towards R&D, i.e., that the head count in Europe overall stays flat? Or do you also expect that overall head count in Europe to go up in the quarters to come?My second question would be on the government subsidies. Can you give us a bit of an indication on what a normal level of quarterly run rates would be for the subsidies and what it was in the third quarter of this year?
Your first question is a very good one. The second one also, but let's spend some time with the first one. The move from West to East, so from Europe to Asia, and especially to Singapore, of 2 things, admin and also the admin of spare parts service, has helped to reduce head count in Europe in the past 2 years and also especially last year.And on the other hand, we've added R&D staff because the key developments and capabilities are in Europe for packaging and plating in the Netherlands, for die attach in Switzerland and Austria. So in the net, you're right, you don't see that so much. But as I mentioned before, we've added some 40 people in R&D. And in a similar way, we have reduced head count in the areas as mentioned, which has gone very, very smoothly.If we look at subsidies, subsidies are not, let's say, on a constant flow. They depend on programs, they depend on also government priorities. So you can't simply model that. They have increased them for this simple reason, and they may well increase going forward simply because our position of those products in their end markets have a greater importance in the requirements for whether you qualify for certain subsidies or not. A lot is customer-supported as well, so you have to have a combination of customer and product development. But this all falls into the decision of political entities and that is hard to forecast.
Very clear. And then my last question would be on the Chinese fast turnaround orders, which you benefited from in the past 2 quarters. Can you remind us on kind of how that works? And what is kind of the lead time for you to receive an order and to ship the machine or at least be able to recognize the revenue? And in the last 2 quarters, what is, roughly speaking, the order of magnitude of these last-minute orders in overall sales?
Well, the fastest turnaround of -- it's not just one type of machine, there are various, but let's focus on the fastest. We can do that in 4 weeks. That's also because of the unique setup of our supply chain. And that quick turnaround also helps us in capturing a big share of that demand. There are other systems, which take a bit longer, 8 weeks to 10 weeks. So quick turnaround, quality, superior is what -- are determining factors apart from competitive pricing.
Very clear. And then in terms of revenue recognition, remind me how that works. Do you recognize the revenue when you ship the products or when you receive the order?
You -- certainly not when you receive the order. Revenue recognition depends on several factors, which are very critical. But Cor, please explain the status.
Basically, we recognize revenue when we ship the system. And under IFRS, you're only allowed to do that if -- once the system is shipped. You can demonstrate the history that you know for sure that the system will perform its tasks as specified by the customer and the work you have to do afterwards. So basically, installation is, let's say, insignificant.And so in, I think, 98% of our shipments, we can recognize revenue at the moment we ship a system to the customer. Only when it's new technology, then it -- you have not demonstrated yet that the technology is working. We wait until we have the final acceptance from the customer on the site.
The next question is from Mr. Nigel Van Putten, Kempen & Co.
I'd like to ask just one question on just hearing your thoughts about the outlook in 2020, maybe without getting too specific in terms of applications. I count a couple of potential drivers. On the one hand, there's technology at the higher end of the market, but there's also substitution at the lower end from wire bond to flip chip. There's completely new features in analog like 5G antennas and there's also the potential for a cyclical recovery in a couple of end markets. I guess automotive would be a good example.So my question would be, just maybe without handicapping a couple of those, would you argue that we are maybe indeed in terms of -- at the start of an upcycle, even though the -- yes, the eventual timing of a lot of these drivers will be unclear?
Yes. But you could add to your consideration -- and we've seen that in many cycles. For me, it's a bit more than many of others and that was 35 years. The longer downturn lasts, the more uncertainty about a recovery. And then when that recovery happens, it happens very fast. And of course, there are the key drivers and you mentioned them, although the magnitude of the upturn depends again very much on GDP.So concluding, it's very hard to tell. 2020 looks like a turning, could be a year like 2016 when we had a downturn in '15, which didn't last that long, but then you had a gradual upturn developing in '16 and a large expansion in '17. Whether that's the same model for 2021, nobody knows. But you have to be prepared for that. You have to be able to ramp 60% quarter-on-quarter. And that means you need to have your supply chain prepared, you need to have your organization prepared to begin with and that's what's key, apart from the developments in those next drivers.
And maybe as a follow-up to a question that was asked before. You've said, as always, you're here at the very last moment in terms of potential new orders from especially, I guess, smartphone suppliers. Would that, in terms of seasonality, still stick that number around -- or that date around maybe the end of January, maybe February, around the Chinese New Year? Would that be sort of the key moment for you to know more about the potential of one of those potentially quick ramps into next year?
Yes. That's usually -- but in December -- and simply follow the daily stream of information from this whole sector. And especially, our customers, the key ones, pick the winners, and everyone is focused on that. So when it comes to us, and typically it comes in January, February, that's about the pattern.
Mr. Sanders, your line is open.
I just had another follow-up on micro LED. It does seem like that technology is moving to that sort of manufacturing feasibility stage, which is where you guys would potentially come in. So what does your research tell you about how many times faster does this sort of pick-and-place technology need to get to before we reach cost effectiveness?And related to that, I mean were you to get this business, I'm assuming you would have to develop an entirely new machine, which would consume a lot of R&D. So would you consider taking pre-funding to mitigate the risk of developing this tool and then the technology not working as a whole? And I have one follow-up.
As I mentioned in the earlier question about micro LED, this is still longer -- takes a longer development time to become major volume in the world. You can read that in many publications. But you're very right, to participate in that world, you need a unique technology development, which addresses that, and then the equipment, which makes it happen. And -- but those developments are our daily bread and is our reason of existence.
So you don't see it as a particularly onerous development effort in terms of dollar millions for you guys given your history and expertise, basically?
No. This fits into the overall R&D spend of what I mentioned, today in the high 30s; next year, growing towards EUR 40 million, into the mid-40s. That's what it takes.
Got it. And I just was on the call of another company in Europe and they talked about some -- having some issues with export licenses into Taiwan, Korea or in China. I wondered if you had any issues related to getting into markets or getting products approved or anything like that, just to check.
No, no. Not with us. We had this check in -- before the summer. None of our products are blacklisted, so we have no issues. We check that, of course.
The next question is from Mr. Peter Olofsen, Kepler.
Yes. I had a follow-up on share buybacks where you commented in the press release that you are extending the program and then reducing the daily purchase volume. But just to be clear, once you reach the 10% authorization, there's no plan to cancel a share? So basically, at that moment, the possibility to do buybacks would end? Is that correct?
Well, you're very right. If you have the authority to buy up to 10% and you buy more, you have a big issue. So we won't do that. But then at the shareholder meeting, end of April, we have to ask permission to buy more.
And cancel shares.
And you can also cancel some shares. But you need to do something because the 10%, if that's the limit, that's the limit.
But do you have the plan to cancel shares then? Or is that still to be discussed?
Yes. It's either or both, but we will do something. I mean if we continue to generate returns which help to create shareholder value, then that's what we're going to do. And we've done that for years. We started to buy back shares in 2001, 18 years ago.
Okay. So in the run up to the AGM, you will probably come up with a proposal then to...
Yes, certainly.
There are no further questions at this moment.
Well, then thank you all for taking the time and asking questions. If you have further questions, don't hesitate to contact us. Thank you. Bye-bye.
Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for joining, and have a very nice day.