BE Semiconductor Industries NV

AEX:BESI

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, good afternoon, ladies and gentlemen. And welcome to Besi's quarterly conference call and audio webcast to discuss the company's 2017 fourth quarter and annual results. You can login 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 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 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 of our fourth quarter and year ended December 31, and also update you on the markets, our strategy and outlook. We're also introducing a new format for our quarterly webinar, which includes detailed financial slides as an appendix to which you can refer. First, some overall thoughts on the year and the fourth quarter results. Besi achieved new corporate benchmark levels of financial performance in 2017, underscoring the strength and market position of our advanced packaging portfolio and continued efforts to enhance the profitability of our business model. Besi's substantial revenue and order growth this year was supported by a variety of favorable trends. The assembly equipment industry conditions continued to improve in 2017 from their start in the second half of 2016 against the backdrop of a global economic recovery. In addition, improving consumer confidence levels and new device introductions encouraged our global IDM customers to significantly expand and upgrade their advanced packaging capacity for a variety of leading-edge applications, such as mobile Internet, automotive, cloud server, memory and high-performance computing. Customer demand in 2017 was broad-based across Besi's product platforms. In addition, we gained share versus competitors as customers accelerated the investments in advanced applications, such as 3D, facial recognition and blockchain software, which played to the strength of our leading-edge assembly technology. In 2017, revenue and net income reached EUR 592.8 million and EUR 173.2 million, respectively, increases of 57.9% and 165.2% over 2016. Assembly orders grew by 82.2% versus 2016 to reach EUR 680.9 million. Gross margin rose to 57.1%, highlighting the success of Besi's product strategy and technological leadership position. Increased revenue and gross margins, combined with the ongoing initiatives to further reduce European overhead costs and optimize our Asian production, resulted in sector-leading margins of 29.2% in 2017, up 11.8% versus 2016. Besi's fourth quarter results continued the trend of outperformance versus 2016. Revenue and net income rose by 64.6% and 161.1%, respectively, versus Q4 '16 while gross margin and net margins increased by 3.1 points and 10.4 points, respectively. Assembly orders of EUR 149.4 million rose by 63.5%, reflecting a continuation of the current industry upturn as well as ongoing customer investment in advanced packaging applications. Our cash generation also improved significantly this year, and cash flow from operations growing by 70.4% and net cash increasing by EUR 79.5 million to reach EUR 247.6 million at year-end. Further, total cash and deposits expanded to EUR 527.8 million, aided by the December issuance of a EUR 175 million convertible of 0.5% in June 2024. Combined with the 2016 convertible notes, Besi has raised a total of EUR 300 million of financing over the past 2 years at a blended average interest rate of 1.33%, an average life of roughly 6.5 years and with minimal restrictions on operating flexibility. We believe this solid liquidity base positions us to take advantage of future opportunities, which may arise in our cyclical business. Given continued strong cash flow generation and our solid liquidity position, we propose to pay a cash dividend of EUR 4.64 per share over fiscal 2017 for approval at our April 2018 AGM. This represents an annual increase of 166.7% over fiscal 2016 and a payout ratio of 100% relative to net income. Besi's capital allocation policy seeks to provide a current return to shareholders in the form of cash dividends and share repurchases while retaining a capital base sufficient to fund future growth opportunities. Total dividends and share repurchases were EUR 88.1 million in 2017, an increase of 29.9% over 2016. Since 2011, aggregate distributions, including the proposed 2017 dividend and share repurchases to date in 2018, were EUR 449.9 million. In October 2016, we initiated a new 1 million share repurchase program. Through year-end 2017, Besi bought back a total of 606,636 shares for EUR 26.8 million. Of which, 480,241 shares or EUR 22.8 million were purchased in 2017. In the aggregate share repurchase since 2011 have enabled us to accumulate approximately 2.8 million shares in treasury by year-end 2017 at an average cost per share of EUR 20.05. Such activities have lessened the diluted impact of convertible note issuance and employee share grants. Now I'd like to update you on our strategy, the markets and the guidance for the first quarter of this year. 2017 marked a decade of significant transformation of -- at Besi. Since our repositioning in 2007, '08, revenue has grown in a step-function manner, both organically and via timely die-attach acquisition. As seen in the slide, Besi's 4-year rolling average revenue levels have successfully increased from EUR 164 million to EUR 302 million and EUR 424 million in the most recent period despite periodic volatility. This step-function revenue growth has been accompanied by increased gross margins, reflecting the strength of Besi's core technology combined with a successful pivot to a lower cost Asian manufacturing and supply chain model. We are formulating the next phase of Besi's growth, building upon the strategic progress made in recent years. Our plan is to retain and develop intellectual capital and product management in Europe through 3 highly focused development centers in The Netherlands, Austria and Switzerland; and to further build out our Asian production, sales and service capabilities to capture additional market share in the region. With this in mind, we began a EUR 3.5 million expansion of our Leshan, China facility in Q4 to double its potential output from current levels and to accommodate additional die bonding and packaging system production for the local Chinese markets. We will also continue to expand our Singapore development center to handle additional developments, logistics, administrative and software support functions and further reduce nondevelopment-related European overhead. In addition, the Singapore center will support the buildout of sales and service functions to better service Besi's growing installed base of Asian customers. From an R&D perspective, our priorities include continued investment in wafer-level packaging technologies for future growth as well as common platform initiatives to further drive reductions in unit costs and cycle times. By such means, we hope to stay at the forefront of assembly technology while increasing our revenue, market share and earnings potential, given increasing seasonal and volatile end-user markets, scalability and customer lead times have become even more important competitive factors. As a result, we have invested significant management resources to optimize our Asian supply chain model and production capabilities. 2017 was challenging due to a market which turned upward in a rapid and unexpected fashion at the start of the year. As such, we worked closely with suppliers to ramp system deliveries by 83% between Q4 '16 and Q2 '17. In addition, system output from our Leshan, China facility more than doubled to reach a total of close to 300 units to help satisfy demand -- customer -- demand and customer lead times.Leshan represented about 18% of total unit production last year. In parallel, we have also built out our Asian sales, service and development capabilities to better serve our growing installed base. As such, we grew Chinese sales and customer support personnel by 84% over the past 2 years to better serve the local market. Furthermore, we expanded Singapore headcount by 76% as it becomes our key Asian center for development, sales, service, spares and administrative functions. Now a couple of words about the assembly equipment market and our first quarter guidance. PSI research currently estimates that the semiconductor assembly equipment market increased by 21.4% in 2017 to reach a record of USD 4.4 billion, much higher than the 9.3% increase initially forecasted at the start of the year. They estimate that the current industry upturn will continue into 2018 with a market growth of 18.1% versus 2017. Cautious optimism is also supported by favorable global GDP estimates for 2018 and capital spending forecast by many of our major semiconductor producers at the start of the year. Longer term, there are many reasons to be optimistic about Besi's prospects. New devices are being created and deployed to assist in the development of a new era of applications for the digital society. Exciting new applications, such as driverless and electric cars; artificial intelligence; virtual reality; smart homes, cities and factories; blockchain software deployment; and increased automation in our daily lives are becoming a reality and will complement the ongoing mobile and cloud revolutions currently. As a result, we believe that the new technology cycle will be encouraged over the next decade, wherein customers increasingly demand more complex assembly packages containing evermore functionality in ever smaller form factors with less heat and power dissipation. We also foresee that additional spending of wafer level and 3D stacked die solutions will be required as the market evolves over time. In fact, it's very possible that the assembly process will become a critical bottleneck through the long-term realization of many future device designs unless new solutions and systems are developed. Such trends play to Besi's strength as a technology leader in advanced packaging and offers new opportunities for long-term revenue and market share growth. Besi's second half 2017 order trends, year-end backlog and bookings to date in the first quarter of this year confirm a continuation of current favorable demand trends into 2018. For the first quarter, the forecasted revenue growth will range between plus or minus 5% versus Q4 2017 in what is typically our weakest quarter of the year, but will grow by 32% to 46% versus the first quarter last year. In addition, gross margins is anticipated to range between 55% and 57%, and OpEx should increase by 10% to 15% versus the fourth quarter last year. The OpEx increase is primarily due to approximately EUR 7 million of share-based incentive compensation related to Besi's 2017 performance. As share-based compensation is a nondeductible item, we assume a slightly higher first quarter effective tax rate versus our annual guidance for a range between 12% and 15%. Further, capital spending should roughly equal the EUR 5 million spent last year, primarily focused on completing our Chinese capacity expansion. That ends my prepared remarks. I would now like to open the call for some questions. Operator?

[Operator]

[Operator Instructions] The first question is coming from Mr. Nigel Van Putten, Kempen & Co.

[Nigel Van Putten, Analyst]

I have 2. First off, on the 3D sensing which you flagged as an area of strength in 2017. How do you expect 2018 to evolve on this front? And do you expect to supply to new end customers as well this year already? And then also a question on the LTI. I think it's EUR 7 million, as you just mentioned, which compares to about EUR 4 million in the same quarter last year. How should we see this going forward into the second, third quarter? I know it's difficult to already forecast, but should we assume that variable pay to be higher as well based on current share price? That's it from me.

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

Thanks, Nigel. Well, the first is a very positive trend in the 3D sensing rollout in additional products in the mobile Internet devices. And also it can be expected that this will gain more traction in a broader customer base. On the second question, LTI, Cor?

[J. Cor te Hennepe, Senior Vice President of Finance]

The LTI, EUR 7 million is of course correct, as we just stated. And it'll be very much a Q1 effect and some of it will be in Q2 like last year, but then it will be back to normal. And the share price will have some effect on the LTI costs, but not a lot because, in fact, the LTI costs are, let's say, attached to certain levels and are including -- or let's say, are influenced by the share price. So the increase for the rest of the year will not be significant as compared to last year. But in Q1, it's the EUR 7 million. And that was, of course, a significant increase compared to Q1 last year and, of course, also compared to the fourth quarter where we had it at a normal level. So going forward, it's -- it will be almost back to normal.

[Operator]

The next question will come from Mr. Peter Olofsen, Kepler Cheuvreux.

[Peter Olofsen, Analyst]

A couple of financial questions. Maybe first on the bookings. In your outlook statement, you referred to bookings so far this quarter. If I then look at Q1 last year, you had a very strong spike in IDM orders. Should we expect something similar at this time? Or could you shed some light on what you have seen so far this quarter in terms of bookings strength? Then I have a question on the dividend. In previous years, when you paid out 100% of earnings per share, you indicated that part of the dividend was to be considered as special. In today's press release, there is no mentioning of any special dividend. So should we consider it part to be special? Or is 100% payout the new normal for Besi? And then thirdly on the balance sheet. Given that you already had a very strong balance sheet, you're generating a lot of cash, your CapEx needs look rather limited, I'm struggling a bit with the rationale for the most recent convertible bond issue. I'm tempted to believe that it signals that you're quite keen to do acquisitions. Am I wrong in that judgment? Or what would be the -- yes, the possible use cases for the -- all the money that you currently have?

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

Well, let me answer your questions. The first question, bookings so far compared to last year, strong IDMs. Yes, you can expect a similar trend in 2018, but the total mix is, of course, different. So there's mobile Internet devices, there is computer-related device capacity investments and also automotive. So the mix will be slightly different, but it is a similar trend. So a strong trend. Second, dividend, 100% payout.As you may know, our dividend policy today is between 40% and 80%. And as you correctly said, in the past 2 years, we have gone above the 80%. And I've mentioned that as a special dividend. At the AGM where we will propose the dividends to shareholders, we will also inform the shareholders that we will change our dividend policy between 40% and 100%. The third question, yes, we have a very strong balance sheet. And the rationale is certainly that with the proceeds of the convertible, we are in an excellent position to consider any next step. Timing is of course critical. And for that, we certainly look at the convertible, as mentioned, 7 years for the last one; still 6 years for the one in 2016, blended 6.5 years. And we expect that in that periods, we will certainly face an opportunity, which will further enhance shareholder value significantly. So that is the rationale.

[Peter Olofsen, Analyst]

Okay. That's very clear. Maybe 2 follow-ups. On one of the specific end markets, namely crypto or currency mining, do you have any idea of what proportion of your sales or bookings is related to that particular type of application? And can you also tell a bit more on what type of products customers in that field buy from you? Is that mainly a flip chip? Or what type of products do they need from you? And then I noticed that in the press release, you also mentioned higher agent commissions. What proportion of your sales is through agents? And is that mainly something you use in China? Or do you also work with agents in other regional markets?

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

Well, excellent. First of all, the percentage last year was relatively small. This year, we expect for the crypto world, and which is for computers, a larger portion of our bookings and revenue. And these are products, flip chip packaging, so across both fronts. Agents, yes. China, for language purposes, we need help sometimes, also support with installation and -- due to a very strong growth. But that is only related to China. We have a very strong owned sales force around the world. And only for specific circumstances, we may have an agent in America and also in Europe, but that is very small.

[Peter Olofsen, Analyst]

But the meaningful part of your sales in China is through your own...

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

Yes, yes, yes. Everything is through our own organization. And we only use agents, so maybe the word is a bit confusing. They don't sell, they help us support installation and sometimes service.

[Operator]

The next question comes from Mr. Edwin de Jong, IC.

[Edwin de Jong, Analyst]

A couple of questions left. First of all, VLSI and the growth expectations are -- have increased quite a lot since the last time we saw them. Now then, 2 questions. And did you recognize yourself in the -- in those trends? And where does the growth in the VLSI growth projections come from? Maybe to start off.

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

Okay. Well, yes, we do recognize that. The sentiment broadly is very strong. You could even say stronger on a broad base than as -- at the beginning of last year. That's not unusual. In every cycle, there's a buildup of confidence. And at the same time, that also can be a risk. So yes, the sentiment is very positive and that has a good impact on us.

[Edwin de Jong, Analyst]

On the -- and the 18% for this year -- for the full year does not sound...

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

Oh, we never look beyond that. The answer is better that if it comes and even more than that, we are prepared for that. We have expanded our capabilities in Malaysia, and in particular in China. And we can accommodate revenue growth of at least 35% if that would come compared to last year.

[Edwin de Jong, Analyst]

Okay.

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

When it comes, time will tell.

[Edwin de Jong, Analyst]

Okay. Well, because that was also one of the questions I had. And if you look at China, you doubled more or less the prediction in 2017. In 2018, 2019, that kind of increases our possible order as well with the capacity that you now have?

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

Yes. Because we timely started that as we always do, simply because our customers are rating us every so now and then. So if they would recognize that we would not be able to increase our capacity, that would be damaging to our overall share of their wallet. And so typically, we prepare our next step already in an upcycle.

[Edwin de Jong, Analyst]

So you are ready for, let's say, much more?

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

35% more.

[Edwin de Jong, Analyst]

For the total?

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

Yes.

[Edwin de Jong, Analyst]

Okay. Then maybe also looking into 2018 and to more to the advanced side of the order equipment. So maybe a TCB fan-out system and package maybe to TSVs. Could you say something about the growth prospects in the really advanced parts of the market? And separately on solar?

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

Well, on the first part, the TCB fan-out. Last year, we did not see any capacity expansion of note. Yes, there's a lot of development. All of the key customers, especially IDMs, are developing certain applications. Still materials, process choices are being evaluated. And it is expected that for higher volumes in the next 2 years, things should become more clear. But I'm saying it hesitantly because you can also simply conclude by the huge ramp last year, which was for 99% based on existing flip chip and also wire bond, for that matter, and stacked dies, system and packages and not using TCB and fan-out yet in volume. But we are well-prepared. We are with the major customers. We are also involved in many of the developments. And we will keep you posted quarter-by-quarter how that is developing.

[J. Cor te Hennepe, Senior Vice President of Finance]

Yes. But maybe because you should start to see something in that market, you would say that.

[Edwin de Jong, Analyst]

Okay. And then solar?

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

Solar is gaining traction. We had some orders in the fourth quarter from another new solar manufacturer, some upgrades on existing lines. So the technology using copper is gaining traction. And it looks positive. But still also there, we are in a phase of long-term quality testing of using copper in the grit of solar cells. But there's positive progress to be reported.

[Edwin de Jong, Analyst]

Okay. So the growth this year, so to say, will really be from -- again, from the testing and...

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

There's a lot of investment in semiconductor plating. We had a very successful year. And also the first half and for the year 2018, there are many investment plans in plating for semiconductors. And there are certain key solar programs underway as well.

[Operator]

The next question comes from Mr. Robert Sanders, Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

My first question is just around cycle. There have been some cyclical worries in the industry after a slowdown in the smartphone market, which is about 30% of your business and while auto semis has been seeing some double ordering. So could you contrast how you feel about your outlook and visibility today versus the sort of height of previous cycles?

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

Well, thanks, Robert, for the question. The first answer is that, of course, everyone looking at this current cycle, 6 quarters down the road into the seventh quarter is, from statistics, sensitive to any signal simply because of the length. So time and again, there are certain signals whether it's in the smartphone arena, but also already in the middle of last year. But that did not prove to be concerning. Of course, at the beginning of a year when also there's Chinese New Year, there are certain -- that this is the slowest part of, let's say, the seasonal trends. But if you follow closely, VLSI Research and also pricing trends, capacity utilizations, they have not yet pointed at any concerning developments. But needless to say, this is a cyclical industry. And at some point, there may be overcapacities. Besi is well-prepared for that. As many of you know, our breakeven level is at 1/3 of revenue. We have been able to demonstrate very fast ramping capabilities, but we also can adjust very quickly to slower demands. And so it's not a worry to us whatsoever. But to summarize, we don't see additional worrying signals.

[Robert Duncan Cobban Sanders, Director]

Got it. And just to pick up bit on that. Your orders in subcons were quite strong. But they typically -- well, historically were -- and maybe not recently, but historically, were the more sort of short cycle.

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

Yes.

[Robert Duncan Cobban Sanders, Director]

So the recent uptick, do you think that is more driven by a complexity or market share? Or a kind of a maybe slight late-cycle expansion? Or is it difficult to say?

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

It's a mix. It is -- yes, it's definitely a mix. You can't say, "Well, this is typically the trend of where we are in a cycle." Not yet. What you usually see in a cycle is that towards the tail end, you have less IDM investments. So the relation turns and then you would see more subcontractor orders than IDM orders. Today, that's not yet the case.

[Robert Duncan Cobban Sanders, Director]

Got it. And just my last question was just a simple one, which is just what's your rough breakdown, let's say, last year now that you've reported it between the end market, so logic, analog discrete and memory?

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

Well, memory is 10% to 15%. Logic is certainly 25%. And the rest is a broad mix.

[Robert Duncan Cobban Sanders, Director]

So the rest will be LED, analog, discrete?

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

Not so much LED. But the analog, many of power devices -- yes. So a broad -- also logic, ICs, various types, smaller ones, bigger ones, complex ones. But key message is memory is always a small portion of our revenue. In any case, below 20%.

[Robert Duncan Cobban Sanders, Director]

Got it. Just to summarize. You said memory, 15% roughly; logic, 25%; and then 60% other. That would be 100%.

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

Yes.

[Robert Duncan Cobban Sanders, Director]

Okay. Brilliant.

[Operator]

[Operator Instructions] There's an additional question coming from Mr. Trion Reid, Berenberg.

[Trion Merton Reid, Analyst]

It's just -- I had most of my other questions answered. But just I noticed on the working capital in 2017, it was a quite significant outflow. Obviously, we've had very strong growth on the revenue, but it is something you have historically been able to manage perhaps a bit better. So I just wondered, was it just the revenue growth was so strong that we saw that sort of EUR 50-million-plus outflow? Or was there something special happening this year? And what should we expect going into 2018?

[J. Cor te Hennepe, Senior Vice President of Finance]

Basically, if you look at the increase in working capital, that's basically to support a 60% growth in revenue. So compared to this 60%, the increase is you could say a bit lower than expected. Because if you look at, let's say, the cash turn cycle or the working capital turn cycle, that is actually going down. Meaning that they are -- we have better possibilities to keep our cash under control. So in the appendix, in the numbers, you will see what we call cash generation trends. And basically, you see that the cash conversion cycle in days measured is going down over the years from 2013 to 2017. So you could say that the increase is solely attached to the increase of revenue. And for 2018, of course, we do -- we work very hard to bring down this cash conversion cycle further. Just as an example, our inventory turn is just above 4, which is historically seen at a very high point with our competitors that are for this ratio a 6. So there's still more to gain. Also DSOs around 90 days, there's also some to gain. So looking forward, depending, of course, very much on how the revenue develops in '18 as compared to '17, you might expect an increase or decrease in working capital depending on how revenue develops. But you -- we could -- we are also aiming at a somewhat lower cash in -- or let's say, cash conversion cycle. So all in all, to drive higher revenues, but to better cash conversion cycle, reduced increase in working capital a bit. And that's the trend we will also see in '18, of course, depending on revenue.

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

Well, what you could also add to Cor's comments, if you look at the first half 2017, and you look at the first quarter guidance 2018, we will certainly be at a higher revenue level year-on-year. At the same time, we have indicated that the order intake so far is also developing very positively. So if you simply look at that trend, you will need on a relative basis more working capital for a higher revenue level.

[Operator]

There's an additional question coming from Mr. Robert Sanders, Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

Sorry, just a clarification question. On your customer ecosystem slide, you classified TSMC as a subcon. But I seem to remember your Q1 blowout order number last year, we talked about IDMs, including foundries. So I just want to check that you are classifying TSMC as a subcon or as an IDM.

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

As a subcon.

[Operator]

[Operator Instructions] There seems to be no further questions.

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

Well, then I thank everyone for participating in the call. And if you do have any further questions, you know where to reach us. Thanks all very much. Bye-bye.

[Operator]

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