Inficon Holding AG

SIX:IFCN

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, welcome to the INFICON Second Quarter 2019 Results Conference Call. I am Genia, the chorus call operator. [Operator Instructions]. At this time, it's my pleasure to hand over to Mr. Lukas Winkler, Chief Executive Officer of INFICON. Please go ahead, sir.

[Lukas Winkler, President & CEO]

Thank you, Genia. Welcome and good morning, everyone, and thanks for joining us today to review our results for the second quarter of 2019. As always, we have a PowerPoint presentation on our Investor Relations website, which supports you with additional information and some graphs. Please turn to the Slide #4, where we start with the key figures for the current quarter. After a first quarter with a weak semiconductor and OLED market, we experienced a similar overall second quarter, but with an improved semiconductor market. And on the other hand side, a disappointing development in our General Vacuum market. The highlight in the first quarter was clearly the record sales in our Refrigeration, Air Conditioning & Automotive market as well as the book-to-bill ratio above 1. In total, our revenues were 7% below last year's second quarter, but 1% above the first quarter of this year, and we finished with sales of USD 96.6 million. Adjusted for foreign exchange currency fluctuations, the organic decrease was 6.3%. With gross profit margin below 50% of sales and lower operating expenses, we finished the second quarter with operating income of $15.8 million or 16.3% sales compared to $22 million or 21% a year ago. Net income after taxes was $11.8 million or 12.2% of sales. Matthias Tröndle will review the numbers with you in more details later, and I'll go through some important developments in our target markets first. Please turn to the next slide, Slide #5, where you see the sales breakdown into the 4 key markets that we serve. The pie chart shows a higher contribution from the RAC and Automotive market at the expense of the reduced share from the Semi & Vacuum Coating as well as General Vacuum market. The graph on the right-hand side shows the sales rebound in Asia, while sales to the Americas remained stable. Our shipments to European customers went down. Now let's do a quick analysis market by market, starting with the smallest one. In the Security & Energy market, on Slide #6, sales decreased 7% year-over-year, but increased 15% sequentially and reached USD 6.7 million. The HAPSITE, our man-portable, on-site detection instrument represents still the majority of sales in this market, but the contribution from sales to energy and environmental applications increased. Some geopolitical uncertainties, especially the U.S.-China conflict on tariffs, made it more difficult to sell U.S.-made products into China. Nevertheless, we continue to develop the next generation of products to remain the preferred supplier for portable battery-powered laboratories in the security market. As I mentioned before, investments into energy and environmental applications increased, and we see a growing interest in new green energy technologies, such as biomethane and biofuel applications, as well as water and air quality monitoring in Asia and landfill analysis in the U.S. Looking forward, we remain critical for the full year guidance and expect sales to be below last year's level. Moving to the Refrigeration, Air Conditioning & Automotive market on Slide #7, where we reached a new quarterly sales record of USD 23.3 million, which represents an increase of 12% year-over-year and 9% sequentially, mainly driven by a small acquisition that we made last October and higher sales to all regions around the world. Growth came from all major applications in this market. We have even seen a sales rebound to the RAC manufacturers. A recent study from the international energy agency predicts that the numbers of installed air conditioners will more than triple by the year 2050. The current heatwave clearly supports that prediction. These numbers of installed units are the basis for our handheld after-sales service leak detectors, and we expect this market to grow even faster. In the automotive market, we continue to enjoy the increased popularity of e-cars and the necessary investments in lithium-ion battery manufacturing capacities around the world. With our full line of helium, hydrogen refrigerant and multi-gas leak detection instruments, sensors and modules, we can fulfill all customer needs for their quality inspection, safety and leak tightness applications. We expect that this positive market trend will continue. Now let's go to the Semi & Vacuum Coating market, which includes besides semiconductor and optics, also some display in solar activities on Slide #8. Where sales decreased 12% year-over-year to USD 41.7 million, which is an increase of 6% compared to the first quarter of this year. All indications that we track show that we have reached the bottom of the cycle, while capacity investments into the memory market will continue to be low over the next few months, we see at least 2 positive indications in the semiconductor market. The logic market will expand again already in 2019, and investments in new technologies, such as the extreme ultraviolet lithography and 5-nanometer technology continue to grow. On top of that, the OLED activities, which are used for flat panel display technologies did not stop completely, and the 2019 sales to this market might not be as bad as originally anticipated. Contrarily to that, we remain concerned about the negative impact of the China-U.S. trade discussions, especially for the China semiconductor initiative. We experienced already some negotiations and price pressure for our U.S.-made products sold into China, which had a negative impact on our gross profit margin. Looking ahead long term, semiconductor will remain the most attractive growth opportunity for INFICON. New chip designs, new material and manufacturing processes are asking for more accurate process control and monitoring. We are working very closely with OEMs and end users around the world to develop new sensors, solutions and methods to assure high-quality mass production of new chips. 2019 will remain challenging, but we expect a strong second half of the year. Finally, we had a disappointing quarter in the General Vacuum market on Slide #9 with sales of USD 24.9 million, which is 13% below last year's second quarter and even 15% lower than the first quarter of this year. Driven by lower sales in all regions, the biggest negative impact coming from Europe. As you know, we sell analysis, measurement and control products for many different industrial applications through private label partners, primarily vacuum pump manufacturers, and also by our own direct sale channels to industrial OEMs and distributors. The unexpected slowdown came from our direct sales channels as well as from our private label distribution partners. The global geopolitical uncertainties as well as a weakening economy directly influenced our sales to almost all customers around the world. We, therefore, expect now to end the year 2019 below the 2018 record sales level. Before I turn over to Matthias, I'd like to close my part of the presentation with an outlook on Slide #10. For the next 6 months, we expect a mild rebound in the semiconductor environment with accelerated growth for new technologies as a positive note. On the other hand side, the risk in the General Vacuum side of our activities increased. Overall, we remain confident to reach our 2019 targets. Therefore, we do not change our previously given 2019 guidance of sales around USD 400 million and an operating income of approximately 19% of sales. With that, I'd like to turn over to Matthias Tröndle, who will give you more details about our financial performance. Please?

[Matthias Tröndle, VP & CFO]

Thank you, Lukas. Good morning, everyone, to our second quarter 2019 conference call. I will start my presentation with Q2 financial performance, comment on the half year results and follow by the guidance for the full year. My commentary starts with Slide #12. Revenues for the second quarter of 2019 came out at $96.6 million compared with $104.2 million in our so far second best quarter, Q2 of last year. Total sales decreased by $7.6 million or 7.3% compared to 1 year ago, the U.S. dollar did strengthen against some of our major currencies. Due to that, we had a negative exchange rate impact of minus 2.4%. Further, we had positive impacts due to acquisitions of 1.4%, which means we had an organic sales decrease of 6.3%. Looking at the end market development, and Mr. Winkler, already go into the details, all markets, except the Refrigeration, Air Conditioning & Automotive market decreased, Semi & Vacuum Coating market had a not unexpected decline and decreased by approximately $5.8 million or 12%. The General Vacuum market showed a decline of 12.6%, and the Security & Energy market had a lower second quarter sales and decreased by approximately 7%. The positive thing is, the picture looks a little bit different on a sequential basis. Sales in the second quarter did improve slightly, an increase by 0.9% compared to the sales level in the previous quarter, Q1. This increase was mainly driven by a solid growth in Semi & Vacuum Coating and the Refrigeration, Air Conditioning & Automotive market, which did grow by 6%, respectively, by 9%. Further, the Security & Energy market showed a good development with approximately 15% growth, while sales to the General Vacuum market did decrease by minus 15%. Let's take a look to the regional sales performance on a geographic basis, Europe reached 27%, North America 31% and Asia Pacific ended with 41% of total quarter 2 sales. As you can see from the chart, Asia -- Asia sales decreased by approximately 12%, which was mainly driven by the Semi & Vacuum Coating market, Europe weakened by approximately 9% and North America did grow by approximately 8%. Compared to previous quarter, Q1, sales did increase in Asia by plus 14%, mainly Semi & Vacuum Coating, but also Security & Energy developed well. North America developed more stable, while Europe did declined by 11%. Let's go to the next slide. The gross margin for the second quarter of 2019 reached 48.4% compared to 51% in the same quarter of last year. The margin percentage decreased by 250 basis points. And the absolute margin decreased by $6.4 million or 12%. Our actual gross margins are a function of several factors, such as business volume, product mix, customer concentration. Also, we experienced some price pressure. And therefore, we always have to expect to see some variability quarter-over-quarter. Moving on to the operating expenses. R&D expense in the second quarter reached $8.5 million and increased by 9.5%. The number is mainly driven by acquisition impacts as well as some favorable impacts from foreign currency. SG&A expense in the second quarter was $22.4 million or 23.2% of sales, a decrease of $0.9 million or close to 4%. A decrease in SG&A expense is influenced by lower variable compensation and commission spend as well as some favorable foreign currency impacts. Now let's turn to the bottom line. For the second quarter of 2019, we achieved operating income of $15.8 million or 16.3% of sales. This compares to $22 million or 21.1% in last year's second quarter, which means the result declined by roughly $6.2 million or 28% compared to last year, which was, by the way, one of our best quarters so far. The decrease is driven by the lower sales volume, and therefore, lower gross margin contribution, while cost did decrease slightly. Let's go to the next slide. For the second quarter of 2019, we recorded tax expense of $3.1 million, which represents an average tax rate of about 20.9%, slightly 0.5 percentage points lower due to our profit mix. As a result, the net income for this year's second quarter reached $11.8 million or 12.2% compared to $17.1 million or 16.5% in the same quarter last year. The decrease of 31% is comparable to the operating income development. The second quarter net income equates to earnings of $4.84 per diluted share compared with net income of $7.05 per diluted share in the same period of last year. The decrease is also in line with the net income development. Let's move on to the balance sheet. Our net cash position was $18.3 million. This compares with $62.3 million at the end of last year, which means a decrease of about $44 million. The decrease is clearly impacted by the $54 million -- roughly $54 million dividend payment just a few months ago in April of this year, which is partially compensated by new cash flow generation. The operating cash flow, which you can also see on that slide, did decrease from previous year's high level and reached with close to $10 million, a solid level. For the second quarter, our day sales outstanding, DSO, was, despite some higher accounts receivables levels with 51.3 days, a little bit below the level of the end of last year. Inventory turns did decrease and reached 3 turns, and the working capital level increased solely driven by the higher accounts receivable numbers. On the balance sheet graph on the left side, you see the structure and composition of assets and liabilities. The equity ratio reached close to 64% in Q2 after 57.9% at the end of last year, and as a comparison 70.1% 1 year ago. There is no material long-term liability, and the net cash of close to $18 million confirms a solid balance sheet structure. With that, I covered our current quarter results. I want now to give some comments regarding our half year performance for the current year. Net sales for the first 6 months of 2019 reached $192.2 million compared with $214.9 million in the same period of 2018. This is a 10.6% decrease and includes a positive impact from acquisitions of 1.4% and a negative 2.5% impact from foreign currencies. With that, the sales decreased organically by 9.4%. In the second half of 2019, sales to all end markets, except Refrigeration, Air Conditioning & Automotive, decreased. Refrigeration, Air Conditioning & Automotive achieved a new record level with $44.7 million and increased 7.2%, mainly due to higher sales to customers in Europe and North America. Also, we benefited here from some acquisition impacts. The sales to the Semi & Vacuum Coating market decreased by $18.8 million or 18.9% due to lower demands from our OLED display and semiconductor and equipment makers, mainly in Asia. Sales in the General Vacuum market decreased to $54 million or 9.1%, reflecting lower sales -- sales strengths with European and Asian customers. In the Security & Energy market, where we have a more long-term and project business-related environment, the sales declined 10.7% or $1.5 million, primarily due to lower sales to Asian customers. From a regional point of view, the majority of sales did go to Asia, where we reached $74 million of sales and approximately 39% of our worldwide sales. This is a 23% decrease compared to last year first half and is solely driven by the sharp decrease in sales to the Semi & Vacuum Coating market. Second largest region is Americas, where we had $60 million of sales and 8% growth -- and 8% growth. And in Europe, we had a 5% decline and a 29% share of worldwide sales. We reached in the first 6 months, operating income of $32.5 million or 16.9%, after $46.6 million or 21.7% last year. This is a decrease of 30%. Lower sales and weaker gross margin percentage and a lower operating expense level did drive this lower result. As mentioned earlier, the complete half year report 2019 with more details and comments is available in our Investors Section of the INFICON website. I'll conclude now my portion with our guidance. Mr. Winkler already did give comments and insights to our view of the various end markets. Based on our assessment, we confirm our previous guidance for the year, we expect sales of around $400 million with an operating income margin of around 19%. The last slide shows our corporate calendar and the upcoming dates. And this concludes now the formal part of the presentation, and we are ready for your questions.

[Operator]

[Operator Instructions] The first question is from Michael Foeth with Vontobel.

[Michael Foeth, Head of Industrials Team]

I have a question regarding your -- the gross margin development. You -- if we look at it sequentially, it was down quite significantly, despite nearly stable volumes on a sequential basis. So I would like to understand sequentially, really what happened because it can't be related to the volumes. Maybe you can quantify, how much was mix related and how much is price pressure related? And the second question would be regarding the activities you see in semiconductor and displays, and a bit more specifically in the second half of the year? What sort of -- are you seeing any significant ramps of fab activity in the second half of the year that would drive your business, be it in the memory space in the logic space or in displays?

[Lukas Winkler, President & CEO]

Thank you, Michael. Let me start with the second question first and then go back to the gross profit margin development. What we see in the semiconductor and display market are kind of 2 to 3 elements that we see as a positive trend. First of all, the investments in logic chips and the inside logic chips foundries and so on going to now 7-nanometer and even below the required, definitely the new lithography technology. So we continue to see nice growth coming from the EUV lithography part of our business, and we don't expect any kind of slowdown there in the second half of this year. Secondly, with OEM or in the OEM market. What we have clearly seen that is that they have used up all their inventory. So they have to start ordering again to make at least the shipments to the end users. And again, the majority of their equipment goes more to logic companies and less to the memory guys. Memory is still pretty depressed with the exception probably in the China market. And third, on the end-user side, which is not necessarily always directly linked to the CapEx cycle. We clearly see a higher demand for, let me call it, more sophisticated process monitoring applications to scope with the increased complexity of making semiconductor chips in the 10 and below nanometer dimensions. They need more sensors, more information to get a better output and higher yield. So the need for more software and sensors is actually still going up, and we are not talking just to 300-millimeter device manufacturer, we also have increased penetration, especially with our software products. In some of the 200 millimeter, we call them the second-tier chip manufacturers. So that's all positive. And even the acquisition that we made in last October, which is pure software-driven, they continue to gain market share, and this is based on the subscription sales. So even our recurring revenue then goes up to more installed bases we have. Last but not least, in the OLED sector of the business. I was much more pessimistic at the beginning of the year. Now it looks like the slowdown is still there compared to 2018, but it might not be as severe as I originally thought. And we see continued investments in even rigid displays, but also in flexible displays in -- especially in China, but also now coming a little bit back in the South Korea. Now that's the -- should answer your second question. So overall, we see clearly a trend -- positive trend on the OEM side, they have used up their inventory. Secondly, logic investments; third, new technology investments, memory is still down. Now coming to my concerns and it has also to do a little bit with the gross profit development. The Chinese semiconductor initiative. On one hand side, it's still going on, but on the other hand side we have -- we face 2 elements there. One is the tariff. So we have to pay some tariffs when we import products made in the U.S. into China that had an impact -- negative impact on gross profit margin. Secondly -- and we shipped more in the second quarter than the first quarter. And secondly, most, not all, but most semiconductor companies in China try to get the best price by doing a kind of a public auction. And as the #1 for some of the end-user products, we used to have clearly the highest price level. But if you go through a public auction and the bidding process, you sometimes have to justify or have to -- not justify, but to lower prices just to keep your high market share, and that did cost us, Matthias might know the numbers better than I know, more than we originally expected, just to keep our high market share. So we had to give up some on our high price policy, especially in China and the majority of the shipments actually happened in the second quarter compared to the first quarter. So the single biggest impact from our negative gross profit margin development on a sequential basis was coming from those 2 elements and both were in China, tariffs and price pressure.

[Operator]

The next question is from Jörn Iffert with UBS.

[Jörn Iffert, Director and Analyst]

And the first, I would be, please, on the semiconductor recovery you're mentioning for the second half? And can you tell us or give us a little more detail what has been the underlying market? And what is the sales contribution from your new product launches? And also the incremental sales contribution from the EUV rollout? Second question would be, please, I mean, your book-to-bill is above 1 and how much above 1, if I may ask? And can we expect that Q3 revenue is -- Q3 revenues are reaching 1 million plus? And last question, you mentioned, OLED, I know 2020 is very far out for this kind of end market, but would you see that supply is meeting demand again, and there is likelihood that in 2020 OLED investments are increasing. And what signals you are getting from your customers here?

[Lukas Winkler, President & CEO]

Many questions. Thank you, Jorn. You're asking about what we see in the semi recovery. I think it's not necessarily pure market-driven. The only market that we see is actually coming back is the logic market and the semiconductor market, not memory at all. Our more positive view on the semiconductor market is coming on our own strengths of selling more products to the EUV market, which is still booming. However, there's no way and with the EUV part in 2019, will clearly above the EUV of 2018. Secondly, with those new initiatives that we have with new products and also new services that we delivered to the semiconductor market, we add a few millions. It's still single digit, it's not double digit, but nevertheless, single-digit more revenue for those new technology. And last but not least what I mentioned, we definitely sell much more, we call them, software alone or stand-alone kind of products in the semiconductor area, not just to 300-millimeter, but also to second-tier and 200-millimeter semiconductor guys, where the -- the acquisition, together with our own piece of software gains traction, and that will add also mid-size single-digit revenue figures compared to last year of pure software sales to the semiconductor recovery. So as I said, it's not necessarily driven by the market itself because based on the interviews that we did -- based on the -- not interview, but based on discussions we had in semiconductor trade show 2 weeks ago with Semi West in San Francisco, nobody expects a recovery in the memory market before 2020, only in the logic market. Now to our bookings, we never really disclosed our orders. So the book-to-bill ratio was above 1, it was not hugely above 1, but it was above 1, which is a good indication from a trend point of view because in Q1, it was below 1. So you can see the -- the order trend was over proportionately going up compared to the sales trend, and that makes us feel even better about what's coming for the next few months, but we do not disclose all those directly. And therefore, I'm not going to go into too much details. Now you even asked about 2020 outlook. I don't know yet, of course, based on projects, based on forecast, based on our own ability to launch new products, I think -- we see -- we look actually forward for a good 2020. On the OLED side, I remain cautious. I don't think that it will come back to the 2018 or end of 2017 levels. But on the other hand side, it's not going to crash. There are at least 2 large OEMs who believe in OEM, and we are working on design wins, on new type of equipment that are -- only go into the OLED market, and they believe in that market, they see a big growth. I'm a little bit more skeptical, but nevertheless, 2020 should be above 2019 on the OLED side. On the semi side, it will clearly grow again. How much, I don't know yet. But I'm not concerned about 2020 yet at all.

[Jörn Iffert, Director and Analyst]

Okay. Many thanks for this. And if I may, a follow-up question for my colleague on the gross profit margin. And what you roughly expect here for the full year? And how can you reverse it? What are your actions for the second half to improve the gross profit margin again sequentially?

[Lukas Winkler, President & CEO]

We can -- let me say that way, what happened sometimes, and this is not a secret in the market, but you sometimes have to lower the price to get the first application. And once you're in, you can actually start to generate value, you can start to show what the products are capable of and then you have a much easier time to sell the second round of investments at a higher price, even for the same application, even at the same customer. And so therefore, we don't expect the same negative impact, but do we expect a full rebound? Not necessarily on that side, but we have other elements, especially new products that usually carry a little bit higher gross profit margin than older ones, and there are a couple of newer products even in the -- not only semi, but also in refrigeration and air conditioning market who actually carry above the average gross profit margin.

[Jörn Iffert, Director and Analyst]

All right. And the pricing pressure only has to do with the tariffs predominantly, it's not that the underlying market?

[Lukas Winkler, President & CEO]

No, no, no. It's not -- it's the tariff is one part, the price pressure has to do with this open public bidding process of most of the semiconductor chip manufacturers in China. Those are prestigious projects and Chinese government wants to have -- wants to basically prove that they are capable to make chips in China at a decent price and one element out of that is that they go through a public bidding process.

[Operator]

The next question is from Marta Bruska with Berenberg.

[Marta Kinga Bruska, Analyst]

I just wanted to come back to the EUV opportunity. I would like to better understand now how to think about it in terms of this year sales, perhaps an opportunity for 2020? There has been a lot of news flow regarding the larger players investing heavily into the new tools. And how -- what are your expectations already may be looking into 2020 even, if you may, please?

[Lukas Winkler, President & CEO]

Thank you, Martha. If you listen to the CEO of the only supplier of EUV tools, let me call it that way, very simple, they usually are very detailed about how many shipments they are expecting for the full year. And that's on the shipment side. So in a growing market, if you are the supplier to the OEMs, then you have even a higher number than what they ship. This is one element. So you can easily calculate how many EUV tools get shipped this year because they disclosed that figure. And since we are the only supplier for those special monitoring products. We always get our share automatically. It's a must to have product for those tools. So we get our share. Secondly, those products require a certain amount of revenue -- sorry, service and on a regular basis. So whenever they do a plant maintenance they usually have to replace that piece of instrument, which is quite large and send it back for service purposes. So even on the recurring revenue side, we get increased volume with the increased installed basis in the market. So from 2 sides for us, this is a very interesting opportunity. So we grow together with the OEM, and we also grow with the number of installed bases on the service side of the business. Now if you look at what they tell you about 2020. I believe they said they like to go from 35 systems to 50-something systems next year. So that's another 20% to 25% growth on the OEM side, plus additional revenue on the service side.

[Operator]

The next question is from Philip Saliba with HSBC.

[Philip Saliba, Analyst]

Just trying to elaborate, again, of course, on the difficult question on how 2020 will look like, specifically on the memory side. I mean, there's still different indications, Hynix today said that they would cut the DRAM production starting from Q4. Let's say, what are chances that memory could go down further? What are chances it could go up? And what's, let's say, the probability that it stays flat as it is just to have a feeling there?

[Lukas Winkler, President & CEO]

I'm not sure if I'm the right person to actually ask you -- answer that question. I can only give you my kind of own gut feeling, and what we see and what we hear. It is clearly a hard time for the existing memory guys like as SK Hynix and Samsung. Because they now have a new competitor and it's called China. And in China, they start, of course, first, with making memory chips and not with the more complicated logic chips. So there is a huge new capacity that has been installed in China and so the memory prices went down. And if you just listen to the experts around the world and then it looks like that the rebound will not come before whatever they say, Q2 2020 or something like that. So overall, most experts assume that 2020 will only see a slight rebound in the pure memory market, but everybody expects a growing market in logic and MEMS, and those, I would call it, Internet of Things Sensors, which are usually based on MEMS technology, that part of the business will grow. The memory market, we probably have to be a little bit more patient.

[Operator]

The next question is from Alexander Koller with ZKB.

[Alexander Koller, Research Analyst]

I've got a question regarding the R&D expenses. Since we saw there an increase in the first 2 quarters due to acquisition effects. What can we expect for the second half of the year there?

[Lukas Winkler, President & CEO]

Not much change. That's the short answer. Because as we explained and as you said, the main driver for the increase is really the acquisition we did last year in October. So we added some more fixed cost, and this will remain there. And this is due to the acquisition of FPS. The software -- basically software company, where most of the expenses are shown and have to be shown in the R&D section. So we don't expect to see a major change.

[Operator]

[Operator Instructions] There are no more questions registered at this time.

[Lukas Winkler, President & CEO]

In that case, I simply like to thank you all being listening during those hot days of the year. And I'm looking forward to talk to you again on, I think, it's October 17, when we are going to disclose our Q3, 2019 financials. And I wish you nice, hot and comfortable vacation or summer time over the next few weeks. Thank you very much, and have a good day. Bye-bye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing chorus call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.