Inficon Holding AG

SIX:IFCN

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the INFICON Third Quarter 2019 Results Conference Call. I'm Andre, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Lukas Winkler, Chief Executive Officer of INFICON. Please go ahead.

[Lukas Winkler, President & CEO]

Thank you, Andre. [Foreign Language], and good morning, everyone, and thanks for joining us today to review our results for the third quarter of 2019. Sales of the first 3 quarters of 2019 have all been within plus/minus USD 2 million at the stable label -- level, sorry. The expected upswing or rebound in the semiconductor market did not start yet, and the U.S.-China trade conflict as well as the general economic uncertainty had some impact on our results. You can find the PowerPoint presentation, as always, on our Investor Relations tab on our website that supports our conference call. I'd like you to turn to number -- Slide #4, please, where we start with the key figures for the reporting quarter. We closed the third quarter with decreased sales year-over-year in all our target markets and all sales regions except the Americas. Total quarterly sales reached USD 93.2 million, which is 8.1% below last year's third quarter and 3.5% below the second quarter of this year. With a gross profit margin at about the same level as a year ago and lower operating expenses, we finished the quarter with operating income of $16.3 million after exactly $20 million a year ago. Sequentially, compared to the second quarter this year, we increased our operating income margin from 16.3% to 17.5%. Matthias Tröndle will review the detailed numbers later, while I now go through all our target markets, and I'm going to start with the smallest one on the Slide #5 -- I'm sorry, we go first to the base down on Slide #5 where you see the 4 markets that we serve. The pie chart on the left side indicates only minimal changes and has been as stable as the quarterly sales level in the 3 first quarters of this year. On the other hand side, the graph on the right side shows the sales fluctuations in Asia, while the contributions from Europe and America have been relatively stable during the last 2 years. Now I will go through the 4 key markets and start with the smallest one, the Security & Energy market on Slide #6. Sales decreased more than 18% year-over-year and 6% sequentially and reached USD 6.3 million. The main contributor was still the HAPSITE, our man-portable on-site chemical warfare detection instrument. With decreased activities in Europe -- I'm sorry, with increased activity in Europe, geographical breakdown has been more balanced than in the past. Overall, the spending for security applications were lower than a year ago but has been slightly offset with increased sales to the energy and environmental markets. Looking ahead, we have become less skeptical than at the beginning of the year. And despite the ongoing geopolitical uncertainties, we experience a positive order momentum for all existing and new applications. Now moving to the Refrigeration, Air Conditioning & Automotive market on Slide #7, with sales of USD 20.1 million, which represents a sales decrease of 5.6% year-over-year and a surprisingly high decrease of 13.7% compared to the second quarter of this year. All regions were weaker than a year ago, and for the first time in 3 years, we experienced a sales slowdown in the RAC and Automotive market. The sudden weaknesses came as a surprise but indicates clearly the economic uncertainty around the world, combined with the trade conflict and the change in the automotive market towards E-mobility. RAC device and automotive manufacturers became more reluctant to invest in new capacity given the unstable outlook of the world economy. Even the e-car battery manufacturers became more cost cautious as it is expected that the price for batteries needs to go down in order to be competitive. Nevertheless, as the preferred #1 supplier in this market, we are able to keep our high market share and expand into new sophisticated leak-testing applications, such as the rechargeable battery test market for small batteries to be used in mobile devices, phones, wearables and wireless earphones and so on. For our line of hand-held, battery-powered aftersales service products, the distribution strategy, in conjunction with a multiprivate or white label brand strategy, pays off, and we are on the way to gain market share globally. We still expect to finish the year 2019 on a new [ RAC ] level. Now let's go to the Semi & Vacuum Coating market, which includes solar, display, optics and semiconductor applications on Slide #8 where sales decreased 9.5% year-over-year and 3.8% sequentially to USD 40.1 million. Investments in new capacities, mostly memory chips, in certain countries in Asia have been reduced, postponed or sometimes even canceled. On the other hand side, sales for new technologies such as the EUV lithography or new software solutions to enhance quality and efficiency to logic device manufacturers in the U.S., Europe and at least one Asian country increased. We expect that the positive market trend will continue. The expected general rebound of the semiconductor market did not happen so far, and all the indications point to 2020 as the recovery year now. Nevertheless, we remain cautiously optimistic about INFICON's sales growth opportunities earlier on. New products, software and services just started to generate first revenues, and the need for new EUV lithography tool continues to grow. Investments in new OLED capacity are discussed widely, but the business activities are still at a low level, stable at approximately 40% below last year's record investments. The China initiative for semi and OLED technologies experienced some setback due to the U.S./China trade and IP issues. Unfortunately, defending our market position and the duties we have to pay will cost us a small single-digit U.S. dollar million figure on the bottom line this year. Also 2019 will be seen as a challenging year. Looking ahead, long term, the semiconductor market will remain the most attractive growth opportunity for INFICON. Finally, we had a sequentially improved quarter in the General Vacuum market on Slide #9 with sales of USD 26.7 million, which is 5% below last year's third quarter but, as I said, 7.2% above the second quarter of this year with growth coming from all regions. As you know, we sell analysis, measurement and control products for many different industrial applications through private label partners primarily vehicle part manufacturers but also directly to industrial OEMs and distributors. We gained market share with our direct sales channel as well as with private label products and get slowly into new applications, such as stabilization, life science and analytical market. And as a positive side note, we sold the first Contura S400 Leak Detector for food packaging applications to North America. Before I turn over to Matthias, I'd like to close my part of the presentation with an outlook on Slide #10. 2019 will remain a challenging year with market and geopolitical uncertainties with a delayed semiconductor rebound and an unknown outcome of some U.S./China trade discussions. The list of the main challenges on this slide did not [ catch up ] for the first quarter. We rather face new issues, such as the cost pressure for e-car battery manufacturers. And on top of that, the exact year-end shipment timing can have a large impact on our final annual sales recognition. Special efforts will be needed, and we'll do our best and focus on reaching our ambitious unchanged guidance of sales around USD 400 million and operating income of approximately 19% of sales. With that, I'd like to turn over to Matthias, who will give you more details about our financial performance. Please?

[Matthias Tröndle, VP & CFO]

Thank you, Lukas, and good morning to everyone to our third quarter conference call. I will start my presentation with the Q3 financials and followed by the guidance for the full fiscal year. My commentary starts on Slide 10 (sic) [Slide 12] of the PowerPoint. Revenues for the third quarter of 2019 came out at $93.2 million compared with $101.4 million in the same quarter of last year. Total sales decreased by USD 8.2 million or 8.1%. 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 effect of minus 1%. Further, we had a positive impact due to acquisitions of 1.5%, which means we had an organic sales decrease of 8.6%. Looking at the end market development, all markets decreased. The Semi & Vacuum Coating market had the highest decline due to a drop in sales in Asia and decreased by approximately $4.2 million or 9.5%. On a sequential basis, sales in the third quarter did decrease by 3.5% compared to sales level in previous quarter, Q2. While the General Vacuum market did grow by 7%, the overall decrease was driven by weaker sales to the Semi & Vacuum Coating and the Refrigeration, Air Conditioning & Automotive markets, which did drop by 4%, respectively 14%. Let's take a look to the regional performance. On a geographic basis, Europe and North America reached 29%, and Asia Pacific ended with 41% of total third quarter sales. As you can see from the chart, Asia sales did fall by approximately 19% and, as just mentioned before, was mainly driven by the Semi & Vacuum Coating markets decline. Europe developed more or less stable, and North America did grow by approximately 8%, thanks to higher sales to the Semi & Vacuum Coating and the Refrigeration, Air Conditioning & Automotive market. Compared to previous quarter, Q2, sales did increase in Europe by 2% due to higher Semi & Vacuum Coating sales, while the other 2 regions did decline. Let's go to the next slide. The gross margin for the third quarter of 2019 reached 49.6% and ended nearly around the same level as last year. Compared to previous quarter, Q2, the margin increased by 120 basis points. Moving on to our operating expenses. R&D expense in the third quarter reached $8.8 million and increased by 11.4%. The number and the increase is mainly driven by the acquisition impacts as well as some favorable FX impacts. As a percent of sales, this represents 9.5% after 7.8% in the last year. SG&A, selling, general and administrative, expense in the third quarter was $21.2 million or 23.7% of sales, a decrease of $1.2 million or 6%. The 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 third quarter of 2019, we achieved income from operations of $16.3 million or 17.5% of sales. This compares to $20 million or 19.7% in last year's third quarter, which means the result did decline by roughly $3.7 million or 18.5% compared to last year. The decrease is mainly driven by the combination of lower sales volume and, therefore, lower gross margin contribution, while the cost did decrease slightly. Let's go to the next slide. For the third quarter of 2019, we recorded tax expense of $3.6 million, which represents an average tax rate of about 22.7%, slightly 1.6% higher -- points -- 1.6 percentage points higher due to our profit mix in the different countries. As a result, net income for this year's third quarter reached $12.4 million or 13.3% compared to $15.3 million or 15.1% in the same quarter of last year. The decrease for both -- the decrease of 19% for both net income and earnings per share is more or less in line with the operating income development. Now let's move to the balance sheet. Our net cash position in Q3 was $29.2 million. This compares with $62.3 million at the end of last year, which means a decrease of about $33 million. This decrease is due to the $54 million dividend payment we did do in April this year, which is partially compensated, of course, by new cash flow generation in these last months. The operating cash flow, which you can also see on that slide, did increase from previous quarter level and reached close to $50 million, a solid level. For the third quarter, our DSO days sales outstanding, was due to some higher accounts receivables levels with 52.7 days, a little bit above the level at the end of last year. Inventory turns did decrease and reached 2.9, while the working capital level increased, driven by our higher AR and inventory numbers. On a sequential basis, both inventory, AR and therefore working capital level did decrease slightly. On the balance sheet graph on the left side, you see the structure and composition of our assets and liabilities. The equity ratio reached close to 66% in Q3 after 57 -- after 75.9% in Q4 and 71% 1 year ago. No material long-term liabilities and the net cash position of $29 million confirm a solid balance sheet structure. With that, I covered our current quarter result. I conclude my portion of today's call with our guidance. Mr. Winkler did already give some comments and insights to our view of the various end markets and the various internal and external challenges we see. Based on our assessment and, of course, with strong effort and focus on achieving our outlook, 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. This concludes now the formal part of the presentation, and we are ready to take, as usual, your questions.

[Operator]

[Operator Instructions] The first question comes from the line of Jörn Iffert with UBS.

[Jörn Iffert, Director and Analyst]

The first one would be, please, on the guidance. It would imply that you have the strongest quarter ever in the history of the company in Q4, if you come close to it. And can you give us some more clarity? I mean book-to-bill, you said, it is above 1, but where is it? It's 1.2, 1.3? Also if you can comment on the order backlog and the sales recognition. You stated what is behind it, what is the effect for Q4? Second question would be, please, you also mentioned some delivery delays. Or there were some delivery delays happening in Q3. What is the magnitude here? How much of this do you expect to materialize in Q4? And then the last question is on Europe. General Vacuum is improving. Where exactly is this coming from? How sustainable do you think it is? And what is this reflecting? Is it macro stabilizing or any specific things?

[Lukas Winkler, President & CEO]

Thank you, Jörn. Let me summarize the question 1 and 2 together because they belong kind of together. Everything that we had not shipped in Q3, we'll, of course, ship in Q4. So that helps achieving the strongest quarter, as you mentioned. And we will have to do whatever it takes to ship what we have in our backlog. We have a pretty high backlog, unusual high backlog. The trend on the order side looks positive as well. So with some help of, let's say, last-minute sales recognitions, and that usually includes installation and includes also a sign-off from the customer side, and that can easily make a swing of $3 million, plus/minus, but assuming that we will be able. And if we attack it early on, that's what we do right now so that we don't have to fear the last-minute changes. So we're approaching it already in the next few weeks so in order to be prepared to have this last-minute sales recognition not necessarily as we usually have, that we early enough would know if we can make it or not. And as you said, it will require a lot of effort, but we'll do our utmost best to get there. And the trend looks positive, our backlog is quite high, and we have some leftovers to be shipped from Q3. So that all helps to get to a very strong last quarter. On the Europe side, I think it's a combination of several levels. We have been able to gain back some products that we lost a few years ago. We see some catch-up effect from early in the year. We see some fulfillment of larger projects that we did in Q3 with some bulk shipments in the General Vacuum market only. So a combination of all led to this increase in Europe in the General Vacuum market. Can that be seen as a trend already? I have my doubts. I would hope so but I see it more or less as a stabilizing element, not necessarily as a change in trend.

[Jörn Iffert, Director and Analyst]

Okay. And may I come back to the guidance for Q4? I mean where do you expect the stronger sequential improvements, in which one or 2 divisions? Is it in Semi? Or is it also emergency?

[Lukas Winkler, President & CEO]

No. These both -- clearly, Semi will have the single biggest impact and probably in absolute terms anyway. In relative terms, it might also come heavily from Security & Energy.

[Operator]

The next question comes from the line of Marta Bruska from Berenberg.

[Marta Kinga Bruska, Analyst]

Thank you for taking my questions, I have 3 of them. So firstly, I would like to ask, with the 120 basis point improvement in your gross margin, where does it come from? Is it mainly from the improvement in the situation with the Chinese tenders? Or is that the product mix? Secondly, if you could please give us some more insight on the EUV situation. How does it currently develop? We had some positive comments yesterday from ASML. Can you maybe disclose how your content per machine is developing? And thirdly, on the OLED applications, how big of the share, if you could remind, of the Semi & Vacuum Coating end markets is OLED at the moment?

[Lukas Winkler, President & CEO]

I think I hand over the first question to Matthias regarding the gross profit improvement.

[Matthias Tröndle, VP & CFO]

Yes. Let me try to answer your question. The majority of the increase in the gross margin is driven by the product mix. So there have been some higher -- more shipments in some areas which have a more favorable contribution. Nevertheless, there was also some smaller impact on the, yes, headline pricing and pricing pressure. So it's a combination, but more focused on product mix.

[Lukas Winkler, President & CEO]

Okay. Then the EUV part of the question, let me answer that. As you know, we are the sole supplier for that piece of instruments that we ship to the main customer in this market. And we are glad that the customer actually is looking forward for the last quarter as well and increased the guidance because we simply follow their trend. The content per tool did not increase because we still keep the same amount of content that's for the current product generation, I have to say. For the next product generation that we work on, it might change. But for the current product generation, the content per tool did not change. But the trend is clearly looking in the right direction, and we are glad that our customer confirmed the positive trend. And on the OLED side, unfortunately, I -- there are -- the news are still very mixed. There's a lot of capacity in the market for normal OLED display. And it has not -- the flexible applications or the application that would require flexible displays did not start yet. And therefore, I do not expect huge rebound in the market in 2019. So it will be depressed throughout the whole year. And our experience is it is probably down approximately close to 40% from the record year last year. Now having said that, it doesn't mean that we are not working on some new applications because, as I mentioned before, eventually, the flexible displays might work. And once they work, new investments will be needed, but it's unclear as of today how those new investments will start to materialize.

[Marta Kinga Bruska, Analyst]

Okay. And could you give us a bit of an indication how big OLED is in terms of the sales at the moment for you?

[Lukas Winkler, President & CEO]

Relatively lower. The link is -- we're down to -- I would have to figure out the number, but it's -- as I said, it's about 40% below last year's. So it's probably below -- around the single -- middle single-digit figure overall. Yes, that could be -- it was close to 10% last year, and now it's probably somewhere close to half of it.

[Operator]

[Operator Instructions] The next question comes from the line of [ Bjork Grüne ] from [ AWP ].

[Unknown Analyst]

This is [ Bjork Grüne ]. Could you give us a little bit more information on new products, especially in General Vacuum and -- the industry?

[Lukas Winkler, President & CEO]

Okay. I'll try to do it. Interestingly, you asked about new products in the General Vacuum market. So most of our new product is actually going to semiconductor market. But nevertheless, we have at least 2 products out there in the General Vacuum market that we now generate to make more revenue than we used to do. It's -- one is the -- I mentioned it in the call, the leak detector for food packaging, where we expanded now our distribution network into the U.S. and now we got the first orders, which I'm very happy about that. And the second product that we finally got some breakthrough is a leak detector for gas pipelines where we have signed up a nice contract with the #2 service provider in the U.S. and -- who does provide those type of services for the gas distribution providers. And we are lucky that they now picked INFICON as their instrument provider. And they slowly are going to replace all their instruments with one of INFICON. It's called the IRwin, the yellow box. And then finally, we have been able to get into the U.S. market with that product as well. Other products that might be of interest that's sold more in the [ other ] parts are the leak checking applications for the small rechargeable batteries. If we talk about batteries that go into earplugs and small wearable devices but also into mobile phones, they are all lithium-ion based or kind of -- and therefore relatively dangerous if they get exposed to air. And we work very closely with one of the largest battery manufacturer -- rechargeable battery manufacturer, I have to say, to work on new solutions, and we got now our solutions patented. So we got some first successes, and we expect that this business will grow in the next 2, 3 years as well. But those are the main new products for the more industrial market, most other new products go into the semiconductor applications.

[Operator]

The next question comes from the line of [indiscernible] from [indiscernible] Bank.

[Unknown Analyst]

For this very strong fourth quarter, you expect the order -- to execute on the order backlog is good, right? However, you also said that the trend on the order side looks good, promising. That, however, is more relevant for 2020, right? So could you elaborate a bit more on this trend -- on the positive trends on the order side and if that is also mainly happening on the semiconductor side? And within that, where exactly? And hence, is the conclusion fair that you should see a good start into 2020 stemming from that order trend?

[Lukas Winkler, President & CEO]

I'm not looking that far yet. We focus on achieving the guidance in the fourth quarter first. But let me give you at least 2 information regarding what you've asked for. Yes, we have relatively high backlog for those products where we have very long lead time. And there, it's all about fulfillment, shipment and getting the sales recognized and getting the sign-off from our customers. It's at least as important. And that's especially for those products that have a very long lead time. Some of them, let's say, they go in 2 main markets. One is the semiconductor market, mostly to end users, not to the OEMs; and secondly, they go to the emergency and response market, again, end user related, so we have to wait sometimes for the sign-off. On the other hand side, we see the order trend, especially for those products looking to the right direction where we have a relatively short lead time, talking about 2 to 3 weeks. So everything that we book now as order will get shipped this year. And that trend, we clearly see from the OEM market, coming from the semiconductor OEM side, not the end user side, meaning that the guys who make the equipment. And those products have a relatively low lead time, which is good because that means we can already turn them into revenue if the trend goes on as we see it right now. So those 2 groups of products have different characteristics. And luckily, the positive order trend is more on those products with short lead times. And we have a huge backlog that needs to be shipped for those products which have a long lead time. Now if we ship everything, and you ask now about the Q1 next year, if the backlog will be gone, then we have to build up backlog first, of course. But that is too far out to give you some indication how Q1 is going to look like next year.

[Unknown Analyst]

Okay. So as the orders are strong on the short lead time projects, we should not get overexcited on the start of 2020 yet.

[Lukas Winkler, President & CEO]

No. Not yet. That's too early.

[Unknown Analyst]

Okay. And to be very clear on the fourth quarter, I mean to make it quantitative here, I mean in order to reach your guidance, you must have sales above $110 million, which is almost 20% above the previous quarter, Q3, and above the previous year and a margin of around 23% operating margin plus. That is right, correct?

[Lukas Winkler, President & CEO]

Yes.

[Operator]

The next question comes from the line of Rolf Renders from Helvea.

[Rolf Renders, Research Analyst]

You mentioned in the opening remarks that you expect now 2020 to be the Semi recovery year, and I always wonder, can this be predicted? And if so what are your indications for this confidence?

[Lukas Winkler, President & CEO]

Okay. Let me quickly answer that. As you know, the logic part of the semiconductor market is in good shape. I have just been in Taiwan yesterday, and TSMC is booming. And they primarily provide or make chip for the logic market, and they are actually the single biggest user of these new EUV tools. So this part of the market has already started to show very nice positive tendencies. The recovery needs to come from the memory market. And the memory market, at least that's what we -- indications from the memory market itself is that they -- the projects primarily from the 2 large memory makers, that they postponed from this year into next year. They did not cancel those product -- projects, they only postponed them. And we have now first technical discussions about where they might need some help once the tools are installed. So those indications for me are the ones that let me assume that the rebound in the memory market will start next year.

[Rolf Renders, Research Analyst]

Okay. Great. So you think it can be done. And...

[Lukas Winkler, President & CEO]

Yes.

[Rolf Renders, Research Analyst]

Good. And the other thing is are there any extraordinary cost elements to be expected in Q4?

[Lukas Winkler, President & CEO]

I would have to ask my CFO. I don't hope so but he might know more than I know what here to expect.

[Matthias Tröndle, VP & CFO]

No extraordinary, no. We will recheck all costs. No, no, just kidding. No, we don't expect any major upticks. So as you maybe have seen over the last quarters, the cost basically did decline from Q1 to Q3 the operating expense. And I would expect for Q4 a similar level, and I also would not expect any major surprise on that.

[Operator]

[Operator Instructions] We have a follow-up question from Jörn Iffert from UBS.

[Jörn Iffert, Director and Analyst]

And just quickly coming back to the food and gas leak detector products. You are now also distributing in the U.S. Can you roughly tell us what is the revenue recognition you're expecting here for both in 2020 comparing versus 2019? And the second question, sorry to come back on this, on the guidance. I mean you said even for the products that you have short lead times, order intake is now improving. But what is giving you confidence that this is sustainable also into November, December? Is there any larger project on the customer side [ where they ] say yes, given our experience, there should be orders for 3, 4 quarters now for these product lines or for 3, 4 months? So some more clarity here would be appreciated. And then again, on the Q4 guidance, will it be relatively equally split the revenues between October, November, December? Or do you really need a very strong December, so it will be quite a bit skewed to December to make the guidance?

[Lukas Winkler, President & CEO]

Let me start with the first question. The revenue expectation for next year, we can simply give you a rough figure. We believe we can double revenue. Now the revenue is still a single-digit million figure, as you know, but we expect to double revenue with those new contracts in the -- especially in the U.S. So we expect 200% of revenue compared to this year, but it will still be relatively small. Now coming back to the Semi guidance. There is never a perfect confidence level that we have. But we get -- as you know, we are hooked up to the online system of the larger OEMs, the equipment manufacturer, and we get a weekly forecast about their needs for the next 2, 3 months. And based on that, the order trend, if they stick to their forecast, needs to go up. Now it's not guaranteed yet because we ship, as I mentioned, very fast within 2 to 3 weeks, and the backlog is relatively low for those products. But the forecast that we get from the equipment manufacturer, they are pointing towards the right direction. Now last thing is how equally will it be distributed? I don't know yet. I have not looked into the detailed shipment plans. The only thing that I know is that we start early enough to make sure that we can recognize everything that can be recognized as revenue early enough and don't have to wait for the last minute.

[Jörn Iffert, Director and Analyst]

All right. And from the OEMs, the order books, the order indication they are sharing with you. Is this linked both to memory and foundry and logic? Or is it more skewed to logic and foundry?

[Lukas Winkler, President & CEO]

We do not know that part because they use the same equipment. We only know that once they have shipped the tools when our engineers see them showing up in the field. But while they just give us the forecast during that period, we don't know for what end product it will be used because it's the same piece of equipment.

[Operator]

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

[Lukas Winkler, President & CEO]

If there are no more questions, then I'd simply like to thank you all for your patience and for the interesting questions. And we'll hear about the financial results at the beginning of next year. And then -- until then, I wish you a good time and a nice day. Thank you very much.

[Matthias Tröndle, VP & CFO]

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.