VAT Group AG

SIX:VACN

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good morning. Welcome to the Q1 Trading Update Media and Analyst Conference Call. I am [indiscernible], the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mike Allison, CEO of VAT Group; and Mr. Andreas Leutenegger, CFO.

[Michael Allison]

So good morning, ladies and gentlemen. This is Mike Allison speaking. Welcome to our trading update for Q1 '18. As you heard Andreas Leutenegger, our CFO, is with me as is Michel Gerber, from Investor Relations. So this is my first earnings release as new CEO or trading update. It's always good to start with good news. Things continue to look positive in all our market segments. And that really hasn't changed since the 2017 update we gave a few weeks ago. So let me start with some of the headline numbers and then I'll say a little bit about each segment. Q1 order intake was CHF 215 million, up 18% year-on-year, and net sales were just shy of CHF 198 million, which was an increase of 20%. Now this 20% includes a negative 3% for FX impact. So overall it's a pretty positive start and in line with the guidance we provided a few weeks ago. We also continue to have strong order backlog and this grew 10.8% to CHF 183 million. Looking at the individual segments, the Valves segment reported net sales growth in first quarter of 20% to CHF 159 million, net sales grew 22% in Global Service to CHF 27 million, while the Industry segment net sales were up 18% to CHF 12 million. Valves accounted for 81% of our net sales in the first quarter, Global Service is 13% and the industry is 6%. Looking a little bit deeper into our Valves business. Some key spec wins allowed us to report higher sales in each segment. Semi reached record levels, Display & Solar also had substantial growth, especially as we recorded a very key win in a major Chinese Solar project. As you can see in the press release, General Vacuum also had a strong quarter as we address some of the capacity issues that had hindered us in previous quarters. And this now gives us a better platform for future growth in 2018. Global Service grew net sales in all units compared to the first quarter a year earlier. The retrofit business, which now represents about 1/3 of our Global Service sales, and grew fastest as customers continue to upgrade the large-install base of our valves, and that really reflects the ongoing technology improvements we're making in our valves, especially around contamination management with the latest products, because that gives our customers a significant yield impact by upgrading to the latest generation. The Spare Parts business, at approximately 50% of segment sales, continued to benefit from the growth in semiconductor and display manufacturing and the maintenance business remained about the same level as Q1 2017. So let me now comment a little bit on some of the market segments. The Semiconductor market continues to look strong with the supply/demand drivers pretty much in balance. Chip pricing is still above historical levels and most of our customers and their customers are reporting a very strong financial performance. Just last week, I visited a large Japanese OEM during a trip to Asia and they were seeing pretty robust demand from all the key device segments. I try to get around to our top 3 customers very frequently, not just from a relationship standpoint, but also to stay on top of the key technology challenges and to help the teams with our key partnerships. This is really key to keep our focus on the new technology design wins. Also the week before I had a visit here in Haag from one of the top U.S. OEMs and really got the same outlook for '18. I think the first half driven by DRAM and Logic and then flash improving again in the second half of the year. Of course, there's a lot of critical projects sitting on the Q4, Q1 boundary that could fall out either side of this fiscal year. So it's difficult to forecast exactly the total outlook. But overall, very positive and we retain our previous guidance of 15% to 20% growth. The Display market also looks to be doing well. There's a record number of Gen 10.5 projects on the horizon. In the AMOLED sector, not so positive. The investment delays that are reported last month have really not work through the system yet and mainly driven by the disappointing sales of the iPhone X. So I think it's going to take some time before we get more clarity on the AMOLED future. In the General Vacuum space, continues on a positive trend as I said earlier. And we have some key new orders in the aerospace sector as well as winning some key tenders in R&D fields. The Industry segment also had growth in orders and sales, driven mostly by our bellows business in the automotive sector. That's really coming around with stronger petrol sales versus diesel as our components used in petrol engines and -- as well as positive developments in other sectors. So moving on to capacity. We've had a lot of focus on that in the last year as you know. At the end of March, production capacity grew to -- grew roughly CHF 50 million to around CHF 900 million, putting us in a much better position to deal with the growth and also any quarter-to-quarter spikes, which can happen if you get overlapping major fab projects. We still have a few bottlenecks in certain products, but we do expect that these will be fully resolved by the end of Q2 as we bring on new machining, and also resolve some of the remaining supplier issues. We're also using the move to the new Malaysia facility to broaden the supply base. During my Asia trip last week, I also visited our new Malaysia factory. That was really amazing. I was really blown away with the scale of our new facility there. It's a full state-of-the-art factory with around 24,000 square meters and it's equipped with real state-of-the-art clean rooms, roughly 4,600 square meters of isolate and 1,400 square feet of ultra-high performance clean room. So that is really a fantastic platform for us to continue building our business and also to become the supplier of choice within Asia. We've committed capital and expense to take the factory to more than CHF 400 million in revenue by 2020. But looking at the magnitude of the facility, I think we can ramp beyond that. We'll also have in a region of 500 people by the end of the year, and what I saw from the teams there, really first class. That base in Penang is a big center for assembling test, although not directly front-end semiconductor, but these guys have a lot of experience in engineering for semiconductor and that's allowing us to tap into a pretty strong talent base. So we've made some good hires and we're growing our engineering and supply team there as well as our manufacturing base and that helps a lot with the product transfers. And this will really be a key focus area for me in 2018 to ensure that we ramp this facility and make it a very strong competitive advantage for VAT. Okay. So final segment here is the outlook for 2018. I think that you see in the release, as the world market leader for high-vacuum valves, modules and components, we continue to benefit from the strong favorable market trends. As we announced previously and we don't change our guidance, we expect to grow around 15% to 20% at constant foreign exchange rates. The midterm EBITDA margin target of 33% by 2020 remains in place, and we will show progress towards our goal this year. As a consequence of the expected sales growth in '18, also higher EBITDA margin, lower finance costs and a slightly higher effective tax rate, net income and earnings per share are expected to grow substantially. Accelerated capacity expansions mainly in Malaysia and Romania mean our capital expense will be around 7% of net sales before coming down to around 4% in following years. So that concludes my update for the quarter. And I'll now invite any questions from the audience. Thank you.

[Operator]

[Operator Instructions] The first question comes from Sandeep Deshpande from JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

I have couple of questions, I mean, firstly regarding you mentioned in your prepared remarks that you have some wins in China in Solar. Can you describe, is this interim Solar starting up again as a technology? Or is this standard Solar that you are winning business? Secondly, can you possibly -- I mean, what is your view at this point based on your conversations with these display companies on what is happening in the AMOLED display market, and how that will play out through the rest of this year? And finally, was there any change in the mix, overall, within the Valve business and that could have any margin impacts for the first half?

[Michael Allison]

Okay, starting with the first question. Yes, we're certainly seeing some revival in Solar, mostly in China. This is one -- this order is specifically one large major Chinese player and their technology is mostly based on the CIGS technology. They're ramping a whole series of programs there. And they've set some very ambitious goals to generate, I think, upwards of 50 gigabytes over the next 5 to 7 years. So that is the majority we're seeing right now. There's a few projects associated with that. Some of the other OEMs are supplying equipment into it. So I wouldn't say it's a full market recovery at this point, but I'm certainly seeing a robust Q1 and Q2 as a result of that. In AMOLED, it's very difficult to say more than I commented. It's pretty well known, I think, that Samsung have pushed out their next AMOLED factory, which is a big chunk of business. And until we get more visibility on that, I just really don't know what this year brings. At the moment, we're focused mostly on LCD area, the Gen 10.5 projects. And all I would say is our relationship with both the customer and the OEMs in AMOLED is very good. And when it comes back, we should be able to take advantage of it. In terms of the mix, Andreas, would you say there's much change in...

[Andreas Leutenegger, Chief Financial Officer]

Yes. We don't expect any significant changes. You have seen we have a bit more sales in Solar, which has, of course, a bit slightly lower margin, but it should not impact overall margins materially.

[Operator]

Our next question comes from Reto Amstalden from a Baader-Helvea.

[Reto Amstalden, Analyst]

A question regarding your supply constraints you had at the beginning of this year. Can you quantify this adverse effect on the sales level? And do we have to expect an impact also then on the margin trend and progression in the first half against the second half '18?

[Andreas Leutenegger, Chief Financial Officer]

Yes, certainly. No, we don't expect any. We had some bottlenecks, but all the books are full, auto intake is strong. So this bottlenecks didn't had -- thus did not had any visible impact in the past and will not have a visible impact going forward. So there will no significant impact at all.

[Operator]

And our next question comes from Paul Moran from Northern trust.

[Paul Moran, Partner and Head of Research]

Just a follow-up in terms of the impact of index on sales. Would you be prepared to split what the looking at the sub-reported sales -- what was the volume versus price mix? I'm assuming that given your previous comment it's going to be mostly volume. If you could confirm that, please?

[Andreas Leutenegger, Chief Financial Officer]

Yes. We will not disclose that in Q1. But nevertheless, you cannot expect a significant change. In other words -- sorry, significant change from what we reported earlier. You know the FX effect and as yet, the product mix, which means new products, for example, what we disclose at the year-end is usually one thought, and the price effect is almost 0. So that's why I said no significant change for the year-end 2017 reporting. Except what has changed is the FX effect, which is a bit larger. It was almost 0 in '17, now it's almost 3% negative. But the rest has not changed. I would say, insignificant price effect in terms of volume, 2/3 and 1/3 for mix.

[Paul Moran, Partner and Head of Research]

Understood. And just to follow-up on the FX comment, has there been much change in Q1, you mentioned that it was 300 basis points of a headwind, looking at the -- over the quarter, the Suisse dollar was about 5.5, so is there any -- and renminbi is obviously a tailwind at the moment. Is there much change in the FX mix in Q1 versus...

[Andreas Leutenegger, Chief Financial Officer]

Yes. No, I would say as long we stay at the current level there will be no further significant impact on the top line.

[Operator]

The next question comes from Michael Foeth from Vontobel.

[Michael Foeth, Head of Industrials Team]

I have a question regarding your retrofit business. The -- you report strong growth in retrofit, has that actually accelerated over the quarter compared to last year? That would be the first question. And the second one, is it -- are you retrofitting mainly older VAT valves or also valves from competitors, i.e., gaining sort of market share there?

[Michael Allison]

The first part, retrofit versus last year.

[Andreas Leutenegger, Chief Financial Officer]

There's a thing. The retrofit part, remember we always said about half of the Global Service segment is spare part, 1/3 is retrofit and the remaining 1/6 then remains -- is the service itself. No, the proportions have not changed.

[Michael Allison]

And then I think on where retrofits are happening, certainly, the leading-edge fabs, maybe within the last 5 years, this year will benefit from the particle improvements to upgrade to latest generation. That has a significant impact on yield. But then there's still a pretty good productivity improvement for the 8-inch fabs, the older fabs, and there's quite a lot of investment going into that sector with the IoT and automotive being strong. So really, pretty much across the board. And I'd say, it's also a combination of replacing our old technology and some competitors' fabs as well. So bit of a mix there.

[Operator]

The next question from the phone comes from Sebastian Kuenne from Berenberg.

[Sebastian Kuenne, Analyst]

So the ramp up in Malaysia, it seems that goes a bit faster than you had expected. What additional costs do you have in your numbers that just relate to the ramp up? I just want to try to isolate those costs from the ordinary business. Secondly, staff levels, you mentioned 500 staff by year-end in Malaysia. What level do you then have outside of Switzerland if you combine Romania and Malaysia? So just for us to get an idea of the staff mix. And then finally, on your end markets, what projects do you see in the Logic and foundry sides in terms of the timeline? So do you expect a bigger order intake than for Q2, Q3 from the Logic side? Because at the moment, I think, it's mainly driven by memory, right?

[Andreas Leutenegger, Chief Financial Officer]

I will do the first couple questions, maybe the first 3. So Malaysia is not going faster than expected, it's going according to our timeline, which is actually good. If you remember, we said, we want to start up the extension in Q3, that we confirm, we are optimistic that we will materialize, but we are not well ahead of that curve here. Second question, the additional related costs. We do not split that up, but you can imagine a similar number than what we had initial cost last year in Switzerland. Of course, related to Malaysia, not Swiss. Swiss is -- cost certain margin point are in, but we will not split that up, I will not disclose it. Certainly, if the capacity by the end of '17 remains -- the employees 1,200 in Switzerland, 300 in Romania and about 280, Malaysia.

[Sebastian Kuenne, Analyst]

But by year-end in Malaysia you go to 500, right?

[Andreas Leutenegger, Chief Financial Officer]

In terms of people, yes.

[Sebastian Kuenne, Analyst]

Okay. But in Romania, no change in Romania?

[Andreas Leutenegger, Chief Financial Officer]

But Malaysia, not by -- not fully committed by the end of this year. We ramp -- one has to understand, we ramp Malaysia as we grow the volume. So that's why it's not kind of a fixed cost or fixed FT. I mean it can also be 600 if the volume growth is much higher and we -- as you said, if you do well in terms of ramp up then we add. If we don't need the capacity, we'll be lower than maybe 400. So take the 5 -- don't take the 500 granted because this is a variable cost and not a fixed cost for us.

[Michael Allison]

And then the final part of your question was around projects. I mean we don't get 100% clarity in terms of where our valves are going. Obviously, we're shipping to the OEMs. But what I would say is, first half of the year there's been quite a lot of volatility in the projects. Some are pushed out, some have been brought in depending on market situations for that particular customer or yield performance. What I've been hearing, and again, I can't substantiate this 100%, but the first half seems to be a little bit more Logic and foundry driven. There's a little bit of a positive seems to be in NAND with the bill of, especially from Samsung that we saw towards the end of last year. And then there's quite a few projects sitting on the horizon in Q4, Q1 next year around the next major NAND projects, especially in Korea. So I expect the second half of the year to be more memory driven than the first half.

[Operator]

The next question from the phone comes from Jörn Iffert from UBS.

[Jörn Iffert, Director and Analyst]

The first, I would be pleased on operational momentum, given the strong order growth, given the higher order backlog, is it fair to assume that in terms of year-over-year growth, Q2 will be the strongest for 2018? Second question please on competition, I mean you are seeing results for high-end valves now since a couple of years. Do you observe any exercises on your clients that they are trying to diversify the dependency on VAT? And the last question, coming back on the semi cycle, just what is your personal opinion, memory price seems to come down significantly potentially in the next 6 to 9 months. What is your best guess in the view for the 2019 first half and CapEx development in the industry?

[Michael Allison]

You take the first question and the second competition and memory pricing.

[Andreas Leutenegger, Chief Financial Officer]

Sorry, the first part of the question was, again?

[Jörn Iffert, Director and Analyst]

Looking on Q2 2018, the operation momentum, is it fair to assume given the stronger order intake and the higher order backlogs that Q2 2018 will be the strongest quarter in terms of year-over-year sales growth?

[Michael Allison]

So yes, sorry, I think Q2 -- I think, Q4 last year, beginning in Q1, we thought Q2 might be the peak quarter. But I think there's still quite a lot of volatility around projects at the end of Q2 and into Q3. So I expect to see a bit more flattening of the quarterly profile compared to what we originally had forecast. Doesn't really change the outlook for the year, but just a little bit of flattening and probably pushing a bit more to the second half. In terms of competition, we make it very difficult for our competitors with the investments we're making and the new technology we're bringing out. Obviously, as a market leader, you're constantly faced with challenges around pricing and so on. But we've got such an advantage in terms of our performance, reliability, our particle performance as well as other key attributes that -- and also the volume that we can supply to the key OEMs, these accounts are pretty big with almost half the company's revenue going to the top 3 OEMs. So they need a reliable partner that can deliver extreme high volumes. So I would say there's always competition, but we're doing all the right things to repel that as much as possible. Also, the resources we have, the applications, people close to the customer, the quality people, you have to be able to respond with a lot of resources quickly when there are issues and with the extreme technology environment that we're operating under going from 10 nanometers, 7 nanometers, 5 nanometers, things happen every day. And it's that global company response that keeps us ahead of the competition. So as long as we continue to do that and keep our technology investments in place, I don't see a big risk there. Memory pricing. I think, at the start of the year, people thought '19 was going to be a down year. I think it's probably a moderation happening here with maybe a little bit less in '18 and more and in '19. Again, doesn't change our guidance, but I would say from what I'm seeing and hearing a little bit of a flattening across the 2 years. And memory, we invent stuff every few months. So you've got the latest technology coming the next generation pretty soon. So that's going to see another series of technology investments and capacity investment. So still looks pretty robust from what I can see.

[Operator]

The next question comes from Michael Studer from Julius Baer.

[Michael Studer]

I've got 2. The first one, can you remind us what is the peak capacity plan by the end of 2018? And the second question is, what do you hear from your customers regarding Chinese OEM making orders now already in the second half '18? Is that something you can verify? Or is it still kind of un-visible future at the Chinese?

[Andreas Leutenegger, Chief Financial Officer]

Yes, I'll start with the first one. So we have not communicated the capacity targets build up for 2018. We communicated by 2020 having a capacity of 800 in Switzerland, 400 in Malaysia and 100 in Romania. You have seen the numbers -- the figures in the trading update of Q1 with 850 in Switzerland and the 900 we guide in capacity going forward. We also said that Malaysia will double this year, so around 7 -- 10% last year, which is around CHF 70 million double this year to CHF 140 million, CHF 150 million. And I think that should provide you sufficient guidance what we expect for 2018.

[Michael Allison]

And second part around Chinese OEMs. As you see our trading in China has been strong. So we're definitely seeing increase in business there from the OEMs. Also so I mentioned earlier, Solar business and our Display business. I wouldn't say I've noticed a dramatic trend in the Chinese OEMs in the semi area. I probably see as much of a trend in Korea as I do in China, especially towards the end of last year with Samsung and Himax ramping so high. The OEMs in Korean were relatively strong. So I don't see a dramatic impact in China. We've pretty strong market share there. So I'm sure we would see it if it was happening.

[Operator]

The next question from the phone comes from Daniel Strickler from Kepler Cheuvreux.

[Daniel Strickler, Equity Research Analyst]

Firstly, regarding on the aerospace project you mentioned in the press release. You said that you consider this to be a large project. So can you give us some kind of indication on this size of this in terms of revenues? And then the second question, maybe related a bit to question of earlier. It's relating to a statement you made on semiconductor CapEx at the full year results presentation. There you mentioned that you expect to see more coming through in the second quarter. So is that something you would reiterate or rather not at this point? And can you give us some indication on the incremental capacity addition in 2019?

[Michael Allison]

So incremental capacity from '18 to '19, okay. The aerospace contract, I'd say, first of all, it's a multi-year contract, so but it's nothing like a major semiconductor order, but it's pretty sizable for the industrial sector. That's all we can say about that one. The Semiconductor CapEx, as I mentioned earlier, I think there's been a little bit of moderation between Q2 being what we forecasted as a peak quarter into maybe a bit more business in the second half of the year. Again, there's quite a bit of volatility with these major fab projects that can move in and out quite a bit during the year. And it does change quite a bit. So at the moment I would say slight moderation of Q2 and a stronger second half. And then on the capacity, Andreas, for 2019?

[Andreas Leutenegger, Chief Financial Officer]

I think there was a similar questioned before, we do not disclose yearly capacity ramp up. Please be reminded of the 2020 targets. Again, 700 Switzerland, 100 Romania, 400 Malaysia. That gives it a CHF 1.2 million -- CHF 1.2 billion, which will be flexible ramp up by 2020, fully in line with the market growth. Mike has given the indication that the 400, we call it at least, so there is upside potential. But how much we add in '19, again this is flexible depending on the market opportunity.

[Michael Allison]

Okay, I think that was the last question we had. So if there's no other question, I'd like to, first of all, thank you all for attending. And I'm going to close the call at this point. Thank you very much.

[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.