Mycronic AB (publ)

STO:MYCR

Earnings Call Transcript 2023-Q2

[Sven Chetkovich, executive]

Hello, and welcome to the presentation of Mycronic's Q2 report. My name is Sven Chetkovich. I'm the Director of Investor Relations, Mycronic. And with me, I have Mycronic's CEO, Anders Lindqvist; and CFO, Pierre Brorsson, who will be presenting today. As you can see, we have moved to a live video format, which we hope you will enjoy. And with that, I hand over to Anders. Please go ahead and present Mycronic's Q2 report.

[Anders Lindqvist, executive]

Thank you very much, Sven, and welcome to everyone to this new format and our Q2 report. So what we will talk about today, the agenda is similar or the same as it has been before. So I will give a brief introduction of the second quarter of this year. We will go a little bit deeper per division and see the divisional development. Pierre Brorsson, our CFO, will go deeper into the financials. We will talk a little bit about sustainability. And then at the end of the session, we will have a Q&A session as well.

So with that, I would like to start with the highlight of the quarter 2, and that was really the strong order intake. We had an increase of order intake of 45%, up to a little bit more than SEK 1.7 billion, which is extremely strong for us, and it's very much driven by really good performance in the Pattern Generators division. The sales development compared to same quarter last year was almost flat. It was a decrease of 2%. And the EBIT ended at SEK 170 million, but it has to be noted here also that including in that, we had a onetime cost, a nonrecurring cost of SEK 60 million related to business development. So taking that into consideration, we were more or less equal to the same quarter last year with the EBIT.

Margin, with that development cost included, ended at 14%. And with the strong order intake, you could see that the backlog increased up to almost SEK 4.5 billion, which is the highest we have ever had. And that backlog contains 31 mask writers. In addition to that -- and that was per end of the quarter. And then in addition to that, we also had 2 more orders for 1 SLX each after the end of the quarter 2.

So starting with Pattern Generators. As I said, we had a record order intake and it was very much related to the Pattern Generators. We increased the order intake up to SEK 804 million. And in that order intake, we had 6 systems, 2 different variants of precision mask writers, which are writing photomask for the display industry. And then we also had 4 SLX mask writers, which are writing photomasks for the semiconductor industry.

We had a really good development of gross margin. It increased up to 64%. And the reason for that increase is that we have increased the value of the delivery system. Also, we have a little bit of positive currency effect, and also we are continuous working on operational improvement. So all that together resulted in a very nice increase of gross margin. And EBIT ended at SEK 191 million.

So the backlog -- majority of backlog of SEK 4.5 billion is in Pattern Generators with SEK 3.3 billion, and as I said before, that consists of 31 systems at the end of the quarter.

So moving on to High Flex division. What we see here is that we have seen a very strong demand from our customers' customers, like the end customer in the focus segments where we operate, which are aerospace, defense, medical and industrial applications. That demand has not really yet translated into a bigger demand from our direct customers. But of course, it's very good when the end customer market is strong.

If you look on the different regions that we have, we could see that Europe and North America performed well, and this is similar to the previous quarterly presentation we had, and China continue to be weak. We have not yet seen the upswing in China that everyone is waiting for.

We had an increase of sales with 13%, up to SEK 350 million. And we also initiated a project to close down production of storage towers and storage towers also what you see on the presentation picture here, which we, today, manufacture in Germany, and that manufacturing will be transferred and consolidated in Sweden with other production.

Gross margin at 39%, which is reasonably okay. And the EBIT declined to SEK 14 million and a bit of that decline, SEK 10 million, relates to cost of transfer of the production I just mentioned, backlog at SEK 175 million, which is kind of normal for us.

If we move into High Volume division, focusing on delivering dispensing equipment for the electronics industry, also here, we see the weak demand in China impacting this. We see that the investments in consumer electronics manufacturers in China is still weak, similar to the previous quarter that we had. We can also see that our customers are actually replacing manual task by increasing efficiency by automation rather than invest in new production lines.

On the other hand, we have been very successful in changing focus from consumer electronics into the electronic -- electric vehicle industry, where we have been very successful and see a very strong increase. The size of that segment is smaller, so it doesn't make up for the weak demand in consumer electronics. But it's very nice, of course, to see that we can refocus into other healthy segments.

Order intake decreased 24%, sales down 32%, and this is all compared to the same quarter last year. Actually, if we look on the order intake, which we had SEK 370 million of in this quarter, it's the best quarter in 3 -- the previous quarter was actually much less. So we are seeing a change here in the order intake, if you look on it quarter by quarter sequentially. EBIT down to SEK 38 million, and that's a good number actually. We are working a lot on efficiency to keep our profitability up, and backlog ended at SEK 723 million at the quarter.

If we move on to the next division, Global Technologies. In Global Technologies, today, we have 2 different lines of businesses. One is electrical testing. This is the equipment you see on the picture here. And we have also a technology called die bonding, mainly focusing on equipment for the telecom and data market. And we have a mixed picture in performance. We can see that the electrical testing of printed circuit boards and substrates have recovered in this quarter and in terms of sales. And we have seen that demand in this segment is very much driven by investments in AI and also servers.

In die bonding, on the other hand, we have seen very strong demand from aerospace and defense. But our biggest segment or market, and this is data and Telecom, here, we have seen that this market remains weak, and therefore, we see this mixed picture in performance. So combined, the order intake increased 11%, sales down 15%. And order intake of SEK 246 million is actually the best order intake in the last 4 quarters.

So also here, we see a little bit of trend shift. EBIT was down to SEK 9 million, which is unusually low. We have seen that the aftermarket business was impacted in the electrical test line of business. And backlog ended at SEK 272 million.

So if we move on, that was the divisions. If we look on our outlook for 2023, we confirm that we remain at the same number as before that our outlook is that we should reach a net sales of SEK 5.5 billion for the full year.

And with that, I will hand over to Pierre Brorsson to go a little bit deeper into the financials. Thank you.

[Pierre Brorsson, executive]

Good morning from my side as well, and thank you, Anders. Looking at the development over time, we can see that rolling 12 months took a little bit down -- we took the 12-month number a little bit down by declining 2% in the quarter on the same quarter of last year. You can see that, on a rolling 12-month basis, the EBIT margin is around 16%. Aftermarket continued to increase as before, sequentially now since 2021 despite some challenges in -- particularly in the GT division in the quarter.

If we look at it on a quarter-by-quarter basis, you can see that we are having quarters in the beginning of the year around SEK 1.2 billion And given our guidance for the year to reach SEK 5.5 billion, we are then predicting to be on average at SEK 1.5 billion for the remaining 2 quarters of the year, so predicting a stronger ending than start of the year.

As Anders mentioned, we had business development project cost in the quarter amounting to around SEK 60 million, which took down the EBIT margin to a level a little bit below what we've had lately in this quarter.

If we look at it by cost category, you can see that we had an improvement in the gross margin. This stems largely from our Pattern Generators division, where we had improved gross margin on last year due to improved efficiency in our own operations and also higher value in the machines that went out. We had also a slightly higher mix of the Pattern Generators in the quarter.

On the cost side, the main difference on quarter-by-quarter is, of course, the development -- business development project cost that we have in the quarter. And on these other items, we have the main parties there related to the restructuring of Royal Tech within the High Flex division.

That brought us to SEK 170 million at the end of the quarter. Division by division, we had a good contribution from the Pattern Generators quarter-on-quarter, whereas all the other divisions declined for various reasons on a quarter versus quarter basis. And on top then the group functions where we host the business development costs also contributed to a lower EBIT for the quarter compared to the same period of last year.

Looking at the cash flow for the year. We have a strong cash flow. We had a strong cash flow in the quarter as well. We have improved working capital. This stems both from reduced receivables, which is not necessarily only a good thing. We could have had higher sales, of course. We had very high sales towards the end of the year, but also from advanced payments, in particular in the Pattern Generators division that contributed to a strong working capital improvement.

Last year, we had the divestment of AEi, which generated about SEK 215 million in cash, which we didn't have this year. And having paid the dividend, we still have a very solid cash position of SEK 95 million. And on the bank, we have SEK 1.6 billion at the end of the quarter.

And with that, I hand the word back to Anders again.

[Anders Lindqvist, executive]

Okay. Thank you very much, Pierre. So we move on to the last slide before the Q&A. And this is, as usual, about sustainability. So we continue to focus on our initiatives regarding sustainability. And during the quarter, we had a lot of visits to our different subsidiaries from our management team to discuss the local sustainability activities that we are driving around the world. As of next year, 2024, reporting needs to be carried out with a new EU Corporate Sustainability Reporting Directive, normally called CSRD. And as a part of the preparation for this, we made an assessment of our company's reporting from 2022 and also on our current processes and reporting structure compared to the coming requirements of CSRD. So the final report is not yet out, but preliminary result indicates that we're in a good position, and we are prepared to meet the future reporting requirements, which feels very good.

So with that, I would like to hand over back to Sven to introduce you to the Q&A session.

[Sven Chetkovich, executive]

Thank you very much, Anders and Pierre. So now we move over to our Q&A session, and we will start with Carnegie, Mikael Laseen.

[Mikael Laséen, analyst]

I'll start with SEK 60 million in costs that you have related to business development. If you can explain the reason for these costs, and how we should think about them ahead? And when you expect to have a more normalized cost level for the group functions?

[Pierre Brorsson, executive]

Okay. Maybe I can start responding to that question. Thank you. I mean we have business development projects ongoing. We go out with information of about more details as soon as we can. We have only 1 business development project, which we have been clear about so far, and this is the potential listing of Axxon in -- on the Shanghai Stock Exchange. And I -- maybe I can say that I foresee that we will have somewhat lower costs in the third quarter than what we had in the second quarter. That's as far as it goes.

[Mikael Laséen, analyst]

Okay. Do you have other projects ongoing apart for the Axxon listing with just M&A costs and other items in that?

[Pierre Brorsson, executive]

It states in the report that it projects. So, yes, there are more than 1 project.

[Mikael Laséen, analyst]

Okay. All right. And another thing, I'm curious here about the comment you have in the report about exciting development projects. Can you say something about what they are and a bit more on that?

[Anders Lindqvist, executive]

Yes. And that's in addition to of course, the corporate development. And this is very much related to product development projects. We have a very good pipeline of good ideas in all our divisions and very exciting new products that we will develop and introduce to the market. It's not very soon, but I mean the list of ideas and what we want to execute and we'll execute on looks very promising, I would say.

[Mikael Laséen, analyst]

Okay. And this is a part of your ongoing R&D activity that you have a strong pipeline. So we shouldn't expect any significantly higher R&D activity just because of this?

[Anders Lindqvist, executive]

It will be around the range where we have always been, I think, not any extremely high special cost. It's kind of normal development, but very exciting product.

[Mikael Laséen, analyst]

Okay. Interesting. And I have a couple of other questions. Regarding the PG segment, you had a really, really strong gross margin in the quarter, and you mentioned a few reasons for this, for example, the value per system. So I'm just wondering if you -- if this gross margin that you had in Q2, if this is applicable for the other SLX systems you have in the order book? Of course, they vary in price, of course, but if this is in an approximate level that we can use also in the coming quarters?

[Pierre Brorsson, executive]

Yes. It varies depending on system configuration, et cetera, et cetera. So it's not necessarily exactly the same. But we do see an improvement, and we have had also improved exchange rates and that contributes to this development, in addition to our own execution ability and that we are able to lower the product cost of these machines.

[Mikael Laséen, analyst]

Okay. So you didn't have any software upgrades on the temporary boost effects supporting the margin in the quarter?

[Pierre Brorsson, executive]

Not of a significance that drove the margin extremely high, no.

[Mikael Laséen, analyst]

Okay. I have a few more questions, but I hand over to Fredrik to continue.

[Sven Chetkovich, executive]

Okay. Thank you very much, Mikael. So now we move over to Handelsbanken and Fredrik Lithell.

[Fredrik Lithell, analyst]

Thank you for the presentation. I'll continue a little bit on the questions here then. You talked in the quarter about you have moved production from Germany to Sweden within High Flex, the storage towers. Haven't you also moved your production of the inspection machines from France to Sweden? Is that something that is impacting the numbers as well in the quarter? Or is that something that would come?

[Anders Lindqvist, executive]

So the -- if I start with the inspection equipment, so that we moved already completely last year. So that's finalized. And we still have an R&D department left in France, but that will remain there. And the production will remain in Sweden for the inspection equipment. So that is all done, and there is no extra cost coming out of that. When it comes to the storage tower, we have just initiated this move, and it will be a gradual move. So there could be smaller cost, but not significant coming in the coming quarter. And we do it to consolidate a larger volume at 1 place where we see more efficiency in production and also in R&D. So this will be -- turn out very good, we hope.

[Fredrik Lithell, analyst]

Okay. And maybe if I could continue on Mikael's question on exciting projects that you are working with. You have talked earlier about the success with the laser technology you have in the SLX machines, and that you have intention to upgrade your laser technology within the precision lines of machines as well. How is that progressing? Where are we in that type of project? And what do you foresee?

[Anders Lindqvist, executive]

So we don't -- I don't have on top of my mind an exact time line, but it's coming very soon. And we have already got a lot of -- as you said, the solid state laser, which is a more energy efficiency laser, is already in the SLX -- all the SLXs are equipped with that laser. And we have also the intention to put that laser, similar type of laser into the precision machines. And we have been around with customers to calibrate their interest to have this upgrade and there is a remarkable large interest actually to make an upgrade mainly for sustainability reasons. And I don't have the exact time line here and now, but it will come quite soon.

[Fredrik Lithell, analyst]

That's very interesting. Can I also touch a little bit on the order intake. In my view, High Flex came in a tad slower in order intake than what I had anticipated and also High Volume came in much stronger. So should we see this as High Volume in China specifically is starting to ramp? Or was the order intake any onetime large contracts or projects that came into the order intake? Could you comment a little bit about those numbers?

[Pierre Brorsson, executive]

We had a number of let's say, significant for us projects in the second quarter in May, in particular. That said, also the underlying demand is somewhat better in the second quarter than what we have seen before. So I think the [ jury ] is still out there, but sequentially, it looks as an improvement.

[Fredrik Lithell, analyst]

And that goes for High Volume, right?

[Pierre Brorsson, executive]

That is High Volume, yes.

[Fredrik Lithell, analyst]

In High Flex, did you yourself expect High Flex to be at these as in order intake before the quarter? Or is it a bit slower than you expected?

[Pierre Brorsson, executive]

This is more or less according to what we could expect going into the quarter, I would say. So I think the -- we had maybe anticipated the high-volume revenues to be a little bit higher still, but we do see improvement on the order intake side.

[Fredrik Lithell, analyst]

And my final question then also on the back of what Mikael asked regarding the gross margin in Pattern Generators that came in at a very strong level. You alluded to in your response that you had also done changes to production or maybe the COGS within -- for an SLX machine? Is that -- have you been able to reduce the COGS levels on the SLXs, or is it production related?

[Pierre Brorsson, executive]

I mean, we have been, since the introduction, increasing the number of produced units, and thereby, also learned how to assemble this in a faster way. We have a little bit higher volumes on the components, et cetera, et cetera. So we have made improvements on the operations side there.

[Sven Chetkovich, executive]

Thank you very much, Fredrik. It sounded like Mikael at Carnegie had some more questions. Do you have any more questions, Mikael?

[Mikael Laséen, analyst]

I have if it's okay.

[Sven Chetkovich, executive]

Please.

[Mikael Laséen, analyst]

I'm wondering about the high-volume segment. And we that segment has grown strongly. I mean by CAGR 30%, roughly until 2021, but now it looks like growth will be negative in 2023. Can you say something about the overall market situation for this segment, and talk to us about the long-term growth drivers for the segments, what they can achieve over time considering where they are in the market and maturity levels and so on?

[Anders Lindqvist, executive]

Yes. So the underlying segment that we focus on is consumer electronics, which is very much driving the sales of High Volume equipment. And the majority of consumer electronics is in China, still in China and will be in China for the foreseeable future. And the China market, especially when it comes to consumer electronics, has been weak. We haven't seen -- there's a hesitation in the market to invest, rather customers invest in efficiency, like productivity with automation and so on rather than buying new lines. And reason for that is there are not so much new products.

I mean we had a big jump in the past with the 5G, with the AirPods and smart watches and all that. So they haven't seen really those kind of big investment waves yet in consumer electronics. But most likely, it will happen. There is always something new, and now we are talking about 6G and so on. We also, of course, have uncertainty on the Chinese market related to the kind of trade frictions between various countries. We have seen that India is not any more buying Chinese-made smartphones, which is kind of a big market for the China smartphone manufacturers. We have seen also tensions, of course, U.S., China and so on, which is also creating hesitation in the market. And so I think all of this are impacting this. It's very difficult to say how this will look like in the future. I think global demand of consumer electronics will be the same as before. So I think that we might see a little bit different distribution on the market.

[Pierre Brorsson, executive]

And adding to that, I think, on a new important market for our High Volume division is the electric vehicle business, which is growing, and where we are also gaining market share. Another potential market is to address the markets outside China with the High Volume products that we have, and we are growing there as well. This cannot fully replace the consumer electronics industry in China at the moment, but it's becoming a more important part of this business and could be the base for future growth.

[Mikael Laséen, analyst]

Okay. Got it. And when it comes to High Volume, again here, the operating cost on a quarterly basis are varying quite a lot. Can you explain why they vary so much? And how we should think about the OpEx going forward?

[Pierre Brorsson, executive]

Yes, this is varying quite a lot. And this is largely related to that they have a high variable portion of the pay. This is the main explanation. The other explanation is that they are also very quick in adapting to new circumstances and holding back on things when the business is not there. So I think these 2 explanations is -- and thereby, it's a little bit difficult to predict because if they see good development, they will spend more, and they will also cost more because of the variable part. So it will be highly linked to the -- more highly linked to the revenue than what you see in other divisions.

[Sven Chetkovich, executive]

So with that, we have reached the end of the presentation of Mycronic's Q2 report. Thank you very much for attending.