Mycronic AB (publ)

STO:MYCR

Earnings Call Transcript 2021-Q3

[Sven Chetkovich, Director of IR & Corporate Communications]

Hello, and welcome to the presentation of Mycronic's Q3 report. My name is Sven Chetkovich. I'm the Director of Investor Relations at Mycronic. And with me today, I have Mycronic's CEO and President, Anders Lindqvist; and CFO, Torbjorn Wingardh, who will be presenting today. And with that, I hand over to Anders.

[Anders Lindqvist, President & CEO]

Thank you very much, Sven. And again, welcome, everyone. So this is what we would like to talk about today. So a little bit about the quarter, of course. Also a little bit of deep dive in the divisional development. Torbjorn will then review the financials, and we will have some final remarks, and there will be time at the end of the meeting for questions and answers. In the material also, there is a market update as an appendix that you can find on the website, but we will not go through that in this meeting. Okay. So starting with the quarter and the main events that we had during the quarter. So we signed an acquisition in China of company called HC Xin, we'll talk a little bit more about that later. And we also signed an agreement to divest our camera module assembly business, the company, AEi, which will be purchased by ASMPT, we'll talk about that also a little bit. Also, you can see that we have an increase in order intake with 68%, which we're very happy about. That also, of course, includes the acquisition of ATG that we did earlier this year. And even if we exclude for this acquisition, the order intake increased actually 52%. So still a very strong increase. And the best order intake quarter since quarter 1, 2020, actually, so we're happy about that. On the sales side, we had a decrease with 8%. Also kind of sharp decrease in the EBIT. And both reasons is because of the -- we had a less advantage mix in the Pattern Generators divisions where we, in the comparable quarter last year, delivered Prexision P-800, which is a very high value and high profit machine. And the EBIT margin then declined to 11% coming from 33. The backlog is more or less the same, a little bit about SEK 2 billion. And in that backlog, we have 13 mask writers altogether. Okay. If we then go to the divisions, a little bit more in detail, starting with Assembly Solutions High Flex. You could see a very positive development -- Sorry. Yes, I need to manage the presentation. Starting with Pattern Generators, we could see that we have a very strong order intake, and we have a little bit mixed picture on the market. If we look on the photomask for display, we can see that the market is still not back to pre-pandemic levels when it comes to the photomask market. The display market is doing very good at the moment with record sales and a good increase, but the photomask market is more driven by new technology and changes in the market, and we have not seen that coming back yet. On the other hand, on the semiconductor side, everyone know the shortage of semiconductor. We see a very strong trend, very good demand, and we had recently launched SLX mask writer for this industry. where we have received quite many orders and more than expected, actually, are very happy with that. On the order intake had a very good increase, but we should also say that we compare it to a weaker quarter last year. So the order intake for Pattern Generators was SEK 407 million. And we are at a backlog of a little bit more than SEK 700 million, which is again the 13 mask writers. Both the sales, the gross margin and the EBIT is lower. As I said, we delivered last year in the same quarter, Precision 800, which is a very high-value machine. If we then go to the High Flex division, in the Assembly Solutions, you could see a very positive development. We have a good demand for almost all products that we have in the portfolio on the micro series and also good increase for the MySmart dispensing product. We see an increase of orders of 13%. And we could see that the orders are more in quantity. The average order size is somewhat smaller, which we think is a good thing. Sales increased by 14% and a quite good increase on the EBIT. So you can see that the EBIT is actually growing faster than the sales, which is showing that all the things that we did in this division previously actually now is paying off, and you can see the EBIT margin is also increasing up to 11%. When it comes to component shortages and so on, we could see that in the High Flex division that we are affected by that. We have -- we need to put more efforts into logistics and purchasing activities and so on. So we see this effect coming now from that, but we don't have any cancellations of orders and all these small delays are not really material right now. The backlog has increased to SEK 240 million (sic) [ SEK 214 million ] coming from SEK 148 million in this division. If we go to the High Volume division, so earlier in the quarter -- quarter 3, we signed an agreement to acquire a company called in HC Xin, in Shenzhen. The products that we're making is mainly stencil printers and also a little bit of pick-and-place machines. And this will be a very good addition to the HV volume or the high-volume division. And because the main products in the High Volume division has been dispensing products, and now we are actually then broadening our offering into the same customer base, also focusing on intelligent and competitive automation solution. So I think this will be a very good complement to our business, and we expect to close this acquisition in quarter 4 this quarter, this year. If we look on the numbers a little bit, we could see that the order intake was stable, and this is stable compared to the same quarter last year. We had really good quarters this year in quarter 1 and quarter 2, if you remember that and have a very good result year-to-date. But there's a little bit of cyclicality in the market and coming from extremely high demand into a more normal level. The sales increased by 5%. And here, we have some impact also, again, like the other divisions from transportation costs, higher prices for raw materials and components, although we don't have a shortage, we still manage the situation, but again, also with more effort. We had a decline in EBIT to SEK 30 million coming from SEK 38 million corresponding to a margin of 13%. If we then move to Global Technologies. So also here, we had happening when it comes to acquisition or divestment. So we have agreed to divest AEi. So AEi is a company that is focusing on manufacturing of camera module assembly equipment. The main market is the automotive market. And we saw that if we could find a home for this business, which has a much bigger exposure to automotive, most likely this business could develop better in that kind of environment. And we found that in ASMPT, which is the company that has agreed to acquire AEi. So very good for this business, we believe. And also it enabled us to focus more and invest in markets where we have a bigger presence and which is more relevant to Mycronic and the expected closing of this acquisition or divestment, I should say, it will be in quarter 4 or quarter 1 next year, and this is subject to regulatory approvals on that timeline. If we look on the business remaining, we have a very good positive impact from 5G investments affecting our Die bonding business in a very positive way in the newly acquired ATG company doing test equipment for PCBs. We have seen that machine generation that was launched earlier this year, it is doing very well and according to plan. The order increase for the complete division is more than 200%, but that, of course, includes the acquisition of ATG. And if we remove that one, we still have an order intake increase of 80% or 81%. So very happy with that. On the sales side, an increase of SEK 124 million. Excluding the acquisition of ATG, this is a decline of 12%. Here, we have most likely the biggest effect from disruption in the supply chain and the component shortages where we have had -- but no cancellations still, but still more effort needed to manage logistics and so on, we also have had some delays in the shipment of our own equipment to customers because of this. and EBIT, so we have a lot of things affecting the comparability here. So the presented number is minus SEK 16 million coming from minus SEK 57 million, but we should know that. Last year, in quarter 3, we had a write-down of SEK 43 million, which is affecting that number. And in this year, we had a SEK 36 million impact from acquisition-related costs related to the acquisition of ATG. So we need to use that when doing the fair comparison. If we go down to looking on the outlook and our financial targets, we have no change in this. So we still remain or the Board remains at the -- that the outlook when it comes to sales this year will reach a level of SEK 4.5 billion. So this is unchanged from last quarter. On the profitability side, still -- and this is our original financial targets that we should have more than 15% EBIT over a business cycle that remains. And then we had this recently introduced target or recently, I think, it was last year or before, that we should reach a profitability of about 10% what is -- what was the former business area, Assembly Solutions. And if we do a fair comparison to what it should have been, if we still would have the Assembly Solutions, we are actually now above 11%, and that is not including the acquisition of ATG. So after 3 quarters. And this year, we are slightly above our target here. On the net debt side, we should not be about 3x EBITDA. This is also an average of our business cycle. And our growth objective is to reach a minimum SEK 5 billion by the latest, by 2023 in sales, of course, no changes there actually. All right. And then I will hand over to Torbjorn. And actually, this will be Torbjorn's last quarterly report from Mycronic at least. So we'll take the opportunity, of course, too, in this forum as well, to thank Torbjorn for his fantastic effort during the 5 years at Mycronic and -- you still have some time to go here, but it will be the last quarterly report that you're present in. So thank you very much for that. And now I hand over to you.

[Torbjorn Wingardh, Chief Financial Officer]

Yes. Thank you very much, Anders. Thank you for that. And so looking then at this for me, last quarter, but the setting the stage for Mycronic going forward, we can note that in terms of net sales that reached SEK 4.3 billion, a little bit more. And as everybody has noted and Anders has commented, we had a lower EBIT in this quarter. And that was to the dominated extent due to a less favorable product mix in Pattern Generators where in the corresponding quarter last year, just like you said, Anders, we had a delivery of a P-800, which was very much known.We also had expensing of acquired inventory at fair value in our newly acquired company, ATG, which was part of that acquisition-related costs in this quarter, and we can note that this expense of acquired inventory, at fair value, which is according to IFRS accounting now has been completed. So it's -- that has all been done in Q3. So the result of this is that the EBIT margin in this quarter is 11% and that rolling 12, it's 24%. We are also very happy to note that aftermarket constitutes a very stable base of recurring revenue, which you can see in this graph, the gray area in that, and that continues as we see going forward. Looking at the next slide, just as said, negative net sales effect from pattern generators but we're happy to see that, that was outweighed by contributions from the other divisions, High Flex, High Volume and Global Technologies. And the less advantageous product mix, as mentioned, impacted COGS and also the same aspect impacted by the expensing of acquired inventory. We can also see that positive currency results explain the improvement in other income and expenses. And looking at the respective divisions, you see here very clearly, the impact from the product mix and Pattern Generators. We see in the EBIT contribution and improvement from High Flex and High Volume, which has been performing at a very high level, has a change -- a negative change in contribution. And in terms of Global Technologies, which is not perform where we would like it to, but still has a good improvement, which then contributes positively to the development of the EBIT. Looking at the cash flow. Of course, there is a major impact from the acquisition, when we look at the year-to-date numbers. So year-to-date in 2021, we have stronger cash flow from operations before changes in working capital. And then in terms of the investing activities, that is clearly dominated by the acquisition of atg L&M. And for the financing activities, they include utilization of credit facilities. They include dividend payment to shareholders. And also, they include acquisition of a noncontrolling interest in a subsidiary in the HV division. We also classified the cash at AEi, in accordance with the expected divestiture. And we see that cash at the end of the period was close to SEK 900 million, and the net cash amounted to SEK 323 million on September 30. And with that, I'd like to hand the word back to you, Anders.

[Anders Lindqvist, President & CEO]

All right. Thank you very much. And I have a last picture here before we go into the question-and-answer session. So similarly, that in Mycronic, we have built a very strong platform, a very strong and have a strong position to continue to grow in a profitable way. We have an organization which is customer-centric, scalable and decentralized and as well, combined with the competitive product portfolio, which we continue to invest in, which you can -- we have the, at least the same level of R&D as usual, and this should result in a continuous flow of new products on the market. Our growth will be driven both by organic development and also acquisition driven, as you have seen, even in the quarter, we made acquisitions. And our culture is very innovative responsible and dynamic. And one thing I would like to mention is around our sustainability strategy, where we have established what we call an innovation fund in the company. And the purpose of this fund is that the people in the company can seek financing for internal projects or projects that are also done in collaboration with external partners. And the purpose of the projects should be in line with our sustainability strategy to improve that. And the idea with the fund is that -- because not always there is easier to show a financial positive business case when doing what is right for the sustainability and this fund will kind of solve this problem a little bit. So we're happy about that. And hopefully, we'll see a lot of initiatives being financed by this fund going forward. So that was the last for the formal presentation. So with that, I hand over to Sven again here to manage the question-and-answer session.

[Sven Chetkovich, Director of IR & Corporate Communications]

Thank you, Anders and Torbjorn. Now we're moving over then to our Q&A session. Operator, we are ready to take questions.

[Operator]

[Operator Instructions] And the first question is from Mikael Laséen, Carnegie.

[Mikael Laséen]

Can you talk to us about the display photomask market in a bit more detail, please, and comment on why the segment is still not back to pre-pandemic levels.

[Anders Lindqvist, President & CEO]

Yes. So the comment of not back is on the statistics coming from third-party analysts companies, which you also can find in the appendix in the presentation if you download that one. So that we are seeing. And -- The reasons for that, I think, are many, I think there is -- I think also the display market is doing really good at the moment. And we have seen before that when that happens, there is actually less effort into working on new technology or maybe not less effort, but it's less urgent kind of to launch new products. And you could see also -- and I think that's in the same market material actually, that has changed to advanced screens or advanced displays, AMOLED, et cetera and so on that, that conversion is actually going a little bit slower than it used to be. So that is -- so the older current technology is still doing very well. So I think that could be 1 of the reasons, obviously, but yes, so -- that's our take on that.

[Mikael Laséen]

Okay. And do you expect to deliver 800 high-end systems also during 2020 in considering lead times current market demand and delays may be for AMOLED, as you mentioned now?

[Anders Lindqvist, President & CEO]

Yes. I think there is place based for the market for that kind of equipment. But when that is, that's very difficult to say. And if it exactly that equipment is also difficult to say. So on our end, we have made efforts to shorten the lead time overall and mainly actually because of the SLX product introduction where -- which has another demand on the market right now. But of course -- we need an order first before we can say if we can deliver actually that we don't have. And yes, that's a very speculative answer, I would say.

[Operator]

The next question is from Fredrik Lithell, Handelsbanken.

[Fredrik Lithell]

Thank you, Torbjorn, for good collaboration during all these years. I hope all the best for you in coming years. I have a few questions, if I may. If you could talk a little bit about component sourcing, what type of effect you felt you had in Q3, even though it sounds on your comments that it was a small effect do you see it elevating? Or do you feel you can handle it by sourcing and creating safety stock in inventory. So a little bit more color around the component shortage and what you see from your angle here would be very interesting to hear. And then when it comes to AEi. You took -- you wrote down some in Q3. Is that all out of the books now? Or is it so that you finalize that transaction in Q4, Q1. You will still have some items there that might impact the results. So those are the 2 first. And after that, I will also get back into line for other questions.

[Anders Lindqvist, President & CEO]

Okay. So I will take the first question and Torbjorn, the second one. So when it comes to the component shortage, it's a little bit different between the different divisions, both because of the nature of the equipment, the lead time requirements and also geographic allocation of where we manufacture and sell. So starting from Pattern Generators, we have seen quite little impact. And also here, of course, we have quite a long lead time on the equipment, so it's a little bit easier to manage from that side. So component shortage, no real impact on our operations. We have announced the later shipment of 1 machine, and this is actually due to labor shortage on the customer side where they cannot build the site in time. So that's another type of shortage, not a component, but people is also coming up here as a challenge. And then if we go through then the High Flex division, has -- is managing very well the situation, I would say. We have had quite good stock on components there. So with more effort, I would say, we need to put more hours into purchasing, more hours into logistics and problem solving and firefighting, but we have managed deliveries. And you have seen a little bit of a cost increase, but we have also made a price increase to compensate for this. So the net effect is, I would say, not so big in the High Flex division. On the High Volume side, which is mainly in china. So raw material price increases, shortage of advanced components, and so on. So here, we have had the cost impact, which has not -- we have not been able to raise the price in the same kind of level, but also manageable and so on. So no impact on shipments and so on. And then the Global Technology division. Here, we have had shortages that have impacted our delivery where deliveries have been pushed later in the coming months and coming quarters and so on. But again, no cancellation, but also increased cost, both on the material side, but also, of course, to manage the situation. We believe, and this is maybe a little bit of guessing, that this is -- that this will remain for some time. I think we foresee that we will have -- we will need to put more effort in to manage the component shortage for the coming 6 months, but it should -- the level should improve as we go forward, I would say. We also have things coming up in China, which is around energy shortage where -- We have seen that the authorities -- there's not enough energy supply, and it's very scattered. It's different in different cities where authorities could shut down operations with very short notice. This could -- has not yet affected our business, but this is -- this could affect our business or may affect our business going forward. So that is our view on that.

[Fredrik Lithell]

Just a follow up on that one then, the logistics. Do you see any difficulties in sort of logistics to -- there has been talks about that as well, not only on the sort of component shortage, but how do you -- Can you sort of elaborate on that as well, sorry.

[Anders Lindqvist, President & CEO]

The transportation costs have increased, both inbound and outbound, and also the supply of transportation have decreased. So there's more -- there's more effort needed to find suitable transportation at reasonable prices, I would say, for our equipment. And that is both a cost and increased effort, which is, in a way, also a cost. That's on that side. And I think that goes hand-in-hand with this component shortage.

[Torbjorn Wingardh, Chief Financial Officer]

Then on AEi. So just to just to respond to a question to start, so I understand your question correctly. I was just noting that the write-down relating to AEi was in quarter 3 last year. not this year. That was clear from Anders' comment. And then -- We look forward to the conclusion of the AEi transaction as described and the information we give that it will not be a significant number at group level resulting from this divestiture. I hope that answers your question.

[Operator]

[Operator Instructions] We do have another question from Mikael Laséen.

[Mikael Laséen]

A couple of more questions from my side. So the High Volume segment is experiencing a quite significant quarterly revenue variations and also when we look at the gross margins, it varies quite a lot. So can you say something about what is seasonality? What is component shortages? What is the underlying growth and something about the customer activity. I mean to understand the quarterly variations in a better way.

[Anders Lindqvist, President & CEO]

So I can give a little bit general answer on that one. So if we look on the business. So we serve the High Volume market and the majority of that market is in China, and it is characteristic by waves in investments, and it's normally when there is -- the 5G was such a wave, creating an investment wave. So it's normally technology and capacity increase, which is driving that. And recently, we also saw a very positive investment wave driven by this earphone wave, which is the -- which was -- everyone should produce that previously and so on. And these are coming and going. And I think normally, they are a little bit more even distributed over the years, but we had a lot of that in the first half of the year, which you could see if you go back and look on the order intake in quarter 1 and quarter 2, I think they were enormously high and so on and now it's a little bit less. So the average is quite okay, but but this is the kind of quarterly differences where we see. And it's not always the same quarters actually every year. So that is a little bit coming and going. On the margin side and the cost side, so the total cost we have, we are investing quite good very heavily or good in this business. And we are, I think, 35% more people in quarter 3 compared to the same quarter last year. Much of going into R&D efforts, but also manufacturing and so on because we still have quite a decent backlog in this business and also investing for the future. So I think that is, of course, affecting the -- on the EBIT side. And then -- It's correct that we have pressure on cost because of component shortages and so on, but not really to a significant level, I would say. So that's that's part. But all of this together, of course, is making an effect on the result.

[Mikael Laséen]

Okay. And there is no significant seasonality in the business. It looks like a couple of quarters are typically stronger, but we don't have that much historical data to compare with, of course.

[Anders Lindqvist, President & CEO]

Yes, there is -- I think there is a little bit of seasonality and cyclicality, but it was not that same pattern this year. We had much more in the quarter 1 and quarter 2 than normal and less in quarter 3, I would say.

[Mikael Laséen]

Okay. And what do you see in terms of coming wave in new investments? What type of predictability do you have for visibility?

[Anders Lindqvist, President & CEO]

Yes, it's, I think we see -- we still see that especially in China, there is a shift to put much more money into technology, also hardware and so on. You can see that the both governmental activities, but also because of personal desires, I think, and so on. So we believe that this will be a good business going forward as well. It's very difficult to say what will be the next wave and when it will come and so on, but long term, we are very positive -- we have a very positive view on this business.

[Mikael Laséen]

Okay. And another one, if I may, on Global Technologies. You had SEK 36 million, I think, in nonrecurring inventory adjustments or -- How much was sort of nonrecurring in this case? And how much underlying amortization of acquired intangible assets will you have going forward.

[Anders Lindqvist, President & CEO]

Yes, we are looking, I would say.

[Torbjorn Wingardh, Chief Financial Officer]

So first, to answer your question. So we have, in the report, presented the gross margin for the division, excluding the acquisition-related costs. And that was then for 34% in the quarter, as we have noted in the report. If your question is aiming at the special effects related to the inventory at fair value to expense that, which it all happened during Q3, that was SEK 26 million, which was sort of the part of the number that was presented by Anders on the Global Technologies. I hope that was helpful to you.

[Mikael Laséen]

Yes. That's helpful, of course. And so the remaining part will be sort of ongoing amortization, the difference between SEK 36 million and SEK 26 million, so SEK 10 million roughly per quarter.

[Torbjorn Wingardh, Chief Financial Officer]

Yes. And also some other transaction costs and so in there, but the majority ongoing, just like you say.

[Operator]

[Operator Instructions] And we haven't received any further questions at this point. So I hand back to the speakers.

[Sven Chetkovich, Director of IR & Corporate Communications]

Okay. Thank you. Well, with that, we've reached the end of today's presentation. Thank you for attending.