Mycronic AB (publ)

STO:MYCR

Earnings Call Analysis

Mycronic Reports Strong Order Intake and Gross Margin

Mycronic's success in the semiconductor industry is attributed to its modern, high-productivity machines that have significantly outperformed its main competitor, Applied Materials. The company almost doubled its expected sales despite aiming to sell only 5 or 6 units per year initially. Gross margins remain robust, especially in High Flex and High Volume divisions, surpassing 40%, with efforts underway to bring Global Technologies to similar levels. Pattern Generators experienced volatility but are expected to maintain strong gross margins on the back of increased volumes and reduced costs.

Strategic Position and Market Expansion

During this quarter, we have seen significant market success, particularly against our chief competitor, Applied Materials. Our company managed to secure orders nearly double our initial projections, thanks to our modern machinery that offers high productivity and greater value for investment. This traction primarily comes from new installations or additional installations due to global market expansion in the semiconductor industry. Although Applied Materials has a large installed base, making it a tougher market to penetrate, we are confident in gaining a substantial share due to our performance superiority and future-proof production capabilities.

Gross Margin Improvement and Outlook

We've achieved a strong gross margin this quarter, particularly in the High Flex and High Volume division, exceeding 40%. While Global Technologies has been slightly below, we anticipate improvements moving forward. The Pattern Generators division may exhibit some volatility; however, steps to lower costs in our assembly manufacturing and an increase in volume, specifically for the SLX, position us well for maintaining robust gross margins. Overall, our company's margins will reflect a blend of divisions, which may vary from quarter to quarter.

Aftermarket Revenues and Growth Projections

Aftermarket revenues currently stand at 31%. Our strategy is not to chase a specific aftermarket number but to achieve continuous growth quarter-over-quarter. We expect to see an uptick in aftermarket revenues as the installed base of our SLX machine exits its warranty period. This growth is projected to continue and is a part of our broader initiative to enhance customer satisfaction and profitability.

Operational Efficiency and Cost Normalization

In terms of our operational expenditures, we have engaged in business development activities this quarter, which incurred costs. However, due to the termination of a potential M&A deal, we do not expect these costs to continue in the future. This should lead to a normalization of our corporate function expenses. Additionally, the transitional effects from moving stenciling to High Flex and MYSmart to High Volume have been neutral this year, neither contributing to nor detracting significantly from the top-line or EBIT.

Retrofit Market and Customer Adaptation

For our customers looking to upgrade their equipment, the technical aspects of retrofitting are manageable and within our experience of delivering challenging upgrades. All our older Prexision can technically be retrofitted, though the decision for customers will depend on their specific process requirements. While the standalone cost savings from energy efficiency may not justify retrofit investments, the combined environmental benefits align with broader initiatives and customer strategies focusing on sustainability.

Earnings Call Transcript 2023-Q3

[Sven Chetkovich, executive]

Hello, and welcome to the presentation of Mycronic's Q3 report. My name Sven Chetkovich. I'm the Director of Investor Relations at Mycronic. And with me, I have Mycronic's CEO, Anders Lindqvist; and CFO, Pierre Brorsson, who will be presenting. And with that, I hand over to Anders. Please go ahead and present Mycronic's Q3 report.

[Anders Lindqvist, executive]

Thank you very much, Sven, and most welcome to everyone to join this session. As usual, we have an agenda, which is similar to before. So I will start to talk a little bit about the quarter in short. We will go a little bit deeper into the different divisions after that.

Pierre will talk about the financials in that. And also, we will have a section on our work with sustainability. And then at the end of the session, we will also have the opportunity for question and answers. As usual, also in the material, which is available on our website, we also have an appendix with the market information, all coming from third parties.

So if I should start to summarize the third quarter. So in our opinion, we think it's a -- it was a very good quarter. It was a good quarter, both in terms of business performance, but also in terms of activities from the company. And if we start with the activities from the company, one milestone that we had during the quarter is that we shipped our first Prexision system with a solid state laser.

The Solid-state laser is instead of the gas laser that we normally use that reduces the energy consumption with up to -- almost up to 99% compared to the old solution. In addition to that, we also received the orders after the quarter for an upgrade from gas lasers to solid state lasers in an already existing installation.

So we are very happy now to be able to offer this. If you look on the order intake, starting a little bit on the business performance here, we could see that it decreased with 9%, but still the level is very high, close to SEK 1.5 billion which is above our annual average that we need to reach our target for the year.

Sales increased with 5% to close to SEK 1.3 billion and also a good increase in EBIT up to SEK 263 million, which is equal to a margin of 21%. We have, again, in the quarter, a record order backlog of close to SEK 4.7 billion, which is almost double as it was compared to last year. And in that backlog, we have 31 systems for Pattern Generators at the end of the quarter.

You have also seen in previous reports that we have reported quite large numbers on the business development cost and this has been related to a large acquisition project that we decided to terminate without a transaction at the end, and that happened also in the quarter.

If we go a little bit deeper on the different divisions, starting with the Pattern Generators. So the mask writers that we delivered with the -- so let's say laser was a Prexision Lite 8 Evo. This is for the display industry. We received several -- one order for upgrade of gas lasers to one customer, which have several mask writers installed. So we're very happy to see that, that effort pays off. We had a little bit of decline on the order intake compared to the same quarter, declined by 22%, but still we received orders for 3 different mask writers, one Prexision 8 Evo. This is for the display industry and 2 SLX mask writers, this is for the semicon industry.

A good increase in sales, up to SEK 435 million, which is 77%. And we delivered 3 writers -- mask writers, one Prexision Lite 8 Evo and 2 SLX. Gross margin, up to 66% and EBIT improved to a little bit more than SEK 200 million.

And the majority of the backlog I mentioned on the group is referring to Pattern Generators with SEK 3.4 billion, which is quite high backlog. And we have quite fully booked orders now for many months ahead. If we go to High Flex division, we have made a strategic change here. So we have switched product lines between high volume and High Flex.

So High Flex is now responsible for offering stencil printing, which is coming from the acquisition we made some time ago from the company HC Xin, that is China-based, which provides stencil printers for application of solder paste. And the logic behind that, it is very much the same customer base as in High Flex and also has a natural position in a full line solution with other equipment from High Flex.

So High Flex will be now able to offer complete solutions to meet all different customer demands when it comes to solder paste dispensing. We are also very happy with the business performance in High Flex. You've seen that the market is strong in Europe and also in North America, which is where we have our majority of our footprint and our sales. But we also have seen that the demand in China and Asia has been weak as it has been the previous months as well.

Order intake, up 15% and sales up 7%, a very stable gross margin at 41% and very happy with the EBIT of SEK 60 million, which equals to 16%. So I think very good performance from the High Flex division. Backlog at SEK 240 million, which is, I would say, quite a normal number for us in this business.

On the High Volume, so on the other side of this switch between product lines, High Volume is taking over dispensing globally. We had a dual product line that was also offered to High Flex before. But now we have decided that High Volume takes the global responsibility for both what the product line is called MYSmart dispensing products, and also including now the Mexico office from High Flex. So everything with dispensing is now offered through the High Volume division.

On the business performance, we saw small recovery in China, especially in the mobile phone segment during the quarter and also continued good demand from the electrical vehicle industry. Nevertheless, compared to 1 year ago, the same quarter, we had a decline in order intake with 19% and the sales decreased with 39%.

In this division, we are have high flexibility when it comes to managing costs, and we're very happy to see that we can maintain the same gross margin as the same quarter last year of 41% and an EBIT decline down to 41%, but maintaining an EBIT margin of 17%.

Backlog is at SEK 700 million, which is also quite normal for our business here. If we then move to the Global Technologies. So one event that happened during the quarter is that we had an acting Senior Vice President from this division, Magnus Marthinsson. He has now taken over this role permanently. So he will be the Head of Division going forward. On the market, we still see a little bit of sluggish market demand, especially from China. However, we've seen there's a good boost from AI-driven or AI-related demand, and this is applicable both to our die bonding business and as well as our electrical test business. We had an increase in order intake of 8%, very much supported by good performance and good development in the die bonding business. Sales almost flat, down 1%, margin at 37% and EBIT lower than last year at SEK 10 million, which is equal to 5% and a backlog of SEK 300 million.

So when it comes to the end of the year, which is coming closer and closer, we continue to confirm our sales target for the year of SEK 5.5 billion. And with that, I will hand over to Pierre Brorsson, who will now go a little bit deeper into the numbers. Thank you.

[Pierre Brorsson, executive]

Good morning from my side as well. And if we start by looking at the trend over the last 12 months, I think we can note two positive things in this. And first one being that the profit margin is moving slightly upwards. You will see that more clear in the specific quarter on next picture.

We can also see that for the 11th quarter in a row, we have a growing aftermarket revenues, and this is a very important foundation for our business in the various legs that we have and this is now up to SEK 1.6 billion. Looking on the quarter by quarter, you can see here that we have for the first time during my 2 years, a margin in line with our long-term profitability ambitions of above 20%.

And this is largely driven by a strong quarter in the Pattern Generators, but also solid results in High Flex and in High Volume. You can -- on this chart, you see that we have been a couple of quarters around the SEK 1.2 billion. And given our outlook for the fourth quarter, we will have a very strong ending of the year where we need to be between SEK 1.7 billion and SEK 1.8 billion, and we have the orders that is necessary to be able to have that as a forecast for the fourth quarter.

Looking a little bit in the income statement where we have done well and maybe not so well as well. You can see that we have improved the gross margin, both with volume slightly and the relative margin. And this is largely driven by strong development in the Pattern Generators and foremost that the share of the Mycronic sales that is coming from Pattern Generators moved up significantly in the quarter versus the same quarter last year.

On the cost side, we have actually lower operating costs than we had last year despite inflation and a slight volume increase. And this stems mainly from the High Volume division, where we have high portion of variable cost. We have not made any significant redundancies, but rather good cost control and a limited outcome on the variable part of the pay there.

In this other outside the operating cost, this is mainly an effect of unrealized and realized FX changes that we have during this quarter, which was negative and last year same quarter was somewhat positive.

This resulted in an EBIT of SEK 263 million, which is down SEK 60 million above last year. Looking at it, slicing it in the other direction, meaning the different business units we have, we have strong improvement in the Pattern Generators. We had also a significant improvement in the High Flex division. On the High Volume side, I think, as Anders mentioned, we are happy with the relative profitability despite the volume and it has been a challenging environment in being relatively dependent on investments from the 3C industry in China as we are with the High Volume division, but really good adaptation to the new volume level and strong relative results despite low volumes. On the Global Technologies side, we had good order intake from the die -- in the die bonding entity driven by AI, mainly there, still a little bit low profitability, but we do see good signs of improvement in that part of the business.

On the group functions, we did have a little bit of residual business development costs, but the majority of this is also related to FX, which we have on a group level as well for internal loan and other things, transactions. So this is then making the outcome SEK 263 million or 21%. Cash flow wise, we have a strong contribution from the operating result. In the quarter, we had somewhat less positive in the change in working capital, and this is largely driven by increased inventory to do the deliveries we need to do in the fourth quarter, mainly on the Pattern Generators.

When we look at it on a yearly basis, we have a strong contribution from the advanced payments that we get on the large projects in particular. On the financing side, we have the majority is related then to the dividend. And we continue to report a very solid cash position and this is based both for resilience in case of a downturn in an unsecured environment as well as potential to use for acquisitions and other things going forward. And with that, I hand the word back to Anders.

[Anders Lindqvist, executive]

Thank you, Pierre. So to the end here, I always have a section on sustainability. And I think it's obvious that our -- what we feel as a big achievement in our contribution to sustainability is the -- that we saw the first delivery of Prexision mask writer system equipped with solid state laser. So the solid state laser can replace the gas laser in our equipment, and it will reduce the energy consumption from the laser with up to 99%.

It sounds a lot, and it is a lot. And if you look at our total footprint, our total impact on CO2 emission, the use of product for us is the largest area of impact. And in that use of product, the mask writers and the laser, the energy consumption from the laser is the major contributing factor. So this is a big step forward for us to be able to impact this for the future.

And in addition, equally nice, I think, or equally good is that we also received order for an upgrade from a customer in Asia with have several systems installed and want to upgrade to solid state lasers on the installed base. I think this is a very strong commitment from the customer.

It's not always that this kind of investments is supported economically. But for sure, for the investment and sustainability, it makes a lot of sense. So we see these two events as a major milestone in our effort and contribution to sustainable electronics production. Okay. Thank you. And now we move into the question-and-answer session.

[Sven Chetkovich, executive]

Thank you, Anders, and Pierre. So now we are ready to take questions. And I believe we will start off with Mikael Laséen from Carnegie. Please go ahead, Mikael.

[Mikael Laséen, analyst]

Thank you. I have a few questions. I just want to start with this transaction that you didn't decide to go through with. And if you can elaborate on the reasons for this? And if it was your decision or the seller and if it was maybe acquired by another company? If you can give some more color on this, it would be great.

[Pierre Brorsson, executive]

I think, first of all, I think it's important to say that we are having an active acquisition strategy. We have a solid financial position. We have a mission to double this company in the coming years. So we are and will be active in this space. Sometimes there will be a situation where buyer and seller will, at the end, not meet, and this was what happened here, and we will not take any desperate moves to just complete something to have something completed because we have a solid financial position or anything like that. But this was a sizable complex transaction that we decided in the end not to go further with.

[Mikael Laséen, analyst]

Okay. [ Sales on ] your answer that it was primarily the price that was not...

[Pierre Brorsson, executive]

I will not go into the details, but it was a complex transaction, which entailed a lot of things, yes.

[Mikael Laséen, analyst]

Okay. And can you say something on your M&A pipeline, how that looks and your work there, if they are more lined up?

[Pierre Brorsson, executive]

I mean it's a -- we are in the electronic space, and this space is relatively significant transactions. If they happen and when they happen, it's very hard to time. I think we have a solid position in what we do. This is our main priority. And we will be looking at building on that more than having to complete one transaction per year or anything like that.

[Mikael Laséen, analyst]

Okay. And another question is more on the market situation. Can you talk about China and elaborate on that's the market for you and comment on development or your 4 segments in China?

[Anders Lindqvist, executive]

Yes. So as you know, China is a large part of our results and also our coverage. And it looks a little bit different in different segments. I think if you take the High Volume division, which is mostly impacted by China as having the majority of sales in China and also addressing to a large extent, the consumer electronics segment globally. So China market in general is a little bit slow, although we have seen some small signs of recovery from consumer electronics, especially in the mobile phone industry. There are some pockets in the industry, which are still very strong, like electrical vehicle and also semiconductor in China. So it's a little bit different depending on if you go -- drill down in the segment a little bit further. So High Volume is the most impacted by this slow demand in China. From -- also from Global Technologies, both from electrical test and from die bonding, large part of sales is in China and that we have seen in the numbers, although we recently saw some pickup on the die bonding business driven by very much more demand driven from AI-related applications. On the High Flex, our exposure in China is not is not that large, even though, but we are down in China from that division as well. Globally, that is compensated by good demand in the -- in Europe and also North America. I think Pattern Generators have a little bit of different demand driver. It's not so much -- it's more the technology and we sell much, much earlier in the cycle because of the long time both lead time from our side and, of course, decision time for customers, but also the need of building up an infrastructure around our equipment, the whole production line and so on. And here, we have seen -- I think you have seen in the order intake we have that we have had quite good demand both from the displaying industry. The display industry is primarily Asia and also semicon industry, which is also quite a lot of Asia, but also North America.

[Sven Chetkovich, executive]

So now we will move over to Danske Bank and Adolphe Baraderie.

[Adolphe Baraderie, analyst]

First question will be on the solid state laser. Will you say that this is a big retrofit market? And then in that, how much machine can you retrofit every year? And then will it be even more positive for the reshoring trend? Or do you see that it's not more the case right now? That will be my first question.

[Anders Lindqvist, executive]

Okay. So theoretically and technically, it is possible to replace all the gas lasers with solid state laser. So every customer who wants to do this, we will be able to do that. And that is also for the installed base as well for the new system deliveries. There is some effort needed on the customer side to change laser system because they will need to requalify a lot of things, other things in their production. So it's not a single decision only which kind of laser to have, it's also had some other impact. So it will be a choice of the customer. We will, of course, offer both and promote the solid state laser given its better energy efficiency. But at the end, it will be a choice from the customer, which way to go if they want to upgrade, if they want the new equipment with a solid state laser or the gas laser. Most likely it will not make sense to upgrade very old equipment in the field. So I think we will see a majority of upgrades will likely be sold on the more recently sold systems. But there is a choice from the customer in which way to go because of this requalification process on the -- in the production environment.

[Adolphe Baraderie, analyst]

And for the reshoring trend, do you think that it may help or not?

[Pierre Brorsson, executive]

I think both financially and reassuring wise, I think this is not a significant, it's not a significant financial impact on Mycronic, and it does not significant reshoring relevance as well. However, it has a significant importance to the CO2 footprint that you get out of the equipment that we are delivering.

[Adolphe Baraderie, analyst]

Okay. And then last question will be on, we see more and more a growing list of export restriction outside of the U.S. What do you see? And what are your clients saying to you on this situation?

[Pierre Brorsson, executive]

This is a complex world that we are starting to live in and divided world to a large extent as well. We are currently supplying a lot to China, which I think is the main reason for your question. We are, of course, confirmed living by all the regulations, and these are many. And we are certainly having to apply for export licenses and so on. With that said, I think it's also fair to say that even on the Pattern Generators on the semiconductor side, we are not supplying leading-edge technology, which is necessary for the most advanced semiconductors. So we are a little bit further down in the supply chain and thereby so far, at least not so much affected by it, except that we have to apply for certain permits and things.

[Anders Lindqvist, executive]

Yes, I think you can say with the current regulations, we have almost no impact on our current business. And there was a little bit clarification on the regulations just recently issued it actually only will make it a little bit easier for us in the application process.

[Sven Chetkovich, executive]

Okay. Thank you very much. So now we will move over to Anders Rudolfsson from DNB.

[Anders Rudolfsson, analyst]

Thank you. First of all, congratulations to another strong report. My first question comes into the strong order intake you have in SLX machines. This is a market where Applied Materials has been very strong during the years. And suddenly, you get [ 16 ] machines here in a short while. Can you perhaps comment a little bit on that? Why is it like that? And why they -- do they choose Mycronic?

[Anders Lindqvist, executive]

Yes, I can talk about that. And yes, we are, of course, also very happy with that order intake. And if you remember, when we launched the machine, we always we targeted to sell, I don't remember, was it 5 or 6 per year or something like that, and we are almost double that. And it's really the main competitor is Applied Materials. If you compare the -- our what we offer and what they offer, we have a much more modern machine with higher productivity, so more value actually for the investment, I would say. And we have seen that the majority of our sales have been into new installations or addition of installations because there has been a global market expansion on the semicon industry and the manufacturing industry of semiconductors. So we have -- we believe that we have taken almost like a majority of these orders in that space. On the other hand, Applied have a large installed base, and this is a more challenging sales to replace something that the customer already has. But we believe that what we offer is also better in terms of performance and also for future proof production and so on. But that is a little bit more difficult to sell, but still, I believe we will take major part of this business as well. So I think the answer why we're so successful is that we have a really good product, I think, and a very good presence in this industry. We were active in the semicon industry 10 years ago with other equipment called Omega and similar equipment and customers are still running this machines. So we still have a present -- presence as the relevant customer. So I think that helped us a lot.

[Anders Rudolfsson, analyst]

And the follow-up on that one, how big do you think this market can be for you?

[Anders Lindqvist, executive]

I think I think we can see that this is difficult to say. I think the replacement market is quite big. And so far, we haven't sold a lot of replacement. I think that can be going on for many years going forward. The installed base is larger than 200 systems, not supplied by us. And those are getting older and will need to be replaced during the next 10 years. And I think that could give a solid base for a continuous market. I think the other -- the new investments and the new factories will be somewhat more cyclical, most likely. We are in a very good situation right now.

[Anders Rudolfsson, analyst]

Great. Well, good luck on that one. The second question I have is regarding the gross margin. It's been very strong in this quarter. And you're talking about that we will probably see a better margin going forward. Are we heading to a new -- kind of new level here? Or is it -- was it for this quarter?

[Pierre Brorsson, executive]

I think if we look at the division by division, I think we are happy where we are with the High Flex and High Volume where we are north of 40%, which is kind of the bottom. We need to take also Global Technologies to that level. They are slightly below in the quarter. For Pattern Generators, it will be a little bit more volatile, but we do think that we have done the right thing in our assembly manufacturing, where we have lowered the cost on the SLX as we have got the volume up and we think that delivering a high number of equipment will also support strong gross margin in the Pattern Generators going forward. Then when you look at the whole Mycronic, it will always be a blend of -- and this blend will be a little bit different from quarter-to-quarter.

[Anders Rudolfsson, analyst]

Right. And the final one for me is regarding the aftermarket. And you said were up to 31% now. Where do you think this could be in a year or 2 ahead?

[Pierre Brorsson, executive]

I think that we don't target to have this as a specific number. If we sell a lot of equipment, the relative share will go down. We target to grow this quarter-to-quarter. I think this is what is important. And we have some good things also coming there in -- when we speak about the SLX, where we haven't had much aftermarket revenue yet, but where the installed base is coming out of the warranty period and starting to generate aftermarket revenue as we speak. So we will continue to grow that part, most certainly. And in the other divisions, we are having this as a key theme for improving the company, improving the customer satisfaction and then also improving the profitability.

[Sven Chetkovich, executive]

And now we move over to Handelsbanken and Fredrik Lithell.

[Fredrik Lithell, analyst]

Maybe start off with touching a little bit on where Mikael was with his question on the terminated M&A deal and the costs you have had associated to that in your corporate functions. So should they now normalize? Have they been impacted in Q3 as well? And are they sliding lower in Q4 due to the fact of the termination. So that's one question. Pierre also for you, maybe the effects from moving stenciling to High Flex and moving MYSmart to High Volume, is that netting out? Or is that part of the margin rise in High Flex in the quarter? Could you elaborate a little bit on that? So we know this has a meaningful impact on top line or EBIT? .

And finally, why is it not a bigger contributor from the solid state laser technology when you do an upgrade in machines would be interesting to hear more elaboration on that?

[Pierre Brorsson, executive]

Okay. If we start with the business development costs that we had, we had a little bit in the quarter in total, all business development costs, we communicated, I think, a number of SEK 15 million in the quarter. So -- and for this specific project, there will be no costs going forward. I hope that we will have a large business development costs because of other interesting potential acquisitions and other opportunities in the future someday. But for now, we will not incur any cost on this project anymore. And thereby, they will, at this time, normalize. Then you had a question on High Flex High Volume transition, and it's actually very much a wash for both for this year. If you go back in the comparative numbers, especially for the fourth quarter last year, you will see that we had -- we have adjusted the High Flex numbers down quite distinctly. We had a small down of intangibles, et cetera. that affected the third quarter. But for the profitability, this is not the driver in the changed numbers for the good numbers for High Flex in the quarter. .

And then financially, on the solid state laser, the laser cost in relation to a machine is not so big that it has an impact on Mycronic AB.

[Fredrik Lithell, analyst]

All right. And just a follow-up on that one to understand the retrofit market part of this, when one of your customers is signing on a contract to retrofit all their machines. How complex type of project is that for the customer? And how much of sort of revenue on a consulting basis or engineered basis, is this providing you with when you do these retrofits? Is the swap in itself for...

[Anders Lindqvist, executive]

Yes. So technically, on the equipment, it's some changes but not major, and we are used to much more difficult upgrades and changes than this one, I would say. So this is not any increased challenge for us when it comes to upgrades. And technically, it's possible to retrofit all of our old Prexision. Right, there's not all of FPS on the other hand, but the Prexision for sure. But as you say, the hurdle will most likely be the customer's process, how much of requalification and changes in the other steps in the production chain will need to do. And that will change from case to case. So we don't really have how do you say, a forecast or an idea on how money actually will do this one. I think the energy saving in terms of cost versus the investment it's not really justifying an upgrade on its own. But in combination with the environment efficiency or the impact on environment, I think it makes sense. So depends a little bit on the customer's objectives and strategy when it comes to that.

[Sven Chetkovich, executive]

Thank you, Fredrik. So several of you have said that you will go back in line. And now we are ready for additional questions. So please jump in if you have any additional questions at this moment. Okay. It seems we have no more questions. So thank you very much then for attending today's Q3 presentation. Thank you.

[Anders Lindqvist, executive]

Thank you.