Mycronic AB (publ)

STO:MYCR

Earnings Call Analysis

Mycronic's Q3 Highlights: Strong Sales Growth Amidst Market Challenges

In Q3, Mycronic achieved a significant sales increase of 40% to nearly SEK 1.8 billion, driven by robust performance in Pattern Generators and Global Technologies. Despite order intake declining by 1% to SEK 1.5 billion, EBIT more than doubled to SEK 547 million, reflecting a strong EBIT margin of 31%. The company acquired Modus in Germany to enhance its High Volume division. Looking ahead, Mycronic targets sales of SEK 6.5 billion for 2024, driven by sustained growth in advanced mask writers and a stable gross margin of 40% in the High Volume sector.

Strong Sales Growth Amidst Mixed Order Intake

In Q3, Mycronic reported a remarkable sales growth of 40%, reaching nearly SEK 1.8 billion, primarily driven by its Pattern Generators division, which saw an 86% increase in sales due to strong deliveries. However, order intake showed a slight decline of 1%, falling just below SEK 1.5 billion, indicating a mixed outlook where sales excel but new orders are not keeping pace.

Performance by Division: A Closer Look

The earnings call highlighted the differing performances across Mycronic's divisions. The Pattern Generators division thrived, registering a gross margin of 73% and nearly doubling its EBIT to SEK 500 million. Conversely, the High Flex division experienced a 7% drop in sales, reflecting challenges in the European market. Meanwhile, in the High Volume division, there was a significant turnaround with a 56% increase in order intake and a 37% growth in sales, reaching a backlog of SEK 832 million.

Acquisitions and Strategic Moves

Post-quarter, Mycronic acquired Modus High-Tech Electronics, enriching its High Volume division with advanced optical inspection capabilities. This acquisition is positioned to enhance the company's technology offerings and strengthen its market presence in electronics inspection, expected to add significant value in the years to come.

Outlook for Revenue Growth and EBIT Margins

The company's guidance remains optimistic; Mycronic aims to achieve sales of SEK 6.5 billion by year-end 2024, slightly below last year's peak but still a strong performance overall. The continued focus on expanding R&D and improving efficiency underlines Mycronic's commitment to maintaining a robust EBIT margin of around 30% in a fluctuating market environment.

Challenges in the Market: A Cautious Perspective

Despite strong overall performance, Mycronic executives acknowledged pressures in certain markets, particularly in Europe, where a slowdown in demand was evident. This is influenced by broader economic uncertainties and customer-specific challenges. They cautioned that the High Flex division might continue to feel the effects of this market softness for several quarters.

Sustainability Initiatives and Future Goals

Mycronic has made commendable strides in sustainability, with over 60% of its electricity now sourced from renewables. The company remains focused on reducing its environmental footprint, reflecting a broader industry trend while appealing to environmentally conscious investors and customers alike.

Robust Cash Flow and Financial Health

The financial health of Mycronic appears strong, with a solid cash position of SEK 2.5 billion. This robust cash flow allows the company to invest in R&D and acquisitions, ensuring it remains competitive while also providing room for future growth.

Earnings Call Transcript 2024-Q3

[Sven Chetkovich, executive]

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

With that, I hand over to Anders. Please go ahead and present Mycronic's Q3 report.

[Anders Lindqvist, executive]

Okay. Thank you very much, Sven, and most welcome to everyone to today's session. So I will start to present a short overview of the quarter 3 results and what has happened. We'll also look into the different divisions and the development. And Pierre will talk a little bit deeper on the financials. And finally, a few words on our work in sustainability, and then we finish with the question and answers.

Starting with that -- starting with the quarter, I think we saw a very good increase in sales and EBIT. Order intake was quite flat on not a super high level, declined with 1% to a little bit less than SEK 1.5 billion, but we saw a really good increase in sales of 40% to almost SEK 1.8 million. And this is very much driven by the Pattern Generators. We had very good deliveries in that division. But also, we saw a very good contribution from other divisions such as High Volume and also Global Technologies that contributed very positively to the performance.

Because of the mix in Pattern Generators, we also have a very good EBIT margin of 31% and the absolute EBIT more than doubled compared to the same quarter last year to SEK 547 million. Backlog, a little bit down as we sold more than we had order intake. It was down to almost SEK 4.4 billion, which is still quite good. And we had one event after the quarter is that we acquired a company in Germany called Modus, talk about that a little bit more when we come to the High Volume division, which was the division that acquired this business.

If we start with Pattern Generators, we have seen a stable market for photomasks, also both in display and in semiconductors. We have a milestone in the business, which is that we have got our first order for delivery in Europe for an SLX mask writer for the semi-con industry. Order intake goes up and down very much with the quarters as it's more lumpy in the Pattern Generators business on short-term. So we saw a decline down to SEK 274 million, and we had only 2 orders for 2 SLXs received in the quarter.

Sales, we delivered quite a lot of very high-value machines. So we delivered 2 Prexision 8 Evos and also 3 SLX. So with that, we saw a strong increase in sales up to SEK 800 million, which is 86% more. Also, that contributes to a very strong gross margin of 73% and consequently, also EBIT very strong at almost SEK 500 billion. Order backlog is stable, I would say, a little bit down because we delivered a lot in the quarter. Currently, SEK 2.9 billion, which is equal to 27 systems. And after the period after the quarter, we also received 2 more orders with 1 SLX each for the Pattern Generators. So strong performance.

In the High Flex division then, serving the High Flex market with surface mount technology. We have seen -- we have seen for a while that Europe has been very slow and the large market in Europe for us is Germany, France and the U.K. All of them, we have seen a little bit weakening demand. U.S. has stabilized, but at a low level. Asia is not so big for this division, so it's not really contributing. And in total, the order intake declined with 5% and sales down 7%. Keep the gross margin quite stable, around 40% or just below at 39%. And with all that together, EBIT down to SEK 31 million and a backlog of SEK 199 million.

And then we go into the High Volume market, which if you remember before, we have said that we have struggled quite for a while here in the High Volume market. And we have talked also recently about we have seen signs of improvement and the increase from low levels. And this continues. We see a strong positive market development compared to history. And this is both the China domestic market, but also in the markets outside of China. So strong order intake increase of 56%, sales up 37% gross margin very stable at 40%, and EBIT up to SEK 47 million and a very strong backlog of SEK 832 million. We have quite some time between order and delivery in this division. So backlog is large.

And a notable event is that -- but it was after the quarter that we acquired from the High Volume division, a company in Germany called Modus High-Tech Electronics, a very specialized company doing optical inspection of electronics after the process of coating, soldering and components and PCB assembly. So this will be a very good technical addition to the high volume products and enhance the functionality and features of them. So we are very happy to have closed this one. Company is not super big, but technology is very interesting. So the last year's revenue were around EUR 4 million for this business.

Moving to Global Technologies. So driving the market, we have 3 different technologies now in the Global Technologies division. So -- and we see good demand that is AI driven or driven by AI applications. In die bonding, the demand translates into high-speed optical transceivers used in data center and other places where AI application is driving the need and the speed of these. So we had good demand on that. And the same actually applies to PCB test business for the same reasons. And we have also the newly acquired business, a company called Vanguard Automation that we call the business line, Photonic Interconnects and we have seen the first order since the acquisition. However, we have no sales in this business, which you can see soon in the result.

So order intake totally up 64%, sales up 31%, gross margin at 35%, EBIT at 13%. And in that EBIT, as we had no contribution from the Photonic Interconnects in sales, but only cost had a negative impact of SEK 14 million on that result. And backlog quite good at SEK 457 million. So we believe the business is quite stable and good performing. And because of that, we believe that we can confirm our previously communicated target for 2024 to reach a sales of SEK 6.5 billion at the end of the year.

So with that, I will hand over to Pierre to dig a little bit deeper into the finances.

[Pierre Brorsson, executive]

Thank you, Anders. We'll take a look at this one where we see that we have a continuous very strong development over the past year. We have now 4 super strong quarters after each other, and we are touching the SEK 7 billion mark on the rolling 12-month basis at an EBIT margin of 30%. On the aftermarket side, we see continuous growth, albeit small at the moment, also a little bit fighting the somewhat stronger Swedish krona than a year ago in some of the markets we are operating. So we had a modest increase, but there's still a continued increase, which we have been having since the start of 2021 every quarter.

Here, you see even clearer that we have had now the 4 really strong quarters. And you saw the confirmed outlook of SEK 6.5 billion, which means that we will not fully meet the very strong record quarter we had in quarter 4 of last year, but still continuing on a very strong level. We are, at the moment, delivering 31% in this quarter and with a sales growth of 40% to almost SEK 1.8 billion.

If we look where this improvement comes from, it comes mainly in the gross profit. It's volume driven by Pattern Generators, mainly, where we also saw not only an increased volume but also an improved margin in the quarter. On the organization side, we continue to build our footprint in the marketing and sales, and we continue to develop new innovative solutions in the R&D side and continue to increase the spend there, albeit at a slower pace than the revenue is growing at the moment. We see good opportunities both in improving the footprint as well as new innovative solutions in all divisions.

If we look at where this improvement came from in the other dimension by division, we can see that the majority of the improvement came in the Pattern Generators division, which is also contributing by far the most. We had a decline in the High Flex division, even if we don't see the same kind of decline as the market is declining volume-wise. But this is still a decline of around SEK 30 million for the quarter. Improvements in High Volume and in Global Technologies. And in Global Technologies, it's fair to add that we also bore the cost of around SEK 14 million for the newly acquired Vanguard, where we did not have revenues in the quarter. And -- but we did get the first orders in. So there will be less of an impact going forward. So this division actually delivered 10% margin if you exclude that for the quarter.

Cash flow is still strong, especially the result, of course, but also on the working capital side, it's fair to mention that in the comparative period of last year, we had very strong advanced payments coming into the Pattern Generators. So we had an increased inventory between end of the year and the third quarter, which we also had last year, but then being offset by this high advanced payments that we received.

On the investing activity side, half of the amount that's gone out has gone to the acquisition of Vanguard, and then we have investments in R&D and fixed assets making up the rest. On the financing activity side, the main part is related to the dividends paid out earlier in the year and some IFRS 16 repayment of leases. Still a very strong cash position and cash at the end of the period of SEK 2.5 billion.

With that short summary, I hand the word back to Anders.

[Anders Lindqvist, executive]

Okay. Thank you, Pierre. So we're moving forward with a few words on sustainability. And I'm very happy to say that we make a lot of progress on the sustainability side and very much is related to the science-based target, which we have applied and been approved for and so on. And we have already started to do a lot of effort in there. And as an example of that is the -- our facilities in U.S., Japan and South Korea, where we have been able to switch to renewable electricity, which makes a quite big impact on the emissions in the Scope 1 and Scope 2 categories.

And if you look on the total footprint from the group, more than 60% of the electricity now come from renewable sources. So still a bit to go, but great progress on that. Continuing our program in the Pattern Generators to upgrade the different lasers, which plays a key role in the other climate targets, Scope 3, which is our biggest part of emissions coming from that. And you could see that the program which is replacing older gas lasers in our customers with more energy efficient solid-state lasers are continuing and is well progressing and well received by customers. We can also mention in addition to what's here that this laser is also in the new models sold. So when we're replacing the old equipment, we get this effect as well.

So yes, with that, I think we have ended the normal or formal part of the presentation and can move into the Q&A session. So Sven, will you moderate?

[Sven Chetkovich, executive]

Yes. Thank you, Anders, and thank you, Pierre, for presenting. And now we are moving over into the Q&A session. So we will start with Carnegie and Mikael Laseen. So it seems we don't have Mikael online. So then we will instead move to Fredrik Lithell at Handelsbanken.

[Fredrik Lithell, analyst]

Congrats to a very strong results. I have maybe 2 and then I will get back in line and I have a few others after that as well. But in High Volume, if you could describe a little bit more -- we have sort of seen the handset global market improve and all that stuff. So that is a driver for you. And so I'm curious to see how you see the sort of the order intake and the activity among your customers progressing. So that's one thing if you could describe the landscape a little bit for High Volume.

And another question on High Volume is the margins are staying unchanged more or less year-over-year despite the higher revenues. So could you describe a little bit, is it product mix in that? Or what is holding the margins from coming up together with revenues?

[Anders Lindqvist, executive]

So I will answer the first question, and then Pierre will take the second one there on the margins. So when it comes to customers in the High Volume division in those -- in the difficult times, which maybe still exist to some extent, we expanded quite a lot in the High Volume to serve more applications. We addressed also semiconductor segment and also electrical vehicle -- the automotive segment, especially electrical vehicles, you can say.

And now -- but still the biggest contribution to that business is consumer electronics. And it's more now the consumer electronics that have turned. I think you referred to handsets, but we see a lot of next-generation models coming both on smartphone, but also things like smart watches, airpods, accessories, small fun stuff, if you want, for consumers. And many producers are now launching the next generation.

In China, we see a lot of manufacturers that we don't see in Europe are also launching very advanced and very nice new smartphone models with a lot of features and so on. So there is an increased demand from the market because of that. We have also become much more global than before. So our contribution from sales outside China is bigger than ever, and that market is also growing, especially in places such as Mexico and Thailand and Southeast Asia, in particular. So it's very much driven by the market and the customers. But at the same time, we have really increased our coverage, serving more applications and cover more customers. So it have a little bit of double effect.

[Pierre Brorsson, executive]

If we speak a little bit about the margin and the margin development, in particular on the quarter then, I assume we had a few of the consumer electronics projects that went out, which were at a relatively competitive and low margin on the gross margin side. We have slightly higher investments on the R&D and sales side as well as we have a lower level of subsidies and grants coming in from -- which is then reported as other operating income in our income statement. So this makes up the difference. But the underlying performance is we are quite happy with.

[Sven Chetkovich, executive]

And now we will move over then to Anders Akerblom at Nordea.

[Anders Akerblom, analyst]

So a few questions from my end. Just on -- firstly, on the kind of margin profile in the PG division. I mean, this was obviously quite strong and up quite a bit both sequentially and then in year-over-year. I'm wondering to what extent this is purely mix driven? And to what extent it might be impacted from higher service revenues and such? So kind of to what extent one can extrapolate kind of this very solid gross margin?

[Pierre Brorsson, executive]

On the service side, the margins are relatively similar quarter-over-quarter. So there's no big changes on that side. Then the product mix going out on the equipment side is very different from quarter-to-quarter. Even if we have some underlying trends, especially we have been and able to improve the cost on the SLX side over -- for the semicon industry so that we get better margins on those equipments. On the display side, it varies very much from machine-to-machine options, et cetera, that goes into the machines.

[Anders Akerblom, analyst]

I appreciate that answer. But I mean a bit more maybe on -- so are you seeing aftermarket revenues kind of trending up and that being a positive contributor to the gross margin profile kind of irrespective of the mix?

[Pierre Brorsson, executive]

No, we don't see --

[Anders Akerblom, analyst]

I mean, the mix driven.

[Pierre Brorsson, executive]

Yes. We don't see a big shift in the aftermarket revenue. We are continuing to add service contracts on the machines that go out, and we have had a few of the SLX machines going out, but there is not a big explanation in those contracts in the quarter, no.

[Anders Akerblom, analyst]

Makes sense. And kind of on the order intake side, I guess what kind of deviated a lot here was the Global Tech division. So up almost 100% sequentially and 60% year-over-year. Is this pretty much only the new acquisition or is it an underlying improvement as well?

[Pierre Brorsson, executive]

No, the new acquisition accounts for about SEK 15 million of this. So this is not the main differentiator. We had a very strong quarter both in -- it's actually a record quarter for Global Technologies. So we had a very strong quarter in both the traditional business line, die bonding with a fewer customers making up the big numbers and PCB test, a little bit more customers making up the total.

[Anders Akerblom, analyst]

So if we kind of exclude -- going forward, if we exclude kind of the costs associated with the new division or the new business unit, kind of looking at the margin profile then, there is quite a difference to -- I mean, both quarter-over-quarter and then year-over-year. Should we -- how should we think about kind of the margin trajectory in Global Tech going forward? Will kind of -- if we exclude just the new business, will it, going forward, be dilutive or kind of accretive to that margin if we exclude it in this quarter?

[Pierre Brorsson, executive]

If we take the ongoing business first, I mean, we have been quite clear that we want to make sure that all our businesses contribute with at least 10% EBIT margin. And this is what we expect on Global Technologies, say, the traditional ones. And then we invest in a new venture, which may take a little bit of time before it ramps up and reaches that level. So at least above that hurdle, we expect for Global Technologies going forward. And we were just on that mark for this quarter.

[Sven Chetkovich, executive]

So with that, we will go back to Handelsbanken and Fredrik Lithell.

[Fredrik Lithell, analyst]

Could we maybe talk a little bit about High Flex and the softness? I mean, we've seen the PCB assembly industry, especially in Europe with a few profit [ warnings ] out and all that stuff from your customers. Is there any sort of sign of stabilization you feel in Europe? Or should we sort of expect that this continues to be a soft spot for a few more quarters before it stabilizes?

[Anders Lindqvist, executive]

I think Europe will not turn very quickly. And what has affected our peers, if you think about Kitron or NOTE and NCAB and those, which are seeing the same kind of weakness in Europe as we are, but being more affected than we have been. I think -- so it's the same effect. I think what is different for us is that we are even more in the High Flex. It's more flex in our -- or more High Flex in our flex. I think our customer group is a little bit less impacted, having more into medtech and defense industry and those kind of applications. But -- and normally, if you have seen traditionally in downturns, we are shrinking less in the downturn, but also accelerating less in the upturn. So it's a little bit later in the cycle as well. But looking on the market outlook, we don't foresee a quick turnaround in Europe. I think it will continue for a few quarters.

[Fredrik Lithell, analyst]

Can I take another high-level question on the PG side? We've seen that the Americans are talking about banning displays from BOWEI and Tianma to large display producers in China, not -- maybe not specific clients to you, but your customers are probably supplying them with masks. Any thoughts on that? Is this going to create sort of a shift in who is producing what masks to who? And is it going to strengthen the Japan, Korea hub of display production sort of is it driving new contracts for you over time? What's your thoughts on this? If it happens, I'm not sure if it has happened, but if it happens.

[Pierre Brorsson, executive]

We obviously saw those news as well, but it's still a little bit unclear exactly what will happen. There is no alternative display industry in the U.S. or in Europe. So it is still the Asian market. And if this would be an equipment ban on those, then the mask will have to come from someone else. And on the display side, we are supplying generally the most of the equipment. So that would be -- I mean, investments in other facilities being then in Korea, Japan or elsewhere. So -- but we don't have any more news than what has been facing in the news.

[Sven Chetkovich, executive]

So let's move over to Anders at Nordea again. Anders, do you have any further questions?

[Anders Akerblom, analyst]

Yes. Just kind of a final one on the same theme as Fredrik, also a bit high level, but I have to ask kind of in terms of the order intake in the PG division. I mean, this was well flagged, of course, a bit slower during the quarter. But still, just speaking of news flow, we're seeing some people in the market and some companies such as AMAT commenting on expecting a significant increase in capital investments for the display industry to support kind of the LCD to OLED shift.

So just timing-wise, what we've seen among some of the display producers kind of divesting some of the LCD production and such. How should we think timing-wise in terms of -- I mean, we spoke on the last quarter about your new Prexision machine, no orders as of yet. How should we think timing-wise when one can think that this will begin to trickle in to support this continued shift?

[Anders Lindqvist, executive]

That's very difficult to say. I think on the long term, we share the view from AMAT as well on the display industry. And there's also market data supporting that displays are -- will grow in the future. And as you say, very much driven by the technical shift to larger AMOLED screens. This has been traditionally -- the LED technology has been on the smaller sizes, and that is now coming into the larger displays and which will support the need for advanced mask and advanced mask writers.

And that's also why we have launched, of course, the P 8000, which have generated interest. And as you say, not yet any order, but we are in several discussions. So our view is similar. It's difficult to say what is the timing of investments. I mean the -- to get the mask shop from idea to what the production is maybe 2, 3 years, at least, maybe more than 3 years than 2 years. And the mask writer is one of the most expensive and significant equipment in such an operation. So it's quite early. So difficult to say quarter-by-quarter, but for the next 3, 4 years, we should see a positive development on this.

[Anders Akerblom, analyst]

Sounds reasonable. Just kind of on that theme quickly, but just out of interest, are you seeing a shift in terms of selling more to OEMs compared to mask shops kind of given the price point of the new machines and kind of the R&D spend among OEMs? Or is that dynamic kind of similar?

[Anders Lindqvist, executive]

That's -- I would say, without having exactly the fact, I think it's quite similar. I have not really noticed any change in that. There are more or less the same mix as before, as usually.

[Sven Chetkovich, executive]

We now have Mikael Laseen from Carnegie online as well. Mikael, do you have any questions you would like to ask?

[Mikael Laséen, analyst]

Yes, I came in from another conference call a few minutes ago. So I missed the Q&A, unfortunately, but I can reach out to you guys. So we are not repeating anything here.

[Sven Chetkovich, executive]

Well, I'm not sure whether Fredrik had another question. So back to you, Fredrik, again.

[Fredrik Lithell, analyst]

I was hoping for Mikael there, but I'll take another stab here on a question on PG division. Margins are very strong. It's a product mix thing in it. But is it so -- if you dissect the details, is it so that have you done anything on your pricing side on any of these machines or have you been able to improve productivity in production or the input costs in components so that you, that way have been able to improve your gross margin? It would be interesting to hear that discussion.

[Pierre Brorsson, executive]

Yes, I think we are always trying to deliver the optimal value at the optimal price point. There is not significant leap in any way on that side. On the SLX side, we have continued to improve the product cost by having a larger amount of units produced. So there is a bit of cost improvement over time. And then it's a matter of the options that go in and the value that we can create in the deliveries we have in the quarter.

[Fredrik Lithell, analyst]

But nothing on the PG machines, the Prexision machines is not so that you have been able to switch out any components that have been very expensive to cheaper ones or something like that?

[Pierre Brorsson, executive]

No, there is no giant steps, no.

[Sven Chetkovich, executive]

Okay. Anders, did you have any further questions, Nordea?

[Anders Akerblom, analyst]

No further questions from my end, but I think Mikael has.

[Sven Chetkovich, executive]

Okay. So then I move over to you, Mikael. Did you have time to figure out a smart question for us now?

[Mikael Laséen, analyst]

Always, lots of questions. But one thing that I have been thinking about during the quarter is that one of your customers has talked about softer demand for your photomasks, both in semi-con and in displays. And I was just curious if you have addressed this maybe during the call or what your view on this is, if this is isolated or if it's more broad-based, could lead to maybe temporary delays in placing orders for the SLX side or for the Prexision side?

[Pierre Brorsson, executive]

We don't have any data points to -- that would really support that from what we -- the information we have is that the utilization of the machines are quite good.

[Mikael Laséen, analyst]

Okay. So nothing sort of standing out demand-wise, the market continues to be in line with what you saw in Q2 or in Q1?

[Pierre Brorsson, executive]

Yes. Correct.

[Sven Chetkovich, executive]

Okay. Well, I believe that with that, we have now reached the end of today's presentation. Thank you very much for attending.

[Pierre Brorsson, executive]

Thank you.

[Anders Lindqvist, executive]

Thank you.