Pfeiffer Vacuum Technology AG

XETRA:PFV

Earnings Call Analysis

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Pfeiffer Vacuum conference call regarding the first 9 months results of 2022. [Operator Instructions]

Let's now turn the floor over to Heide Erickson, Head of Investor Relations.

[Heide Erickson, executive]

Thank you, and thank you very much. And also from me, a good afternoon, ladies and gentlemen. Welcome to our first 9 months and third quarter 2022 results conference call. Our presenters today are our CEO, Dr. Britta Giesen, as well as our CFO, Benoit Guillaumin.

During the call, we will reference slides, which are available on our website in the Investor Relations section at group.pfeiffer-vacuum.com. As always, we are happy to answer your questions at the end of the call.

And with that, I would like to hand the call over to Dr. Britta Giesen, Ms. Giesen, please.

[Britta Giesen, executive]

Good afternoon, ladies and gentlemen, and also warm welcome from my side. I'm very pleased with our performance during the last 9 months for a number of reasons as outlined on Slide 3.

First, our customers have shown confidence in our ability to successfully manage in a challenging, high-demand environment as indicated by our high sales and order intake.

Second, our teams very effectively navigated a difficult supply chain, which has been the primary limiting factor for an even more pronounced growth in 2022.

Third, we are making significant progress in our strategic objectives, increasing our market share and achieving EUR 1 million in sales, while driving our sustainability. We will do this by moving even closer to our customers.

Before I touch on these points in more detail, let me summarize our financial results for the first 9 months outlined on Slide 4. Sales reached an unprecedented high level of EUR 669 million, up 16% from the same period last year. The order intake of EUR 867 million was up 25%, with continued strength in the third quarter.

With a backlog of EUR 514 million, up 63% from year-end 2022, we achieved another record level. The EBIT margin improved year-over-year by just over 1 percentage point to 14.1%.

Finally, capital spending of EUR 52 million was up EUR 30 million from the previous year as we are executing our strategic plan to drive growth.

On the back of these excellent results, we again raised our sales guidance and now expect to reach sales of EUR 860 million to EUR 880 million in the full year 2022. This represents a sales growth of approximately 11% to 14%.

Sales by segment for the first 9 months 2022 shown on Slide 6 give another perspective on how broad-based the demand is for our 2 segments, Semiconductor and Emerging Technologies as well as Analytics, Industry and R&D.

In this segment, Semiconductor and Emerging Technologies alone, sales grew by 17% year-over-year to EUR 344 million. This represents 51% of our total sales.

Sales in the segment Analytics, Industry and R&D also increased by a remarkable 15% to EUR 325 million year-over-year for the first 9 months of 2022. Here too, the demand is broad-based, but particularly strong in the industrial high vacuum portion of the segment.

We currently have some very positive market dynamics with technology for the semiconductor market at a strong level and the Analytics, Industry and R&D segment generally driven by the energy transition and high-end production technologies.

The sales for our products in the first 9 months 2022 from a geographical perspective, as shown on Slide 7, were particularly strong in the Americas. Sales to the Americas increased by 37%, reflecting the strong demand, particularly from our semiconductor customers as well as the positive impact of the foreign exchange rate of euro to U.S. dollar. Without this foreign exchange impact, sales in the Americas grew by approximately 22%.

In Europe, sales were up 13% based on the high demand also from the semiconductor market.

In Asia, sales were up 7%. Please keep in mind that the year-over-year comparisons for Asia is particularly challenging in relation to the extraordinary year 2021 when year-over-year sales growth was at an outstanding level of 42%.

In the first 9 months of 2022, we generated 30% of our total sales in the Americas, Europe accounted for 31%, and Asia remained our largest market with 39% of total sales.

Shifting now to our EBIT performance on Slide 8. The first 9 months 2022 EBIT margin improved by 1.2 percentage points to 14.1% of sales compared to 12.9% in the first 9 months of 2021. This was driven by the gross profit margin, which improved to 36.4% in the first 9 months of 2022 compared to 35.4% in the same period of 2021.

This is the result of efficiency improvements we implemented, partially offset by higher cost related to the management of the overly stressed supply chain and by increasing general and administrative expenses. Benoit will provide additional details regarding expenses and profitability in a few minutes.

I would like to make some initial comments on our supply chain and our growth investments. Going into the third quarter, we were increasingly concerned about the stability of global supply chains, particularly as we saw first breaks in strained supply chain starting in the second quarter 2022. The strain in the supply chains continued in the third quarter, but were less severe than expected. In addition, product lines less impacted by supply chain challenges were able to ramp up.

Finally, critical electronic components arrived late in the third quarter, which allowed us to quickly finish the assembling, testing and shipping of the already manufactured products. Overall, supply chain conditions remain stressed, but we are currently not seeing a significant rupture.

One of the critical investments that we are working on is the common IT infrastructure across the entire organization. The first implementation that small units have started in the meantime, we are carefully managing the rollout of the common SAP platform over the next 5 years. It is early, but so far, the implementation is going very well. This system will be essential to increase our efficiency as we serve a diverse global customer base.

In the medium term, these efficiency increases will offset additional costs incurring particularly in the current implementation phase.

We also continue to invest in our global production infrastructure. Our capital expenditures for the first 9 months 2022 were EUR 52 million, up EUR 30 million from the same period last year. We are investing in expanding our global production facilities, modernizing existing buildings and continue to buy machinery to meet the current and future demand of our customers, while modernizing our production processes.

Sustainability is also an integral part of our decision-making. As we expand and continuously upgrade our production facilities, we ensure high energy and material efficiency to achieve our carbon neutrality targets. We use sustainable green building criteria and green building standards as part of this effort.

And we are implementing a software solution to measure, track and analyze our various emissions data, such as CO2 emissions, along the entire supply chain to long-term measure and meet Scope 3 standards and are committed to setting and achieving science-based targets in line with a science-based target initiative.

We've had all these benefits on to our customers, and we add value for all employees and for nature in our value chain. One of our goals is to continuously optimize sustainable management through our entire value chain, from our suppliers to our production, and the product life cycle with our customers on to recycling.

Within this process, there are opportunities for further improvement in the ecological and social footprint. In this way, we also have our customers in a wide range of industries to improve their footprint with better products and efficiency improvements.

Only if we act responsibly and sustainably, we can be a reliable partner for our customers and serve them in the long term. Our vision is to be the most sustainable and fastest-growing provider in our industry, driving technology for a sustainable future.

In doing so, the requirements of our customers are at the heart of everything we do. Our employees are demonstrating the engagement to pursue these goals every day. We are all committed to drive sustainability and to pursue our other strategic goals, to gain market share and achieve EUR 1 billion in sales. We are on the right track, and I am confident in the future of Pfeiffer Vacuum.

With that, I would like to hand the call over to my colleague, Benoit Guillaumin, our CFO, before I come back to discuss our outlook.

[Benoit Guillaumin, executive]

Thank you, Britta. As Britta already summarized, our 9 months and third quarter results were very strong.

Let me start with a more detailed review of our first 9 months and then shift to the third quarter 2022 results. On Slide 11, you can see that the first 9 months sales were EUR 669 million, up 16% year-over-year. Britta already discussed the drivers.

What I would like to have is that the foreign exchange rate, particularly the euro-U.S. dollar exchange rate, increased sales year-to-date by about EUR 31 million when compared to exchange rate in first 9 months of 2021. This also impacted the gross profit and gross margin development.

Our gross profit margin was at 36.4%, up from 35.4% in the previous year due to increased volume and more favorable product and market mix, partially offset by higher shipping, personnel and material expenses as well as due to the timing of certain expenses.

With an increase in inflation, material expenses continue to rise. Please keep in mind that due to average cost accounting, increased cost of new materials being delivered is not yet fully reflected in the results. Generally, today's price are higher from the same materials compared to the average in our inventory. However, we have also increased sales price to our customers where appropriate in order to reflect these new realities, which offset some of material price increase.

Selling, marketing, general and administrative expenses for the first 9 months of 2022 also increased by a combined EUR 18 million to EUR 125 million compared to EUR 107 million during the same period last year due to generally higher personnel costs. In addition, IT expenses increased as we are building our global IT environment.

Finally, we are now able to connect with our customers and partners face-to-face again, which increased travel and marketing expenses. As a result, EBIT for the first 9 months of 2022 was EUR 94 million, up by 27% compared to the previous year. Those -- the EBIT margin for the first 9 months 2022 improved further to 14.1% compared to 12.9% for the same period in 2021.

The balance of other operating income and expenses during the first 9 months of 2022 decreased by about EUR 1.3 million compared to 2021, particularly due to currency effect, partly offsetting the positive foreign exchange impact we saw in the top line development.

Let me make also a few comments on third quarter 2022. As outlined on Slide 12, sales in the third quarter increased sequentially from the second quarter 2022. Year-over-year sales in the third quarter '22 increased by 24% compared to last year's third quarter.

On Slide 13, you can see that the EBIT margin in the third quarter was 14.9% compared to 14.2% in the same period in 2021. The primary drivers are the same, as already mentioned in the year-to-date performance discussion. However, the timing of expenses fluctuates between quarters.

Shifting now to selected balance sheet items on Slide 14. Total assets increased by 17% from year-end 2021 to EUR 826 million at the end of third quarter 2022. Inventories increased by EUR 80 million compared to year-end 2021 to EUR 242 million.

The increase is particularly related to higher inventories in raw materials, in addition to work in progress and finished good inventory. The inventory development is driven by the supply chain constraints and our intention to serve our customers and be able to produce and deliver our products.

Trade accounts receivables were up by EUR 18 million to EUR 138 million. In parallel, trade account payables increased by EUR 22 million to EUR 80 million related to the increase in purchasing volume.

Capital expenditure for the first 9 months 2022 were EUR 52 million and more than doubled compared to the EUR 23 million in capital expenditures during the same period in 2021.

Our investment is focused on meeting the demand from our customers today and positioning Pfeiffer Vacuum for long-term growth. This also includes moving our production and services closer to our customers. For the full year, we expect to invest well over EUR 60 million.

The equity ratio remained on a strong and healthy level of 64% compared to 65% on December 31, 2021. Despite increasing bank liabilities by EUR 40 million in total mainly to finance and investment and the increase in working capital, Pfeiffer Vacuum has no net debt from a financial liability perspective.

Cash and cash equivalents decreased by EUR 28 million from year-end 2021 to EUR 71 million, reflecting various developments, including the dividend payout, increased inventory, higher capital expenditures and the bank liability taken out.

Pfeiffer Vacuum is in a solid financial position to meet the high demand from our customers today and to position the company for long-term sustainable growth. The opportunities are there, and I'm confident in our ability to execute well.

Thank you for your attention. Britta will now guide you through the outlook and make some final comments. Britta?

[Britta Giesen, executive]

Thank you, Benoît.

Let's have a look at our order position on Slide 16. As you know, orders can fluctuate significantly from quarter to quarter. In the third quarter of this year, the order intake reached EUR 286 million, remaining at a historically high level similar to the previous 3 quarters.

Demand remains broad-based across all of our markets. For the third quarter 2022, the book-to-bill ratio was at a high level of 1.25, and we had an order backlog of EUR 514 million at the end of the quarter.

Today, with the current backlog scheduled for delivery in 2022, we're optimistic about the demand side for the remainder of 2022. However, what has created uncertainties in our Semiconductor and Emerging Technologies segment is the potential negative impact from export controls in China by the U.S. government, which were announced on October 7, 2022.

U.S. government is seeking to restrict China's access to certain high-end semiconductors and chip-making tools. While Pfeiffer Vacuum is not directly affected by these export restrictions, our OEM and semiconductor customers are and some have indicated that they expect some impact on their sales. The degree that this may or may not impact us in the future is uncertain and subject to an analysis we are currently carrying out together with these customer groups.

In addition, there's a slowdown in the end consumer demand. And therefore, industry analysts expect a slowdown of capital investment in the semiconductor market in 2023. As we have been talking to key customers over the last months, we are being told that the demand for our products continues at very high levels.

In addition, 7 larger semiconductor customers have publicly announced that they intend to continue to build out their facilities in order to be prepared for the next upturn. This sets us up well for 2023, but it is too early to discuss specifics.

A concern for us remains the stability of the global supply chain. All our purchasing department, production and logistics teams performed again above our expectations. And stress has seemed to start to ease, they were still significant.

As said at the beginning, based on the excellent results in Q3 and ongoing high demand, we raised our sales guidance for 2022. We now expect consolidated full year 2022 sales to be in the EUR 860 million to EUR 880 million range, which represents a sales growth of approximately 11% to 14% compared to consolidated full year 2021, but a sequential decline from third quarter sales. This is primarily due to the continued risk in supply chain, but even more due to the timing of shipments.

In addition, December holidays and other activities such as inventory assessment and maintenance are impacting the fourth quarter. Our expectations do not include any potential negative impact from the U.S. trade restrictions on China. It is too early to be able to make a comprehensive assessment in this regard.

The EBIT margin is expected to remain unchanged from previous expectations at about 14% for the full year 2022. as Benoît already explained, the timing of shipments, product, customer and market mix can all impact margins on a quarterly basis.

As you can see, 2022 was expected to be a very strong year for us. Our customers are confident in our ability to manage successfully in a challenging high demand environment. We are navigating very challenged supply chains better than many of our peers, and we are executing on our long-term goals. This is only possible because of the commitment and focus of our employees who work every day to keep our customers at the center of everything we do.

While we will have to manage challenges in the future, I'm confident in the market opportunity for Pfeiffer Vacuum and our ability to successfully execute our strategy in the ups and downs of the overall market.

Thank you very much for your attention, and we are now pleased to take your questions.

[Operator]

[Operator Instructions] And first up is Adrian Pehl from Stifel Financial Corporation.

[Adrian Pehl, analyst]

Actually, I've got 3 for 1. Basically, first of all, your gross profit margin in the third quarter was quite strong at 37.5%. And I was wondering whether you could share some comments on the mix in the quarter. And why was it better than in Q1, Q2?

The second question is a housekeeping one also on general administrative costs that saw significant increase of 38% year-over-year. So I was wondering what is the run rate that we should factor in. Is it like close to EUR 20 million, we should also take into account for the fourth quarter, for example? And what was the background for this magnitude in this one.

Then another question, obviously, on CapEx. Since you have increased the CapEx substantially versus last year, could you help us with the fourth quarter CapEx? Actually, what additional expenses we should see in the December period?

And last but not least, on the order backlog, and congrats to keeping orders at a very high and decent level, so is that nevertheless the peak that we should see with the backlog of EUR 540 million in Q3? Or what is your expectation? What do your customers signal? As you mentioned, you see Q4 revenues coming off, and maybe that's also signaling some slowdown in your activity.

[Technical difficulty]

[Operator]

I'm sorry, this is the operator. We we just lost Britta Giesen. So just -- I think she will be back a moment.

[Adrian Pehl, analyst]

No worries.

[Benoit Guillaumin, executive]

Maybe if you agree, I can make some comments, Adrian, regarding the development of the G&A.

[Adrian Pehl, analyst]

Yes, sure.

[Benoit Guillaumin, executive]

Okay, okay, because I think it's my role to answer to this question. So thanks for the question, Adrian. Okay, regarding the G&A, as you clearly mentioned, we see an increase, which was something expected due to the fact that we are currently in the phases of the rollout for our IT implementation. So it's something we were expecting. It's something that normally would stay at this level for this part.

The other thing is what we explained, too, is the part that we see for selling. It's not something unusual, so it's only back to normal. I would say, the last years, we were significantly impacted by the fact that we have the COVID restriction. So we are only -- we have now only a better possibility to travel again, to meet the customers, which is something that we need and to come back to a normal level regarding the marketing expenses.

So this has a combined effect, I would say to that. And it is something, which is quite normal from our side.

So I don't know if Britta is with us. Britta? No yet.

[Operator]

Not yet.

[Benoit Guillaumin, executive]

Okay. So regarding -- maybe regarding the mix because you ask also for the mix regarding Q3 versus Q2. What we explained, we have -- first of all, we have the volume impact, so asking the growth comparing to the Q2. So for sure, we prepared with growth, and we have invested, as you mentioned previously, in our fixed costs. So we start to, as you know -- I would say, the positive impact of our fixed costs, we were prepared to be able to drive this volume.

As we explained, we have -- still have and we have, and I think we are quite well positioned to achieve in the next years, the EUR 1 billion that we always mentioned for our strategy. And so for sure, now we took the note of, I would say, a better absorption of our fixed cost, which is reflecting in the development for our gross profit.

Regarding also another impact that you mentioned and you see is also the foreign exchange rate impact, which is not something that is significant. For the first 9 months, it has an impact regarding the sales of EUR 31 -- about EUR 31 million, which is something that helps to have this level of gross profit.

Regarding the mix, the mix is also good in this quarter and helped us in also to achieve this level. I hope I answered your question.

[Adrian Pehl, analyst]

Yes. Can I follow up on this one before we then probably go to the other one? And maybe if you can confirm if Britta has joined. Again, when you say -- I mean, probably in the third quarter, there was quite a significant FX impact alone. How did that impact your EBIT result in the quarter.

[Benoit Guillaumin, executive]

So it impacted positively for sure on the quarter, as you can imagine. Nevertheless, we have also some costs, which are in USD, so it has to be challenged and it has to be balanced. So it's not 100% reflected in that.

So -- but nevertheless, it's positive. We do not disclose this impact regarding the big development. But nevertheless, it's positive, so it helps us reach this level.

[Adrian Pehl, analyst]

All right. So the more of the question then at the end, when that is the case, and, I mean, obviously, you're guiding for sequentially lower revenues to some degree in Q4. But on the other hand, for the full year, obviously, you increased your outlook quite visible on the top line, but you're still saying you're going to keep the 14% margin target unchanged.

I mean, you could be on one hand just conservative. On the other hand, even if you see more revenues, the question is that, why don't you have any operating leverage on these incremental portions of sales?

[Benoit Guillaumin, executive]

We will continue to -- as we said, if you look at our Q4 reviews, we have -- it's a little bit -- we expect a little bit lower than Q3 due to the fact -- and it has been explained by Britta in her comments, due to the fact that we have no -- grow further hands for the maintenance and also for the stock count. So for the inventory count that we have to do at year-end, which is something that we do regularly, we still have some supply chain constraints.

And on the other hand, we need to continue our development for midterm, long-term vision that we have. So as explained, and it was one of your questions, we will have to continue the rollout expenses for IT, which with the level of review could impact our EBIT margin. That's the reason why, today, we stay on this outlook, which is the commitment that we took at the beginning of the year.

[Britta Giesen, executive]

Okay, okay. So Benoît, I'm sorry. We've been falling out of the call, and we're back in now. Thank you for taking over from me.

If you don't mind, I'll just pick up the order backlog topic. It is very high, and our sales would be very happy if we could reduce our delivery times, which, as a precondition, would mean reducing our order backlog.

And so it would not be very negative if we could reduce it. But basically, the way it looks now, we can only do that by increasing our production output. Because until, now order intake has been continued -- have continued to be higher than sales, and book-to-bill was still over 1.

And if we do the math, and we think we can reduce the order backlog by, I don't know, a few EUR 10 million or EUR 20 million a month, it will still take very long to bring it back to typical levels.

[Adrian Pehl, analyst]

Right. Let's see, last question was on CapEx. It look quite essentially -- I mean, now that you are in investment mode, obviously, still, is it like there was a substantial increase? Is it like something we should factor in going towards EUR 70 million to EUR 80 million for the full year? Or is it being accelerated? Or do you think trend-wise this could be helpful for our models?

[Britta Giesen, executive]

Yes. I think Q3 was certainly a peak. We will be a bit above what we have budgeted as CapEx because we were able to speed up some of the investments. They're, of course, all going towards increasing capacity. I think Q4 should be -- should come back to normal levels, although we do foresee a continuing increase of investment in the upcoming years.

[Adrian Pehl, analyst]

Okay. So also more than you originally planned probably, so you're going to speed up CapEx from Q3 to Q4.

[Britta Giesen, executive]

Yes, we are, because we're also -- I mean, we've been seeing a very big wave of growth. And capacity being the limiting factor, we want to get out of that situation before the next upturn.

[Adrian Pehl, analyst]

Hopefully. [indiscernible] Okay. And nevertheless, one very last one before I jump back into the queue. When you say you're going to accelerate that, would that be actually CapEx you are deliberately targeting towards, let's say, countries or region in Europe and U.S.? Or would you say you're going to keep investing in China?

[Britta Giesen, executive]

Well, we're certainly investing in all the regions. And our big Asian production site, as you know, are Korea and Vietnam, and they'll certainly be growing. As the typical German midsized company, we're skeptical about China. And yes, of course, the other regions will also see investment.

[Operator]

At the moment, there are no further questions. [Operator Instructions] There are no -- I'm sorry. There are further questions. So we have [indiscernible] from Kepler Cheuvreu on the line now.

[Unknown Analyst]

I didn't want to start finishing right now, but one last quick question, I think. I just want to ask for your input cost inflation outlook for 2023 and if you're confident that these costs will be largely offset by price increases.

[Britta Giesen, executive]

I think the current situation is that we have gotten used to inflation again. So of course, our purchasing teams are fighting very hard to not have additional price increases. But we have implemented price increases twice this year. And if cost continues to develop, we will continue to implement that aggressively.

[Operator]

And we have a follow-up question from Adrian Pehl from Stifel.

[Adrian Pehl, analyst]

Yes. Just one actually. So I've just taken the opportunity to ask another one. On the IT rollout, when I got you directly, you mentioned something like time frame of 5 years. I'm not quite sure actually where we stand because, feeling wise, it seems to me that this whole topic of ERP implementation is now running for quite a while.

And I mean, obviously, you are not a small organization on one hand. Maybe you could elaborate a little bit on, let's say, the effort that you take. And actually, why does it take that long finally?

[Britta Giesen, executive]

Okay. Well, we're starting off in a very diverse environment, with people being used to very different processes and very different setups. And we also have a lot of variety of product types and product groups and customer groups. And all of that has very different requirements towards the IT system.

And that has proven to be a significant challenge in the conception phase. And we have -- for us, it was very important to take the time in the conception phase to assure that we have a state-of-the-art solution once we start implementation.

And the implementation has now started. The template is just being tested for the first go-live. Well, and then basically, that means now, we're, moving from the conception to the rollout phase. And yes, of course, we have a number of locations across the world, and it will take some time until the rollout team has made its way through all of these locations.

[Adrian Pehl, analyst]

Okay. So basically, you are -- what I remember this correctly, but please remind me on that. So actually, the former Adixen units are probably in other system than Pfeiffer. And you want to align that also with Busch probably. Is that the challenge that you have, like more different organizations where you have to streamlining or landscape?

[Britta Giesen, executive]

Yes, you can go to the list of acquisitions since 2010, and that gives you the number of different IT systems that we operate. So it's not only Adixen and Pfeiffer. It's also Nor-Cal and ATC and Trinos and everything that we acquired all the way, it's running on different systems, yes, and that makes it very complex.

And of course, the Busch situation was different. They only -- they had a common but very basic system, so the challenge was more to move from very basic to advanced. But that is really the overall complexity of that project, yes, you're right.

[Operator]

There are no further questions.

[Britta Giesen, executive]

Thank you all for participating in our call. If you come up with additional questions, please do not hesitate to reach out to Heide Erickson, our Head of Investor Relations. For now, have a good day, and please stay healthy. Bye-bye.