AIXTRON SE. Analyst Earnings Conference Call

Transcription

1 AIXTRON SE Analyst Earnings Conference Call 2015 Annual Results February 2016 Prepared Remarks & edited Q&As Martin Goetzeler, President & CEO Dr. Bernd Schulte, COO The spoken word applies AIXTRON SE Investor Relations February

2 Slide 1 &2 Operator & Forward-Looking Statements Operator Good morning, ladies and gentlemen, and welcome to AIXTRON s 2015 annual results conference call. Please note that today s call is being recorded. Let me now hand you over to Mr. Guido Pickert, Director of Investor Relations at AIXTRON, for opening remarks and introductions. Guido Pickert Director of Investor Relations Thank you, operator. Let me start by welcoming you all to the AIXTRON s 2015 annual results of AIXTRON SE. Thank you for attending today s call. My name is Guido Pickert, Director of Investor Relations at AIXTRON SE. I'd like to welcome our President & CEO Martin Goetzeler as well as our COO Dr. Bernd Schulte. As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or re-broadcast without express permission. Your participation in this call implies your consent to this recording. As with previous results conference calls, I trust that all participants have our results presentation slides, page 2 of which contains the usual Safe Harbor statement. I will therefore not read it out loud, but would like to point out that it applies throughout this conference call. You may also wish to have a look at our latest IR presentation, which includes additional information on AIXTRON s markets and its technologies, and is available on our website. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or a transcript on our website at some point after the call. I would now like to hand you over to Martin Goetzeler, AIXTRON s President and CEO for opening remarks. Martin? 2

3 Slide Recap Martin Goetzeler President & CEO Thank you Guido and thank you all for joining the AIXTRON 2015 annual results conference call. One year ago, on the AIXTRON 2014 annual results conference call, I shared with you our view that 2015 would be a better year than 2014 in terms of revenues and earnings. On the positive side, we did manage to achieve our earnings goals despite a difficult environment in our core market, equipment for the production of LEDs. On the other side, we were not able to reach our revenue target of between EUR m, which we communicated to the market in February, however we came in at the high end of our revised guidance range from October The good news was that we achieved, as we had expected, sequential earnings improvement in both the first half and the second half in In addition, EBITDA has been positive in the second half of Our view, one year ago, was that the prospects would pick up as 2015 went on and this was certainly the case in many of our markets in particular equipment for optoelectronics applications such as lasers, infrared and photovoltaics where revenues tripled to over EUR 46m in It was the exact same situation in the power electronics area where producers are starting to use wide-band-gap materials such as gallium nitride and silicon carbide which enable much more energy efficient devices and where we have cost effective and highly innovative solutions. Demand for our power electronics equipment more than doubled to over EUR 25m last year. We also saw solid growth in our silicon semiconductor equipment business where revenues increased by 75% to just over EUR 29m. This was largely due to strong demand for our ALD technology which has become a key element of the DRAM production of our customer. Finally, we saw solid growth in solutions for the production of Carbon Nanomaterials such as graphene and other carbon based materials even though at lower levels. However, we had a weak year in our core market: MOCVD equipment for LEDs. In fact, sales were at the lowest level for years. There are two major reasons for this. First, the market environment for LEDs is tough. Though the trend from traditional lighting towards LED lighting continues, backlighting demand was weak and therefore demand for equipment has been slow. A large part of the reason for this is the ongoing overcapacity and the related price competition across the industry which has squeezed the 3

4 profitability of the various producers which in turn has impacted their willingness to invest in new efficient production capacity, even, if the new production equipment would allow them to improve competitiveness. On the other side most LED manufacturers continue to drive significant efficiency improvements. Secondly, we have been too slow in qualifying the new AIX R6 showerhead system, which was especially designed for the Asian market. Bernd will elaborate more on the status of our AIX R6 later as well as on the San an agreement. Slide 4, 5, 6 Key Financials 2015, P&L, Balance Sheet Let me now take you through our full year 2015 numbers starting with slide 4 which gives an overview of our revenues and equipment orders. In 2015, we generated EUR million in revenues, which were 2% ahead of the previous year s EUR 193.8m. [Slide 4] 76% of revenues in 2015 namely EUR 151.0m came from equipment sales with the remaining 24% or EUR 46.8m coming from the sales of spare parts and services. These ratios are more or less in-line with the breakdown in There was a very big change in product mix in Whereas in 2014, LEDs accounted for 68% of equipment revenues representing EUR 100.3m, in 2015 they only accounted for 26% or EUR 39.7m of equipment sales. This was due to the already mentioned qualification delays with the launch of AIX R6 and the difficult market environment for LEDs. The good news is that we have had strong growth in every other market area as mentioned earlier. On a regional basis, 60% of total revenues in 2015 were generated by sales to customers in Asia, with the Americas accounting for 22% and Europe with 18%. This was a big change from 2013 and 2014 when about 80% of sales were in Asia and is a reflection of the diligent work we have done over the last years in continuously collaborating with customers in these markets. The total equipment order backlog (incl. spares and services) of EUR 42.9 million at December 31, 2015 was 38% lower than the 2014 opening backlog of EUR 69.0 million. The 2015 year-end order backlog was revalued at the 2016 budget rate of 1.10 USD/EUR as per January 1, 2016, leading to an opening equipment order backlog of EUR 48.6 million for [Slide 5] 4

5 Turning to the next slide. In 2015, we generated a gross profit of EUR 49.8m which was a considerable improvement on the EUR 39.7 from the previous year. This is reflected in the 5 percentage point increase in gross margin to 25%. The improvement is based on the better product mix, the favorable USD exchange rate, our continuing focus on lowering material cost and increasing efficiencies around service and logistics. In Q4/ 2015 we achieved a gross margin of 31% which is within our target range. For the full year 2015, operating costs at EUR 76.5m were significantly lower than the previous year s EUR 98.0m, and below our targeted annual cost level of EUR 80m. Besides extraordinary impacts e.g. from a settlement, this is a reflection of our focus on pushing productivity and efficiency as well as managing overhead costs throughout the organization. More specifically, we reduced SG&A expenses from EUR 33.5m in 2014 to EUR 27.8m last year and R&D expenses from EUR 66.7m in 2014 to EUR 55.4m in The operating result for 2015, although still minus at EUR 26.7m was much improved over the EUR 58.3m loss we generated in I also want to point out that we did break even at an EBITDA level in both Q3 and Q4. Even on EBIT level we almost achieved break even with a loss of EUR 46k in the second half. Total taxes for 2015 were EUR 3.2m mainly coming from country specific tax expenses. The net result for the 2015 came in at a loss of EUR 29.2m, which is better than the EUR 62.5m loss we recorded in 2014, but is still at a non-acceptable level. [Slide 6] Moving to the next slide, which shows our balance sheet. With regards to cash we had a negative free cash flow of EUR -57,3m primarily due the net loss and the partial return of the advanced payment to San an Optoelectronics. The second part of the advanced payment was repaid in January 2016 to San an. AIXTRON continues to have a solid balance sheet with EUR 209.4m in cash and cash equivalents at December 31 st, 2015, down from EUR 268.1m at the end of At the end of last year, AIXTRON had no financial debt and an equity ratio of 82%. There were no other material changes to the balance sheet but I would also like to add that in January, AIXTRON was named as a defendant in a putative class action commenced in the United States District Court for the Southern District of New York brought on behalf of a putative class of purchasers of the Company s securities between September 25, 2014 and December 9,

6 The complaint is making reference to an ad-hoc announcement AIXTRON published on December 9, 2015 regarding the substantial reduction in order volume from Chinese customer San'an Optoelectronics from 50 down to three AIX R6 MOCVD systems which caused a strong decline of the price of our shares and ADR s. The complaint claims in part that AIXTRON made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company s business, operations and prospects in connection with the above mentioned order. AIXTRON disputes the allegations and intends to contest the allegations vigorously Based on an initial assessment from legal counsel, AIXTRON believes that the above mentioned claim will not be successful. For more information on this complaint, please refer to our 20-F report which was filed with the SEC on February 23, Now let me hand you over to Bernd who will talk about the most important operational goals for 2016, before I finish with our guidance for the current year. Bernd? Slide 7 Technology Portfolio Dr. Bernd Schulte COO Thank you, Martin. Let me start by talking about the AIX R6 which is currently going through qualification processes at a number of LED producers. Although we are making further progress, the LED market is currently quite difficult and most customers have other more pressing priorities than qualifying new production equipment. We are keeping committed to qualify the R6 to the market, even in this challenging environment. As you might recall, our announcement from December we have reached an agreement with our Chinese customer San an Optoelectronics regarding a substantial reduction in the volume of AIX R6 MOCVD systems ordered from 50 to the three which have already been delivered. 6

7 Despite the efforts made by both parties and the achieved milestone in October 2015, in early December 2015 the technical teams of the two parties concluded that the customer s specific qualification requirements defined as the second milestone could not be met sufficiently. We agreed with San an to continue our existing partnership by cooperating on future system generations as well as on systems for other applications. This partnership includes activities in the area of semiconductors which are expected to play a significant role in Chinas upcoming 5-year plan. Going forward we remain committed to building upon our leadership positions in manufacturing technologies for Optoelectronics including LEDs, OLEDs, Power Electronics, Silicon Semiconductors and Carbon Nanomaterials. We will continue investing in R&D but in a much more focused and product orientated way, and I am convinced that this is the right strategy for AIXTRON going forward. Furthermore, we will focus on costs reduction of our products and efficiency improvements in all areas of our operation. Now let me give you our view on some of the markets we serve starting with the LED market. During 2015, demand for LED chips has grown less than anticipated by market research institutes, while at the same time the production capacity increased, also driven by governmental subsidy programs. These facts resulted in comparatively low utilization rates of LED producers. The currently prevailing overcapacity will have to be absorbed again before meaningful market driven demand for capacity might return notwithstanding potential strategic capacity investments. Over the long run, we expect to see selected capacity expansions or strategic investments combined with replacement activities of less productive equipment with systems of the latest generation providing significant higher productivities. But in the short term, visibility on LED-driven capacity demand remains very low. Following our diversification strategy, our goal this year is to continue to drive markets beyond GaN LED. The progress we have made in this space during 2015 was described by Martin before. An important focus for AIXTRON is wide band gap materials such as gallium nitride and silicon carbide used for power electronics applications. Electronic devices based on these materials are significantly more energy efficient than the established silicon based technology. They are becoming very important for applications such as electric cars, as well as power inverters and converters, just to name a few. We have already more than 45 different customers in this area including the leading players. In the coming quarters, we see growth opportunities for our AIX G5 planetary systems as an increasing number of power device manufacturer s transition from the product development to pilot 7

8 production phase. Additionally, there is initial demand from foundries and we are closely following the developments in China towards their plans to strengthen their semiconductor industry including power electronics. We also see a growth opportunity in and around OLED displays and lighting applications. We gained traction in this market last year including receiving our first order for our OPTACAP encapsulation technology. We expect to receive further orders in this area in 2016 for a high growth end-customer market which the market research firm IHS predicts will be worth USD 20bn by The good news for our large area OVPD deposition technology is that our Gen8 Demonstrator is about to be demo ready but we are happy to arrange on-site demos with customers already today. For memory chip production our QXP-8300 ALD deposition tool performs at the highest uptime levels in High Volume Manufacturing environments. It is production qualified by a major Korean producer with qualification ongoing at two other memory chip manufacturers. In addition, based on R&D projects and customer feedback, we also see tangible opportunities to support the progression of Moore s law for logic device structures with the use of compound semiconductor materials produced with AIXTRON s MOCVD technology. Here we strengthened our development partnership with a leading semiconductor manufacturer to enable the development of more efficient future logic devices - a great achievement of our teams in the U.S., UK, and Germany. Finally, we are seeing rising interest for our production equipment for carbon nanomaterials including graphene - these materials which can potentially be used in a broad range of applications such as displays, batteries and semiconductors. Last year, we successfully reinforced our global leadership in academic and industrial research and going forward we are looking to take that into larger scale production together with our customers. Given the significant number of AIXTRON R&D tools already installed and the close alignment with customers for future production requirements we feel that we are here in a very good position. With those final words let me hand you back to Martin. Slide 8 Summary and Outlook Martin Goetzeler President & CEO 8

9 Thank you Bernd. In terms of financial guidance, we see revenues this year between EUR 170m and EUR 200m million with a significantly stronger revenue generation in the second half of 2016 compared to the first half of If we do reach the high end of our guidance range, we expect earnings and free cash flow generation to improve this year compared to last year, but remaining negative. In order to do so, it also is decisive that our qualification processes and market entries are successful. Finally, we see ourselves returning to EBITDA profitability in Let me highlight our major priorities this year. First, we need to continue improving and strengthening the diversification of our technology and product portfolio. Secondly, we need to continue refining company productivity especially in and around production and service. Thirdly, we need to successfully qualify our tools with our customers, in particular in the areas of AIX R6, Organic and ALD. The past year s figures are evidence that we are on the right path with our diversification strategy and our cost management. In 2016 we continue along this path in order to return to EBITDA profitability in And with that, I ll pass you back to Guido before we take some questions Guido Pickert Director of Investor Relations Thank you, Martin and Bernd. Before we take questions could I ask everyone to limit your questions to a maximum of two each time. This will allow everyone a chance to have their questions answered. Thank you. Operator, we ll now take the questions. Operator (Operator Instructions) Guenther Hollfelder, Baader Bank. 9

10 Q- Guenther Hollfelder - Baader Bank- Analyst I have two follow-up questions on wide band gap. Can you provide us with your estimated market share in this segment today and how you see the difference between single wafer systems and your approach in this market going forward? Thanks. Before Bernd answers your second question on the technology side, basically we are not sharing this detailed market share data today. But I think we always have a view where we see GaN LED and we look at the other MOCVD applications, where the market share is significantly above 50%. And that's the area which also includes power electronics. Nevertheless, we would like you to accept that we don't share these data. Bernd, on the technology side? A- Bernd Schulte Yes, you are right, there are different approaches in the market to address wide-bandgap materials. You mentioned the batch concept as well as the single wafer concept. We are convinced about the batch concept simply because it provides for lower cost of ownership. In particular, when you keep in mind that these wide band gap power electronics devices are comparably thick devices, meaning, they require relatively long epi-cycles here the batch tool is the preferred option. And even in the silicon industry the customers are using the batch approach for these thick films. So it all comes down to cost of ownership. Q- Guenther Hollfelder - Baader Bank- Analyst Okay. What do you see on new entrants - you mentioned foundries in China are getting more aggressive here or is it mainly still driven by the incumbents in power semiconductors? Thanks. A- Bernd Schulte It's both. Operator David Lowish, Generation Investment Management. Q- David Lowish - Generation Investment Management - Analyst Quick question, just the free cash flow performance in the fourth quarter, obviously you had the return of the prepayment to San'an. Could you give us some guidance as to what was the free cash flow have been without that? 10

11 We agreed with the customer that we don't share this information on the payment. And therefore I would ask you to do your estimates based on the size of the order. But I would like to add, David, one more thing that we split this payment in two parts, about One part was in Q4 and the second part was paid in Q1. Q- David Lowish - Generation Investment Management - Analyst Right, okay. And follow-up question was, obviously we saw an improvement in the gross margin for the whole of 2015 versus How much of that is due to cost down? How much of that is due to mix effect and better inherent gross margin in the non-led segment, which are basically more prominent? In the gross margin, there are several impacts. The price mix of a better product mix has a significant impact. We also see some impact from the currency, because a lot of our invoices are in US dollars and therefore we benefit from our euro base. And then we also see improvements in reduction of the material cost. So it's a broad range of activities and impacts. That's the major reason for the overall improvements in 2015, and also for the improvements in the second half. Operator Colin Rusch, Oppenheimer. Q- Kristen Owen - Oppenheimer & Co. Inc. - Analyst This is Kristen in for Colin. Just wanted to touch on what you're seeing in terms of cycle times in the booking and acceptances, if you could build on that for me? May be Bernd, take the step on this. A- Bernd Schulte Typically depending on products and definition of the individual customer between four months and six months. Q- Kristen Owen - Oppenheimer & Co. Inc. - Analyst Okay. Thank you for that. And then any changes that you're seeing in terms of payment terms? 11

12 We definitely see a difference between the silicon industry and the LED industry. And we see differences between different regions. So there are differences that could have a structural impact going forward. But within these industries, we didn't see changes lately. Q- Kristen Owen - Oppenheimer & Co. Inc. Analyst No changes within the industries, okay. Great. And then lastly if I could, you touched a little bit on this in the last question about the gross margins. Can you talk about any relief you might be seeing on the material sourcing side? We have set up a small team which does our design to cost projects. The purchasing group is also working together with the technology group in order to find solutions with the suppliers in order to reduce our material cost base. This process started last year, we are in the middle of this process and we will continue to push that further. And we saw initial results at the end of last year. Operator Srini Sundararajan, Summit Research. Q- Srini Sundararajan - Summit Research - Analyst Veeco seems to say that the market share has gone north of 75% in terms of MOCVD. So I would like to see whether you have any comments on that. And second question is what percentage of AIXTRON's revenue will come from non- MOCVD applications in this year? Okay, thank you for your question. First of all, I think when our competitor is mentioning this number, they primarily refer it to MOCVD for GaN LED applications. If you talk about MOCVD in total, we have the GaN LED market and we have the non-gan LED market, which is covering power electronics, solar, laser and so on. And in the future there are also applications which might move MOCVD into what we call processor or logic production. What we have seen over the last couple of quarters is that we really have very, very strongly defended our leading position and actually sometimes quarter-toquarter improved our market share in this non-gan LED part. So you have to see both and I think if you wait for the next announcements from the market research companies you will also see part of that split and then you can also identify the strengths of the different companies. Regarding the split of the sales in MOCVD and others, that's definitely today a little bit difficult to predict. We also gave quite a broad revenue range today. On the other side, I would say if you look at last 12

13 year, you can see the split and you can believe that we continue to push hard in order to further diversify our portfolio, which does not always mean it must be something like silicon or OLED, we also want to diversify in areas like power electronics which is MOCVD and optoelectronics which is also MOCVD. So it really depends on the endmarkets we are addressing. Operator Malte Schaumann, Warburg Research. Q-Malte Schaumann - Warburg Research - Analyst The first one is regarding the optoelectronics business, which increased significantly in So maybe could you elaborate on the sustainability of this area, should we expect EUR 40 million plus revenues going forward in solar and laser applications? Or would that revenues come down again significantly going forward? So how should we view that area? Thank you for the question. Definitely 2015 was a very strong year in this area because we had a couple of orders which came unexpected to us and it will not be easy to keep that level. And therefore, we always say, we have to continue to diversify our portfolio by pushing the power electronics business, by getting the orders for organic and by qualifying our tools at new customers in our QXP business. So for optoelectronics, 2015 was a very high year and in 2016, the focus continues to be in all these applications we talked about. Q-Malte Schaumann - Warburg Research - Analyst Okay. Risk that it will drop down below EUR 20 million again or somewhere in between? Generally, I think a detailed number here is difficult to predict. Our hope and our expectation is definitely that we will be above 2014, but as I said, this is still a long year and we have to see what happens. Q-Malte Schaumann - Warburg Research - Analyst Okay. And then final question just regarding MOCVD. What your view is on the potential replacement market coming up in MOCVD LED. And how do you assess the potential risk that your device customers might turn to the competing system in the markets when 13

14 they might have to make a new investment decision based on the higher productivity tools? A- Bernd Schulte Regarding replacement activities, I would be less concerned about replacement of AIX G5 planetary systems. Maybe earlier generation of tools could be replaced, that's right. I would see an opportunity from customers who are currently in the situation where utilization rates are not the highest. The first tools they would switch off would be those tools which have the highest running cost per output. Those are typically tools from elder generations we shipped clearly before And there is certainly an opportunity based on what the industry needs to do and what we need to do in order to offer a solution to customers which provides so much higher productivity that you can't compete with even written off equipment going forward. There is definitely an opportunity, but to quantify this opportunity, it's quite difficult. Nevertheless, in our business plans going forward, we also plan with a certain level of replacement business. And that's as Bernd mentioned, that's also related to the uncompetitiveness of older generations. Operator Gentlemen, there are no further questions. Guido Pickert Thank you, operator. Okay then, thanks everyone for your interest and your participation in today's call. If you have further questions, then you know, please don't hesitate to contact either my colleague Andrea Su in the US or myself here in Germany. This concludes the call. Goodbye to everyone. Thank you. 14