Edited Transcript of BESI.AS earnings conference call or presentation 30-Apr-20 2:00pm GMT

Automotive end markets remained suffered due to stay in place, travel and other social restrictions. Besi maintained attractive levels of profitability amidst unprecedented global economic conditions. Due to our flexible Asian supply chain, labor force and assembly capacity, we were able to shift production and final assembly sufficiently between our Malaysian and Chinese and even Singapore facilities to satisfy customer demand.

Besi’s gross margin of 56.7% increased versus Q4 2019 due to a more favorable product mix. Combined with lower-than-anticipated operating expense growth, net income reached EUR 13.9 million, an increase of 46.3% versus the first quarter of 2019. Similarly, our net margin grew to 15.2% versus 11.6% in the first quarter last year. At present, Besi is operating with varying restrictions on its production capacity and supply chain activities depending on location.

At the end of the first quarter, nearly 70% of Besi’s employees and virtually all production was based in Asia. Besi’s Malaysian operations have been deemed an essential industry and were recently permitted to resume full operations again. Our Leshan, China facility is fully functional since early March. Besi Singapore has also been classified economic — as an economic key sector and permitted to remain open with certain restrictions under regulations implemented on April 7 and scheduled to end on June 1.

In Europe and North America, virtually all Besi personnel are working remotely with careful adherence to local regulations. Our supply chain network is based primarily in Asia and has functioned reasonably well considering the circumstances. So far, we have benefited from our dual source supplier strategy and advanced purchases of components deemed critical to Besi’s operations. Issues to date have been related primarily to noncritical items.

We have a strong balance sheet to weather the current crisis. Besi ended the quarter with EUR 427.6 million in cash and deposits along with an unused line of credit aggregating EUR 80 million, extendable to 106 — EUR 136 million at our option. Further cash flow generation remains at healthy levels with net cash increasing by EUR 18 million or 13.8% in the first quarter this year versus the fourth quarter last year as we carefully manage working capital and costs.

As such, we intend to make the payment of 2019 dividend of EUR 1.01, approximately EUR 73 million, in May 2020 as well as continuing regular share repurchases to cover incentive compensation and dilution from the convertible notes. Including the payment of this dividend, we will have returned to shareholders EUR 729.5 million since 2011.

Next, I’d like to speak a little bit about the current market environment. This next slide presents VLSI’s climate trend index, which is a fairly good proxy to near-term industry development. As such, you can see in the fourth quarter 2019 and early 2020, we were just coming out of an extended industry downturn and moving towards gradual cyclical recovery. Then the virus outbreak became a pandemic and conditions deteriorated rapidly.

Similarly, VLSIresearch revised in 2020 assembly equipment market forecast in April to down 8.3% versus up 10.3% as late as February of this year. Further, they anticipate that the market will be declined to EUR 2.8 billion in 2020, one of its lowest levels over the past 10 years. VLSI estimate assumes that global economic activity regained some traction in Q3.

Looking forward, VLSI expects the market to rebound strongly in 2021, ’22, with increases of 27.3% and 9.2%, respectively, from depressed levels currently. Growth is expected to be driven primarily by 5G network expansions, continued investments in cloud infrastructure and artificial intelligence applications and a new PC upgrade cycle.

Now a few words about Q2 guidance. Based on feedback from customers and suppliers, we forecast that the second quarter 2020 revenue will increase by approximately 5% to 25%. In addition, gross margin is expected to range between 56% and 58% as per the current product mix anticipated. Operating expenses are expected to decline by 10% to 15% versus Q1 primarily due to lower share-based compensation expense.

As a result, we expect Besi’s H1 2020 financial performance be higher than the first half of 2019. However, it is difficult to look beyond the first half year given the current unpredictable course, recurrence and severity of this virus in leading developed economies and its implications for the semiconductor industry demand.

Despite near-term uncertainty, we are optimistic about Besi’s prospects in the next investment cycle as the world accelerates its move to the digital society. Our longer-term optimism is supported by our strong performance in the current adverse market conditions and by advanced packaging growth drivers including 5G network adoption, artificial intelligence and the continued build-out of cloud computing infrastructure to name just a few.

We have a leading position in advanced packaging, which is an important enabler of the digital society and the new applications to be generated along with it. Combination with new strategic initiatives, a highly scalable and flexible production model and ample liquidity, we are well positioned to take advantage of industry opportunities, no matter which way the market moves in the quarters to come.

That ends my prepared remarks, I would like to open the call for some questions. Operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Mr. Robert Sanders, Deutsche Bank.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division – Director [2]

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My first question is just on the order strength you saw in Q1 from the subcon end market. I was just wondering if any of that strength was driven by a sort of scramble for capacity given some of the supply chain disruptions out there in your — in various of the countries where your customers reside. And I have a couple of follow-ups.

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [3]

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Robert, I am hesitant to answer your questions. Last time, it ended in such unacceptable personal insults that I do feel that your way of participating in our company is unacceptable.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division – Director [4]

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I’m sorry you feel that way. Maybe we should take that off-line, Richard.

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Operator [5]

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Our next question is from Mr. Marc Hesselink.

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Marc Hesselink, ING Groep N.V., Research Division – Research Analyst [6]

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Yes, yes. My first question is on the mobile applications in the order intake. What kind of mobile applications are that? Is that — did you have significant design wins in there driving that?

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [7]

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Yes. It is design wins and also new features into next-generation models. One of them is, of course, 5G. Another one is the next-generation facial recognition. There are also other features, which have newly been designed and will be introduced in next-generation models.

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Marc Hesselink, ING Groep N.V., Research Division – Research Analyst [8]

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And is that for both Android and iOS or…

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [9]

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Yes. Some are for both. Some are for only iOS. But it’s broad and also several high-end smartphone manufacturers.

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Marc Hesselink, ING Groep N.V., Research Division – Research Analyst [10]

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Okay. Then second question is, what are you seeing in the order behavior of clients? Are they — clearly, the order intake is still good, but are they maybe pushing it out a little bit, really putting it in into the last moment? Or what kind of discussions do you have at the moment?

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [11]

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Well, first of all, the overall environment is what it is. And orders are placed timely and as you can see in Q1, it is indicative that our guidance, which was a very broad range, actually ended somewhere close to the middle. So despite significant unrest starting end of February or let’s say, second half February, there is a reasonable trend upwards, which continues into Q2, also in April. So that is positive taking into account the negative news we hear around us all day.

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Marc Hesselink, ING Groep N.V., Research Division – Research Analyst [12]

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Okay. And then final — my final question is on the supply chain that you’re seeing today because actually, it seems you mentioned in the press release, but looking at the numbers, it seems that it was not too much impact on maybe lost revenues because of the supply chain disruptions. If you look ahead, now that you had the initial setbacks of the load plan, is there still significant risk of supply chain disruptions going forward?

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [13]

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Well, it’s a very good question. And it can be answered with, as it looks now, less risk than we had from end of February till date. And why? One of the important changes is, as of yesterday, 100% reopening for our facility in Malaysia and also all of the subcontractors in Malaysia. That should give us less risk going forward.

China already, as mentioned, since early March, things started to improve, the whole supply chain as well gradually. The only risk, of course, we have is a recurrence of a corona outbreak. But currently, it looks better. That’s also why we have indicated this larger range again. The orders are in, even more than that. Orders, as mentioned in April, also are very positive.

So it is what it is in the current situation. We can manage very well. We have many dual source. We have also more than dual source, triple. We have immediately also widened the scope of subcontractors. Also, again, qualifying certain historical European suppliers simply to mitigate the risk because, number one, the one who can deliver wins in today’s market. So that looks very positive.

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Operator [14]

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(Operator Instructions) Our next question is from Mr. Wim Gille, ABN AMRO.

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Wim Gille, ABN AMRO Bank N.V., Research Division – Head of Research & Equity Research Analyst [15]

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Yes. I got a few questions. First of all, I noticed that the head count in Asia went up by 34 temps quarter-over-quarter. Is this more to resolve some COVID-19-related inefficiencies? Or are you preparing for some additional volumes in the second quarter?

The second question I have is on the demand that you see from your customers, it’s mainly the Chinese customers, which are driving demand at this particular moment. What do you see? What are they kind of preparing for? Or what are they building? Are they just ordering mainstream equipment? Or are they now also increasingly ordering equipment to move into leading-edge applications? So; I’m kind of curious to see what you guys see in China from the buildup over there.

And then the final question is on the CapEx guidance by TSMC. And also, if we look at the outlook for VLSI, they are rather cautious for the second half of 2020. And I fully understand that you’re not going to give any guidance for the second half of 2020. But maybe in a more broader terms, what do you see happening in the second half of this year?

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [16]

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Great. Great questions. First, head count up. If you simply take our revenue guidance and you compare that to revenue levels, second half 2019, it is clear that we simply need some more head count to meet the anticipated and already ramp in place. So head count related, but as you may know, we have a very solid flexible layer in Asia, which helps us to accelerate rapidly.

But also, if revenues go down quickly, we’re able to lower our head count. But what you’ve seen is clearly anticipating and working already, preparation of increased revenue. To compare the guidance, and as also mentioned in the comments, H1 2019 compared to H1 2020 should be up.

Second question, yes, Chinese customers are more and more developing their applications closer to leading-edge products from outside. But also among the subcontractors in China are many suppliers who are outside high-end smartphone manufacturers, both iOS and Android. So it’s not only — China clearly is — day-by-day, step-by-step, they are moving up the ladder into leading-edge technologies. That is, for us, a very positive development because we also have our facility in China, as you all know. We deliver to customers directly, support those customers. So that’s a very broadening market position.

Your next question is, of course, the zillion dollar question, I would say, the CapEx guidance from everyone, clearly, it’s very uncertain how the economic impact will translate in the demand for semiconductors in the second half of this year. Although for assembly capacity, after 1.5 years of correction, so second half ’18 and full year ’19, inventory levels, capacity levels are low.

So it does not indicate a downturn for the industry based on these criteria. But it all depends how significant the impact of this pandemic will be on global economy, GDP and also on semiconductor demand. So far, people are thinking positive. You have to be, as a supplier, prepared to be able to address that demand immediately. So again, the one who delivers the fastest is the winner.

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Operator [17]

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Our next question is from Mr. Nigel Van Putten, Kempen.

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Nigel Van Putten, Kempen & Co. N.V., Research Division – Analyst [18]

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I’ve got 2 questions on the growth of OSAT business into the quarter. First off, is that all China? Or were also other countries like Singapore or Malaysia contributing to the increase?

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [19]

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Mostly Taiwan. So it’s…

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Nigel Van Putten, Kempen & Co. N.V., Research Division – Analyst [20]

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Taiwan, of course.

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [21]

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Taiwan, China and somewhat Korea.

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Nigel Van Putten, Kempen & Co. N.V., Research Division – Analyst [22]

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Great. And then also on that same subject, I mean OSAT in the past have always been more of capacity built. But I think that more recently, some of the bigger ones have become more vocal on their role in advanced packaging, et cetera. So do you think the increase you’re seeing today is mostly tied to capacity or more technology?

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [23]

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Technology.

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Nigel Van Putten, Kempen & Co. N.V., Research Division – Analyst [24]

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There might be — technology. Yes.

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [25]

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Key is new features. And that’s where OpEx is growing, anticipating on new product launches, and that’s similar in the smartphone world as in the logic world. So in an environment, which does not grow, as indicated by the temperature graph from VLSI, the anticipated growth for ’20 has slowed down. But the capacity build for new features has continued.

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Nigel Van Putten, Kempen & Co. N.V., Research Division – Analyst [26]

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Right. That’s clear. I think Qualcomm also last night said that they expect the number of 5G shipments to remain the same. So they are mostly fabless. We could see some of what you’re seeing in terms of order growth for OSATs tied to developments around 5G phones, if I’m not mistaken. And that make cushion somewhat the uncertainty in the second half. Is that a correct sort of summary?

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [27]

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That’s only one. That’s only one, and we’re in the middle of that. We have gained significant market share in those 5G modules, antenna modules and modems. One of the key issues is the rollout of 5G. Then on the other hand, 5G compatibility in all of the high-end smartphones. And the comments from Qualcomm, in that sense, were very positive, again, in an environment, which is careful.

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Nigel Van Putten, Kempen & Co. N.V., Research Division – Analyst [28]

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Okay. I got a question also on the gross margin that you can tie into the split in terms of revenue. Margins for the first quarter are actually higher than the range, impressive, considering all the supply chain issues everybody is talking about. But also there’s a higher range, 56% to 58% for the second quarter. In the press release, you’ve mentioned that’s mostly mix. Is that something that is now sort of a — is that because of this new investment cycle? Do you think there may be a shift in products or applications that would make gross margin structurally higher? Or is that maybe too soon to make that conclusion?

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [29]

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There are 3 elements which are important, maybe we should have been a bit more specific. Number one is the product positioning. That is currently, let’s say, offering us the higher-margin structure. Number two is our continued cost reduction programs, despite the uncertainties and the shifting from China to Malaysia and back. We have ongoing cost improvements. And number three is the high dollar. So the increase of the dollar, it’s a dollar business, has helped us.

On the other hand, the Swiss franc has increased, and that is negative in terms of R&D costs. But overall, always the key in understanding gross margin is product position cost. So that means for the second quarter, and we indicated mix is better than the first quarter, also, the dollar content. And that could lead to a higher gross margin in the second than in the first quarter. Lower cost, OpEx gives us better net.

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Nigel Van Putten, Kempen & Co. N.V., Research Division – Analyst [30]

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Yes, maybe I would…

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [31]

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And tax rate.

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Nigel Van Putten, Kempen & Co. N.V., Research Division – Analyst [32]

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Yes. Got it. Last question, you said already twice the company that delivers fastest gains the business. I think there was one bigger competitor that had plenty of issues in the first quarter weren’t able to ship. Were you able to take market share because of that? And is that structural? Or is that maybe, yes, too specific?

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [33]

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Well, whether structural or not, you don’t know. But again, the developments on our supply chain, in our operations, we are constantly able to reduce our manufacturing lead time. And that gives us strong market position, also with supply chain structure, and we are also expanding that, as I mentioned earlier. Because in an uncertain market, decisions of customers are always at the last moment. That’s what the market is today. Whether that tomorrow will improve, probably not tomorrow, but at some point, it may, a lot still has to happen. So we foresee that uncertainty continue, then the focus on delivery is a key differentiator.

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Operator [34]

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We have no further questions, sir, please continue.

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Richard W. Blickman, BE Semiconductor Industries N.V. – Chairman of Management Board & CEO [35]

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Thank you all for listening in. If you have any further questions, don’t hesitate to contact us. Thank you. Bye-bye.