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Edited Transcript of COTN.S earnings conference call or presentation 19-Mar-20 9:00am GMT

Flamatt Mar 19, 2020 (Thomson StreetEvents) — Edited Transcript of Comet Holding AG earnings conference call or presentation Thursday, March 19, 2020 at 9:00:00am GMT

UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst

Ladies and gentlemen, welcome to the media and investor call conference and live webcast. I am Alessandro, the Chorus call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast. At this time, it’s my pleasure to hand over to Heinz Kundert, CEO of the Comet Group.

Please go ahead, sir.

Good morning, everyone, and welcome to the Comet’s annual press conference.

For obvious reasons, the presentation will take place through a telephone conference to protect us all. Comet is at work and delivers. Work was resumed also at our Shanghai plant 2 weeks ago and Comet Switzerland is producing at normal levels. We have, of course, taken all measures to protect our employees from the virus as instructed by the authorities and beyond worldwide.

As of today, we have not registered any infection in our workforce worldwide. Many employees have set up their home offices. Only production people are on-site and some support services. As of yesterday, there is a total shutdown in 6 counties in the Bay Area in California. Affected are Comet Applied Materials and Lam research as well as Tesla and more. The shutdown was ordered by the authorities and will last until April 9. This is partially affecting our deliveries to our customers in the Bay Area only. Primary demand has not changed. Samsung announced 2 days ago that investments will continue as planned, and other semiconductor manufacturers sent out similar signals.

The biggest concern of our customers in the semiconductor industry is that we maintain our ability to deliver, which we do. We are convinced that there will be a strong ramp beyond the virus pandemic whenever it will come, and we want to be there. More about the market situation later. With that, I’m changing to the slides of the presentation.

We have 5 items. I give you a glance on the group’s results for financial year 2019. Then I will cover the strategic direction, followed by financial reviews by Nicola Rotondo, our Chief Controller. And at the end, I’ll give you an outlook. And of course, you’re going to have the option to go and ask questions.

Moving then to the next slide. Of course, you know already these numbers. We have made a revenue of CHF 371 million. This is slightly down, about 15%, over 2018. It is mainly because of the semiconductor industry that was very weak in the first quarter of 2019. Despite this reduction in sales, we could maintain a reasonable EBITDA. Of course, as you know, I’m not happy with 11% of EBITDA, should be actually 25%. But at least we made progress with several measures, especially cost savings and restructuring of IXS and EBT as well as the absence of one-time items which were in the numbers in 2018 that did not recur again.

We also could uphold the cash — free cash flow by CHF 30 million. This is also a result that made us very pleased under the given circumstances. And the equity ratio remains at 50%, slightly down from last year. So we consider ourselves as a healthy company.

Now how that — does this — what are the components of the revenue? This is, of course, mainly coming from PCT. PCT is the biggest division still with CHF 151 million sales, followed by IXS with CHF 140 million. The profit of PCT or the EBITDA is, as I said, not bad, but should be better and is because of the low volume as well as investments that we did into R&D. We did not slow down R&D at all. That has led to this 10.1% of EBITDA.

IXM is slightly down. However, they did a very good job in improving the efficiency and reducing the costs that resulted in a pretty high EBITDA of 27.8%. And a good example to show that actually, at least some people in the company now have to make profit.

Then the IXS with CHF 140 million, and CHF 12 million is a big improvement over 2018, where we had a lot of write-offs and cost savings and reduction of products happening.

EBT with CHF 15 million with a minus of CHF 6.2 million in EBITDA is actually what we expected and will go away as soon as this unit has been transferred to a new owner.

Come back to the PCT business results. You can clearly see the reduction of the sales in 2019 compared to 2018. Interestingly is that both first and second half have approximately — nearly the same sales. But a very difference — very big difference in EBITDA. Whilst the first half year has only given us CHF 3.2 million of EBITDA, the second half was much higher, that already reflects all the actions that we have taken to bring the cost down while investing into R&D. So it was not surprising what happened, surprising was the EBITDA in the second half that was pretty good.

Next, IXM is pretty flattish. The reduction of sales is mainly due to the economic situation or slowdown and comes mainly from the oil and gas sector as well as security because they have their cycles over years, and we expect 2020 to be better in security, and we’ll see how it develops in oil and gas. Very, very successful is their — management of their bottom line with cost reduction in general and also production cost could be reduced significantly. At the same time, they worked on new products. On the left side, you can see that they have the products where we have really very high hopes in terms of revenue starting from 2020 going to ’21 and the following years. The XPLORER, MesoFocus and the ION are really products which have a higher performance and lower costs for manufacturing. So we are very happy that this division developed pretty well in ’19 and has a good outlook for 2020, ’21 and beyond.

IXS had certainly a very strong restructuring behind them in 2018, now moving into 2021. The sales was up slightly. That was a good achievement after 2018 with all the problems that we had there, and significantly could improve their EBITDA compared to 2018. Of course, there were a couple of write-offs and one-time items in 2018 that did not come up again in 2019 but same, as I said, with PCT. The second half was actually very good compared to the first half, and this is also result of all the new positioning, the restructuring, cost savings and price maintenance, so to say, that we are on the right way here.

EBT business is developing without any surprise. Of course, we have isolated this unit, so it does not have any negative impact on the rest of the company, and we have reduced the losses to minus CHF 6.2 million. And as we announced, and there’s a high probability that will move away by the middle of the year and will not — hopefully not appear anymore in the second half of 2020, and will definitely be gone in 2021.

With that, now the future is set. This next one, this is the strategy to continue. We have already presented the strategy at the Investor Day. There is no change in what we announced at that time. There’s a focus strategy that is in place and it’s now going to be implemented. We have reduced the portfolio to 2 technologies from 3. Of course, this is ebeam that has left. We have now 4 core markets instead of 9, and we have repositioned the X-Ray Systems business significantly, going into modular, standardized systems and digital services based on artificial intelligence, machine learning and data analytics. This change — this restructuring is in full swing and the situation is going to be much more positive in the couple of months to come.

We did a health check in order to investigate and probe the organization what needs to be improved in order to reduce costs further and to increase the efficiency and productivity. For that, we did a health check with all the people in the whole world, where we got feedback of 20 — of 81%. This was very high. And I can tell you that this is really substantial that it not only make a cross on questions, they make opinion clear, and we certainly could — we could find out the real things that need to be improved in order to make the company more successful and performing higher.

It was a good finding. One guy, he wrote, Comet is functioning, but not high performing, that is really what it was. And we are now on the way of becoming a high-performing company, but it takes a couple of months, and would not say years, to really be a benchmark. We’re going to have more — can go back again. We’re going to have a more focused operating model worked out that has now been confirmed by the Board that makes our organization leaner, faster, and more clear for everybody. There were a lot of defects in the organization with a lot of — and responsibilities, accountability and who takes with us a lot in the regions. This has been clarified and is in good shape right now.

Next we already talked about the program that we started that is actually the outcome of all the investigations, the deep learning that we did in the company. And it’s based on growth, on efficiency and culture. We’re working on all these 3 areas very intensively. We also have identified, among these 3 areas, 20 projects which have Board level and are followed by the Board, and they have to be reported and they are the multimillion impact on sales and, of course, also the bottom line.

We have changed a lot, and we are absolutely convinced that we did the right things. Now it’s obvious to say that when you have new rules, that’s not automatically mean that these rules are also lived by the people. It’s like when you learn driving a car, you learn about — very first about the rules on the street and all that. And the first time when you sit into the car, you get the problem moving the car in the right way. So what we do is we have set up a leadership program with the IMD, together with the IMD in Lausanne and the last module even Penang in Malaysia, to tune the people totally and 100% to the new rules and the way we work together, the way we achieve good results, the way we organize ourselves, the way we keep responsibility and accountability.

I’ve been doing that for 2 times, once at Unaxis and once at VAT, and that was very, very successful. And I’m pretty sure after these tight discussions among the people, we have approximately 45 senior managers and 20 talents which are joining, I’m pretty sure that this will give another boost inside the company.

We also work on new products. That’s extremely important to safeguard the future. You heard about the RF Generator from PCT several times, still alive, doing very well, must say, prototypes are working fine. The first systems are now going out in June, July to the biggest customers for testing. They are really intrigued by the technology and very, very interested to get the first prototypes to test it out, and then we will enter the phase of spec’ings that will take, of course, also a couple of months. So we do not expect high-volume sales of the RF Generator before ’21. We may ship the first generators in the fourth quarter of 2020, but the ramp-up will not become true before 2021, just because of this selection process is a testing phase and our customers usually take time.

Also in IXM, I mentioned that before, there are several products coming on the market. One is the XPLORER where we have high hopes also into semiconductor industry. The semiconductor industry has to go to find a focus, and we have made a product that really delivers very good results and is also cost-wise affordable.

Finally, also important is the system FF65. That’s a system which serves in the semiconductor industry at the highest level, especially suited for the new devices coming into the market for autonomous driving. All parts or all packages — semiconductor packages, which need an inside testing because of safety reasons. And the existing optical testing is by far not enough, so they have to look into the devices by X-rays in order to find defects — latent defects which could cause accidents or any other malfunctions. And this is going to be a very big market. As I said, this is a corporation with a company where we engage ourselves and we will be able to tell you more about that at the later stage.

We also expand our manufacturing capabilities. In Aachen, we have a new building that is actually built for the new generator, which is going to be highly automated. You may know that Aachen is a very good place for technology. It’s near the technical university where we cooperate very closely. We also can hire people from these areas easily. And the cost situation is also reasonable in the Aachen area.

We moved from Stolberg and are just now setting up the production lines to be ready for the generator once the ramp will come.

The second expansion takes place in Malaysia, in Penang. You see the building. I can tell you not the whole building belongs to Comet. We have the top floor that you can see here. It’s a cooperation or collaboration, if you want, with a local company. Of course, we have our own company inside this building. But we also work with this partner for the preassembly of matchboxes. The preassembly of matchboxes is going to be done by the partner and the final testing and adjustments and quality control is made by Comet. So it’s kind of investment like what we are doing here. We spent maximum about CHF 3.0 million for investment. The rest is shared with the supplier. And it’s at the moment in the setup phase. We have founded the company, is already registered and we start manufacturing by the middle of this year.

Then some initiatives that show results. You can here see the IXS’ efforts to reduce the warranty costs in percentage of sales from 1.7% to 1.3% in 2019. So we, of course, we drive this issue further in the next couple of years. We have to be much below 1% in warranty costs. But the effort that was made was significant.

We also have reduced the lead time for systems. And believe it or not, but the system — a full system is today assembled, or let’s say, in the final shape in only 5 days. So most of the equipment comes already from a sub-supplier, and we do the final intelligence into the system, and that’s why we only keep it for 5 days. We came down from 7 days, and this is really a big achievement.

With that, I give first to Nicola Rotondo, the Chief Controller of Comet, and he will guide you through the numbers.

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Nicola Rotondo, [3]

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Thank you very much, Heinz. Good morning to all also from my side. Before I start with the financial review, let me share some considerations.

The financials which you are going to see are still impacted by the restructuring we did in 2018 for the division X-Ray Systems and ebeam technologies. While in 2018 this had a negative P&L impact, in 2019 we benefited from those restructuring gains by having a lower cost base. This helped us to achieve also, in a demanding year like 2019, a decent result to maintain a robust balance sheet and is now a solid basis to achieve both further profitable growth and also face potential short-term challenges.

Despite lower sales of 15%, the profitability remained stable. And in addition, the free cash flow increased to a high value of CHF 30 million. I would like to explain this KPIs in more detail. Driven by the high free cash flow, we have reduced our net debt, which now equals to a low net debt factor of 0.6. And also, the equity ratio is with 50%, still on a high and solid level. Economic profit and return on capital employed increased slightly by higher net operating profit after taxes in combination with a stable capital employed.

Needless to say that these low values do, of course, not meet our expectation. Here, we see the impact of the IFRS 16 restatement for the year 2019, and I only would like to mention the relevant one.

Both EBITDA and free cash flow are now reported with CHF 5.2 million higher and the grossing up of the balance sheet ratio helps the balance sheet reduces the equity ratio by 2.3% points.

On this page, we see the P&L and then going to talk about the items which will not be discussed on the next pages. The new orders are clearly below prior year, driven by the downturn of PCT. While this KPI does not show us that in Q4 the demand dynamics in PCT improved significantly. For this, we have to look at our year-end order backlog, which is 20% higher compared to prior year, also this driven by PCT.

Looking at the gross profit margin, we were able to almost keep it at prior year level despite 15% lower sales. On one hand, we have the negative sales volume impact and on the other hand we have the positive restructuring gain of the division, EBT. Third, I would like to explain what happened in R&D. On a comparable basis, we did not reduce our R&D spend as it is reported here. So if we do not consider the one-off cost of last year and the restructuring gain of the division ebeam in the R&D section, we would see an increase of CHF 1 million between the other 3 divisions in order to maintain the pace to execute on our strategy.

SG&A shows the highest cost reductions, which was driven by both the one-off cost of last year and the restructuring gain of the division ebeam, and in addition, we reduced the cost in the other 3 divisions by roughly CHF 8.0 million. So in total, we reduced our functional cost by CHF 29 million, of which CHF 14 million were the one-off costs in 2018.

Here, I will explain what were the main drivers of the strong free cash flow. First, driven by lower sales, we had a lower cash flow of CHF 12 million before the change of net working capital. Second, while in 2018 we did increase our net working capital by CHF 20 million, in 2019 we were able to reduce it by almost CHF 30 million, which is the cumulative difference of CHF 33 million. These were the drivers that increased the net cash provided by operating activities with CHF 21 million compared to prior year. Third, we have lower spend for capital investment at 2018. Still it includes CHF 13 million related to the new building here in Flamatt.

After the cash out for financing activities, we did increase our cash position net by CHF 70 million, which brings us back to CHF 60 million, which is at the levels we have in the beginning of 2018.

What we can see here is that our balance sheet looks very solid and straightforward. I will just highlight a few points. Assets increased mainly due to the higher cash position, offset partially by lower inventory and lower accounts receivable. Liabilities increased by a minor loan and higher customer prepayments in the division X-Ray Systems. Equity ratio decreased mainly by dropping of the balance sheet compared to 2018.

We will now see the breakdowns for sales, the EBITDA margin and the net income. Let’s start with sales. The negative volume effect at local currency was, in total, almost CHF 64 million, driven by PCT. While the division X-Ray Systems increased their sales and reached the guided level, the division X-Ray Modules have a shortfall of almost CHF 2.0 million. And the division ebeam was negatively affected by the divestment in 2018 of the business located in Davenport. Currency impact of minus CHF 1 million is related to a negative euro of CHF 3 million and a positive dollar of CHF 2 million.

On this page, we have the breakdown of the EBITDA margin. Let me guide you starting from the left-hand side. The IFRS 16 restatement in 2018 increases the margin by 1.1%, which brings us to the restated value of 9.8%. The EBS and IXS restructuring impact in 2018 of roughly CHF 10 million at EBITDA level reduces the EBITDA margin by 2.4% and leads to a normalized EBITDA margin of 12.2% in 2018. The lower sales in 2019 reduced the EBITDA margin by 6% and were partially offset with the cost reduction of CHF 50 million, which had a positive impact of 4%.

Those, on a comparable basis, EBITDA margin was 2% points lower than in the previous year. The currency impact was minor with 0.6%, leading to a full year EBITDA margin of 10.8%. What we can see here is that the cost reduction was fundamental to achieve this result.

At the last breakdown, we will see, based on the same structure, how the impact was in CHF million at the level of net income. All impacts are always after tax. The EBS and IXS impact including also impairment costs reduced, in 2018, the net income by CHF 12 million, leading to a normalized net income of CHF 24.3 million. The lower sales in 2019 had a negative impact of CHF 25.1 million and was partially offset with the cost reduction of CHF 11.9 million, which brings us to a net income at constant currencies of CHF 11.1 million.

Those, on a comparable basis, net income was CHF 13.2 million lower than in the previous year. Also here, the positive currency impact was minor with CHF 0.9 million, leading to a full year net income of CHF 12 million. Here, it is even more visible that without cost reductions, we would have achieved only a breakeven result.

This overview we are showing every year and although for 2019, the currency impact were minor, you can already understand that stronger impacts will be expected in 2020 as both euros and dollars are trending lower compared to prior year. The main elements to highlight here are that we have still a very high cost base here in Switzerland with CHF 100 million and that we have sales in dollars of CHF 119 million and in euro of CHF 100 million. All combined almost CHF 300 million. This means that 1% in currency fluctuation will change the sales by CHF 3 million. We also can see that for the euro, we have a natural hedge. In fact, we have a big net exposure in U.S. dollars of almost CHF 90 million. This means that the lower U.S. dollar of 1% is impacting the EBITDA with almost CHF 1 million.

Based on both the strong cash flow that we generated in 2019, but even more important, based on the unchanged growth drivers for our company, we propose a dividend for our shareholders of CHF 1 per share, which is slightly below prior year.

Let me first explain what do we see on this chart. The line is showing the half year sales from 2016 to 2019. The columns are showing the changes of the half year sales compared to the preceding half year. First, let’s focus on the second half year 2018 where you see a sharp decline of sales of 12% followed in the first half year of 2019 by another sharp decline of 30%, both driven by PCT. Finally, in the second half of 2019, our sales started to increase again by 10%. As we said, the sales increase in 2019 was back-end loaded and happened in Q4 with an increase of 20% compared to the September year-to-date run rate, also is driven by PCT.

As we showed in the past, and you can see this on the chart by looking to the left-hand side, we were able to manage strong ramps and are ready to repeat it again. Therefore, I would like to hand over to Heinz so that he can explain when and how this is going to happen.

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [4]

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Thank you very much, Nicola. Yes, when it comes to the outlook 2020, of course, it’s overrided by the question how long the viruses are helping our business, helping our companies, what’s going to happen in the United States. The good thing is that China has managed with the virus and companies are back to work. Yesterday, we had a phone call to several companies and they are between 80% and 100% at work. They see themselves as the winner of this virus game.

We are still at a very unknown situation in Europe. You know that pretty well. And my question is what’s going to happen in the U.S. So it’s very hard to make a forecast. Interestingly is that talking to our customers, they still believe that they’re going to reach their outlook for 2020, although their first quarter might be low, they may not make the guidance, but they are still optimistic for the second half of 2020. So it’s very hard to figure out to what extent this will happen or there’s going to be another hit on the business by then. But they asked us to be ready for the ramp-up and not to reduce our workforce or to let them go. And we are doing the best to make sure that if it takes off again, the ramp is coming by the end of the year that we are able to ship as much as we can.

So we’re, at the moment, between those 2 situations. We see the situation on the virus development on the one side. We see the expectations of the customers on the other side. Definitely, China has improved in the last couple of weeks and sends out positive signals to be ready to have the installations in China. That means we will continue. We will, of course, reduce costs wherever we can. We work from home, those people who can do that. And we, of course, have contingency plans, what happens if the business does not take off, but also contingency plans, what happens if the business takes off in the next couple of months.

So we remain on highest alert and must say we are still positive believing that the situation in Europe gets under control, and it’s not going to be too bad in the United States so that the year is going to be — can be safe in one way or the other. But we are ready for all of that.

With that, I’m coming to the last slide. We have fundamental market drivers intact. Semiconductor, the basic market is there. The applications are waiting. So we are just in a situation where we cannot predict the next couple of months.

In the automotive, of course, there’s a big change to the electric cars. The traditional manufacturers of cars are in a transition. So we have to see what that means for us. Definitely, in future, the automotive is more driven by electrical components rather than by combustion. We are ready for that.

Digitalization is continuing in the aerospace field from analog to digital. Definitely, this is a market that we will grown in the next couple of years. And safety becomes more important. At the moment it is flat, but we are sure that this market is going to grow again. So basically, we believe that the fundamentals for our business are intact and we are just about to take as much as we can out of these markets.

Okay. So the last slide shows, as I said, fundamental growth drivers are in good shape. We have a clear strategy. We strongly believe that the strategy we have presented a year ago is definitely going in the right direction. We have strong financial footing, and we have a workforce that is very motivated and is also very keen to improve the organizational defects that we have in the company. We made a very big progress, and I can say that people are actually motivated now with the exception of the virus that is, of course, a difficult situation. But as the company is concerned, I think we’re in good shape.

With that, I’m concluding the presentation and ask the participants to ask questions if there are any.

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Questions and Answers

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Operator [1]

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The first question comes from Michael Foeth from Vontobel.

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Michael Foeth, Bank Vontobel AG, Research Division – Head of Industrials Team [2]

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I have 3 questions to start with. The first one is regarding your setup in Malaysia. I think Lam Research was talking about also mandatory closures in Malaysia. Are you also seeing that? And do you have any supply chain issues related to that? That would be the first question.

The second one is, I think you mentioned somewhere the positive development in memory prices and inventories moving down, that statement — is that statement still valid today? What are you seeing in the short term in that space and how does it affect the demand, you believe?

And the third question is relating to ebeam. I was just wondering why this process of disposal is taking so long, what the issues are?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [3]

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Okay. Michael, let’s come to the first question, Malaysia. For us, Malaysia is not yet in operation, so we do not have any impact at this moment. And of course, we hope that by the middle of the year, we have more clarity when we start manufacturing. But even if we could not start by the middle of the year, this will not have an impact on the overall output that we produce.

Lam is not yet in — actually, in Malaysia. The plan they have is to set up a plant in Penang, which should deliver approximately an output of $8 billion. It’s correct, $8 billion by the fourth quarter of 2021, so they are now looking for a temporary place to start production. They have some suppliers in the south of Malaysia close to Singapore. They might be affected by that. But Malaysia at the moment is actually not a big issue, neither for us nor for applied.

The second question, in case of memories, it’s absolutely correct what you said. Inventories have been taken down. Prices have stabilized so far and the demand is here. Now maybe you heard that the Chinese they mentioned that their smartphone sales was down by 50%, but that’s not surprising because they couldn’t buy at all. They could not even get out of their homes. And I expect, of course, once they normalize, then the market will take off again quickly. So I do not believe that there’s any change in the outlook of memories in the next 12 months. Also because memories are mainly going into data centers and data centers are extremely hungry for the new memories because they want to replace it with the hard disk drives, which are still up to 80% in the data centers installed and then it could be replaced by CD-ROM because it’s more cost-effective and high performance.

Then talk about ebeam. Of course, this is a big item. As you know, this has been in the portfolio for 15 years in Flamatt. It’s very much focused on 1 big company. And to sort this — all this out takes time. It’s just a matter of negotiations and investigation, also to have a plan what’s going afterwards. Of course, we want to get totally out of ebeam. Still supporting in a commercial way if that is needed. They will stay in Flamatt, so will — they will occupy certain space in the new building. There’s no change planned, but it’s just a big thing to sort it out and to come to an agreement. But I’m very optimistic that by the middle of the year, we’re going to have the final paper or, let’s say, closing that we can then announce and then this is off our table. It’s going in the right direction at the moment. That’s all I can say to those.

More questions?

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Operator [4]

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There are no further questions at this — we have a follow-up question from Mr. Michael Foeth from Vontobel.

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Michael Foeth, Bank Vontobel AG, Research Division – Head of Industrials Team [5]

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Yes. If there are no other questions, I have a few more. The — you — we saw strong growth in the systems business, IXS, driven by aerospace or aviation. The question I have, is that sustainable? What are you seeing for this year?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [6]

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Okay. This year, it’s more difficult because we don’t yet know the impact on the virus. We have a lot of orders. As you have seen, order intake was very strong in the first quarter, which — the delivery time is by the, let’s say, by the fourth quarter 2020. So if this continues, this recovery from the virus, also the supply chain is important in that sense. Shipping is a problem. We might have a couple of projects moving into 2021. The systems, I showed you, which have actually a lead time of 5 days. These are electronic systems, so the electronic systems market works quickly, but we are still hanging on, on these orders for the areas where we actually want to get out. So we are in the middle of this transition. So basically from the electronic side, I see positive signals. From the automotive, rather not because of obvious reasons. So we’ll see how this is turning out. At the moment, we are going sideways, and we’ll have to see what we can do as soon as we know how these problems with the virus continue or going to be get solved quickly.

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Michael Foeth, Bank Vontobel AG, Research Division – Head of Industrials Team [7]

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And in electronics, which applications specifically are those systems used for?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [8]

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This is mainly in the back end, the PCBs and things like that. The new systems that we planned for the IC packaging are not yet in the market. They will come in 2021, maybe late 2020. It’s mainly in the back end, the PCBs.

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Michael Foeth, Bank Vontobel AG, Research Division – Head of Industrials Team [9]

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Okay. And then one last question, financial question. Can you give us some outlook on your CapEx plans for 2020 and ’21?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [10]

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Nicola?

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Nicola Rotondo, [11]

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Yes. So they will be higher compared to 2019 as we still are in the phase of increasing our capacity. So I would say that it will be roughly CHF 30 million for 2020, and then for ’21 until ’25, I would say that we will have average CapEx of CHF 25 million over the next couple of years then. So this is the amount that you can factor in, in your model.

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Operator [12]

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The next question comes from (inaudible).

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Unidentified Analyst, [13]

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I see that the Board proposes the general assembly to cancel the age limit of 70 years for Board members. That means Mr. Kundert that you plan to stay longer than the next 2 years at the Board.

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [14]

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That’s exactly what I wanted to avoid that this was made because of me. It’s a general question. We talk about diversity, we talk about change. And in the United States, it’s forbidden to have a limit — an age limit, so we adjust to the latest recommendations from proxy advisors like ISS who does support this. Actually, I’m going to be elected every year, so it’s up to the Board to put me on the list and also by the shareholders who vote for me or not. So I’m not hanging on this position. That’s not the problem.

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Unidentified Analyst, [15]

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But still in practice for Comet, it only applies to you, of course.

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [16]

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At this moment, yes, but it’s not made for me alone. I mean a couple of years later, maybe it looks different.

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Unidentified Analyst, [17]

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And your timetable stays more or less the same, you know that — and when you were elected to the Board that you said, well, actually, that’s a 3-year program for you. And you also mentioned 70 years. So you don’t see any prolongation of that time frame?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [18]

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I do not have — I never thought about that. I mean I have a job to do and I’m on the way to do this, and I want to hand over a company that is in good shape, and I’m sure that we can do that. And again, if the general assembly elects me again for another term, then I will consider that, of course, in a positive way. If I’m healthy and still motivated, what I’m absolutely right now, in both cases, but again, I’m not hanging on something just because for personal reasons. So I just want to see a company that is well-shaped and is going back to the position they had before and are leading in the world. And I hope that’s not taking too long.

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Unidentified Analyst, [19]

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Okay. And what stage is the search for a new CEO? How’s that priority, I guess?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [20]

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It has a very high priority, of course, very high. We have a candidate, so we are not at the negotiations leg at the moment.

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Unidentified Analyst, [21]

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Okay. You have different candidates or…

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [22]

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We have 1 preferred. It will be openly — that, it’s not easy to find somebody who really understands these markets, to have the network, to have the experience, how to go through a cyclical business and all that. You can almost not find them in Switzerland, not even in Europe. So it’s not — of course, you can find a good manager, but that’s not enough for this company. Can’t we expect somebody who is really familiar with all these items that I just mentioned, otherwise, it’s going to be a difficult job.

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Unidentified Analyst, [23]

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So they will be non-Swiss, that’s for sure, I guess?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [24]

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It’s not for sure. But as I said, looking just into Switzerland, they are good people. I mean we had the same problem with VAT, you know that. And I think the selection was not a bad one, I’m pretty sure. Now, the same thing we have to do here. If we find a Swiss who has all these features, then its fine. If not, then we have to look for somebody else. And it’s very hard to find managers in Switzerland with that experience that is necessary to bring this company quickly forward.

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Unidentified Analyst, [25]

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But you can say that the preferred candidate is not Swiss?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [26]

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It’s not the Swiss. Yes.

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Operator [27]

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The next question comes from Daniel Regli from Octavian.

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Daniel Regli, Octavian AG, Research Division – Senior Research Analyst of Financials [28]

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Apologies for being so late, I was first only on the webcast and tried to ask my question there, but somehow I didn’t get through. So now I’ve redialed in into the call. I hope I didn’t miss anything important. I just wanted to ask whether you could be a little bit more specific on your exposure to the oil and gas and the aerospace sectors and also the automotive sectors, which obviously are currently a little bit into trouble. And what is the percentage share you generate with these industries on the revenue side? And also what do you have in terms of receivables on your balance sheet to these sectors?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [29]

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Yes. The ratio of the business, Nicola maybe has the numbers, to think about that afterwards. Basically, the main markets for IXM will also be in electronics. Oil and gas, this is something that is going forward in cyclical. So 1 year, they are the big numbers and the next year not seeing them again. So it’s a very erratic business at the moment. You see what happens with the oil industry. The prices, they go to hell, and that’s not — maybe not a good time to invest into that technology for the owners. But it’s — we call it kind of by-catch. So we do that, of course, and we are happy to make revenue in oil and gas, but the biggest potential is definitely in electronics. So it’s not impacting us too much. It’s not going to 0, definitely not, but it will be difficult this year maybe to have growth in oil and gas.

And automotive, lot — car, a traditional car with combustion engines has approximately 25% of the value of the manufacturing value in the electronics, and the electrical car has more than 50% in electronics. So it’s — the definition of a car is going to be very different in the next couple of years. And you can see that every day when you read the paper what’s going on, what is being discussed. So part of this transition in the automotive industry is going into — also into PCT and PCT is profiting from that situation. But also packaging, as I said, packaging has to be tested throughout. There are several chips, up to 10 chips, in 1 packaging. These chips are connected with approximately 100,000 connections. If only one of them is defective, then we’re going to a safety problem. So there’s going to be 100% testing of packaging, IC packages, which are going into cars. And this is a huge market and needs definitely X-rays and not anything else.

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Daniel Regli, Octavian AG, Research Division – Senior Research Analyst of Financials [30]

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Okay. But..

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [31]

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Nicola, could you…Yes?

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Daniel Regli, Octavian AG, Research Division – Senior Research Analyst of Financials [32]

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But you would then say that all — the impact on the oil and gas or automotive industry are currently not really relevant for you for the growth projections and (inaudible).

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [33]

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I would say so. Yes.

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Daniel Regli, Octavian AG, Research Division – Senior Research Analyst of Financials [34]

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Okay.

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [35]

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Of course, any kind of loss of the side markets are not wishful, but it’s not the mainstream.

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Daniel Regli, Octavian AG, Research Division – Senior Research Analyst of Financials [36]

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Okay.

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [37]

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Also, if I may add that, when you look into the portfolio of new products, we have a lot of new products coming out in the next couple of years. And most of them are electronic related, most of them, from all 3 divisions.

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Operator [38]

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We have a question from Sebastian Vogel from UBS.

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Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [39]

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Can you hear me?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [40]

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Yes.

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Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [41]

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Perfect. I’ve got a couple of questions. And the first one would be on IXS. You mentioned earlier that you wanted to get rid of a couple of sub-industries. I was wondering if you can give us an update there where you stand at the moment?

The second one would be on working capital and second half was really good in that regard, as you have outlined in the presentation. I was wondering how you see this at the moment, given, of course, all what is going on in the world?

The third one would be on your guidance. With your press release in February, you mentioned that you have seen a decent backlog. That statement was not anymore part of today’s press release. Was that just IXS-driven that you have not included that anymore?

And then one very last one would be on PCT with regard to logic and foundry exposure. If you can update us there where you stand in the meantime after your previous announcements at your Capital Markets Day?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [42]

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Okay. The working capital will be answered by Nicola Rotondo. The IXS — what is the question again on IXS? You said this — the…

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Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [43]

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You mentioned in the past that you — I mean in the past last year, should that you want to get rid of a couple of sub-industries and you want to focus on just a couple of verticals. So I was wondering where we stand in that regard?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [44]

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Yes, we are, of course — let’s say, IXS at the moment is in a transition phase. I mean they have to get out of the old systems. They have to get out of — for instance, they made systems for museums and institutes, one of a kind, very long delivery time and not making much money on 1 system. So we stopped taking orders. We still have orders in those areas which have to be fulfilled and, of course, they will be shipped during this year. But we will not take orders anymore. So it’s a slight change over from those onesies and twosies, one of a kind, into volume markets.

At the same time, the standard platform with the module platform is in development, is in a prototype stage, being tested right now. There are a lot of activities which are maybe not mainstream, also could be done. But then we have 1 system, 1 module system and it will not take for a couple of months up to 9 months to make such a system. It will then be very short term, and we can decide whether we serve a certain market which is not mainstream or not. We only serve these markets when we have the chance to have high profitability. Otherwise, we won’t do that. Usually, all these one-of-a-kind systems, they deliver very, very low margins and we have to stop that. So we are in the middle of this transition. And I’m very, very positive that this will be successful. But in 2020, it’s going to be tough because we have to get out of these old systems, we have to get into the new systems. And at the same time, everybody is expecting that we have a higher EBIT ratio that’s a management challenge of highest level. But again, I’m very, very optimistic. The right things have been done. And in 2 years from now, IXS will be a totally different company. You bet.

Nicola, you want to say something to the working capital?

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Nicola Rotondo, [45]

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Yes. Basically, the point is twofold. I mean you have seen that we have reduced it significantly by year-end. And now we are basically adapting it to Q2 levels, depending how then the demand will be. And there, basically, we have to balance on one hand maybe slightly shrinking demand in Q2 or lower demand, I will not say shrinking demand. But on the other hand, also, we want to be prepared towards the ramp when it’s kicking in. So it could be that during the mid of the year, we may increase it a little bit more compared to the sales that we are going to generate, but only to be ready once when the ramp would start, let’s say, in Q3. Having said that, our goal is that regardless now what is going to happen is that our ratio, so reading our net working capital ratio, the percentage of sales is not going to increase, which then is basically the indicator of how well we are managing our net working capital. This is basically my consideration towards this point.

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [46]

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Do you want to say something to the guidance, Nicola?

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Nicola Rotondo, [47]

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To the backlog, yes. Basically, I said we have, at the year-end, backlog 20% higher compared to prior year, and this was still valid by end of February. So it means that basically, we continued that level. So we have not yet really felt a strong decline in demand so far, but how it is going to develop in the next couple of months is really hard to predict. But really to repeat, still end of February, we were 20% higher compared to prior year. So we are still there on a good shape. Our books are full, and we have basically still a lot to produce and shape.

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [48]

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Yes. And there are also no cancellations. So the business continues at the moment as usual. Of course, there are these kind of uncertainties that we know, but at the moment looks not today. The fourth question was PCT regarding — did I understand it correctly the foundry business? Can you repeat that again?

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Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [49]

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Yes, that was right. You mentioned earlier that you want to expand further out of memory, also into other areas of the semi side of things. I was wondering if you can give us an update there, how advanced you are in the meantime?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [50]

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We are not addressing actually the subsegments of semiconductors. I mean the products are going into all areas. They’re going into foundry, into logic, into memories, into power devices, whatsoever, because the technology is always the same, the recipe is different. The design is different on the chip, but the machines are more or less the same. So the reason that we are so strong in Lam is because Lam was (technical difficulty) the first company that approached Comet to help them to get the plasma better under control and to make matches — matchboxes because of the excellent capacity technology that Lam has developed over years. And that is why we have a high exposure in memories, but we are currently working with applied materials, with other [departures] So for us, it doesn’t matter whether it’s foundry, whether it’s memory. It’s just that the equipment suppliers, they need to buy from us and finally, where they sell their machines is not that important for us.

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Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [51]

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Understood. One follow-up question, if I may, with regard to the tax base. I mean, of course, there is — that’s a question that comes up in many calls these days, how should we think of your tax rate going forward given the early changed tax regime in Switzerland?

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Nicola Rotondo, [52]

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Yes, let me answer this. So we will basically benefit here in Switzerland not that much from the patent box mechanism. We are going to benefit for the R&D-related tax reductions that we’re going to have. And you may expect going forward that the tax rate will decrease by, let’s say, 2 to 3 percent points compared to what we have now on a normalized basis. So that will be basically the overall impact that you’re going to see.

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Operator [53]

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The first question from the webcast comes from (inaudible). Is there anything ongoing to use x-rays in semiconductor production, not only for quality control but also for the exposure process itself?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [54]

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Not audible. Can you repeat the question again?

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Operator [55]

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Is there anything ongoing to use x-rays in semiconductor production, not only for quality control but also for the exposure process itself?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [56]

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No. X-ray cannot be used for the process itself. That’s just for quality control, application intelligence during quality control to make sure that the learnings are going to be feedback to the assembly line, but is not involved in the semiconductor process itself.

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Operator [57]

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The next question from the webcast comes from [Christian Wolf] from MainFirst. Could you please share with the — EBITDA margins of PCT in Q4 with us?

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Nicola Rotondo, [58]

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Yes. So basically, as you know, we have the ramp in PCT in Q4. And so by definition then, the EBITDA margin was the highest in Q4. And what I can tell you is basically that this — it is slightly below 20%. It is close to 20%, but it is not 20%.

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Operator [59]

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Another question from [Christian Wolf.] What margins can be expected in the PCT when the segment reaches sales of CHF 212 million like in 2018?

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Nicola Rotondo, [60]

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Yes, basically, here I would even make the comparison not with 2018, as in 2018 we suffered already 2 quarters, meaning the second half at a downturn with low capacity utilization. So I would take as a benchmark 2017. And there, we reached 26% EBITDA margin. And by reaching again this sales level of CHF 210 million, CHF 220 million, you can again expect margins in the mid-range of the 20s still including high investment for R&D.

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Operator [61]

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Another question from [Christian Wolf.] Could you please give us some more details about the different customer segments of IXM? And what are your expectations for the segments in 2020?

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Nicola Rotondo, [62]

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Heinz?

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Operator [63]

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We have lost connection with Mr. Heinz. We will try to join him as soon as possible.

Mr. Heinz, your line is now connected to the conference.

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [64]

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Yes, I’m here again. I was disconnected.

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Operator [65]

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We have a question from the webcast from [Christian Wolf.] Could you please give us some more details about the different customer segments of IXM? And what are your expectations for the segments in 2020?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [66]

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No, that’s what I said before. At the moment, it looks like that they make headways in the electronic business. This is the most promising sector for IXM, and also new products are going to be positioned. I mentioned that the oil and gas at the moment is flattish. We don’t know what the effect on the price crash of the oil has on this market, but definitely not positive. And then there’s the security sector, which was very bad in last year in terms of order intake without losing market share, but this is the — these are the ways that we see in this market segment. And here, we expect actually a positive trend, of course, always with a grain of salt that the impact on the virus will also hit these markets. It’s very hard to say. But at the moment, order intake from China is increasing in the last couple of days since they declared that the virus has solved, so to say. So we — it’s very hard to say how it’s going on, but electronics will be — will definitely be a market that is getting more important for IXM.

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Operator [67]

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We have a question from the phone comms from Remo Rosenau from Helvetische Bank.

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Remo Rosenau, Helvetische Bank AG, Research Division – Head of Research [68]

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I also was partially off the call, so I hope this has not been asked before. About the potential divestiture of ebeam or other solutions, you mentioned that already at the Investor Day last year. You said that there are talks ongoing with potential partners. Have you — given the current environment, do you expect that these discussions get kind of a bit delayed or that the whole process of these potential solutions might be going into 2021 and/or that the prices will develop in a direction where you would not be prepared to do certain steps anymore?

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [69]

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No, I do not see any impact on the current situation, especially the virus. These talks, they are very complicated because it’s the nature of the technology and the business model, I mentioned that before. But the talks are going into a very positive way, and I definitely expect that we can solve it by the middle of the year regardless of what’s going to happen with the virus.

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Remo Rosenau, Helvetische Bank AG, Research Division – Head of Research [70]

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Okay, great. That’s very clear.

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Operator [71]

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We have no further questions at this time.

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Heinz Kundert, Comet Holding AG – Chairman of the Board & Interim CEO [72]

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Okay. So with that, I’m closing the conference call, and thank you very much that you joined and you asked a lot of questions. I hope we can fulfill all the promises and expectations in the next couple of months. We remain positive and bullish, of course. We are now to see what’s going on in the United States, mainly, but we are really positive for the longer term. Thank you very much, and have a good day.

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