Aixtron Se Unsp/Adr

The conference is now being recorded. Good afternoon, ladies and gentlemen, and welcome to the Extron SE results of the first half 2021. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Guido Pickert. Please go ahead.

Thank you, operator. Welcome to Extron's presentation of our Q2 and third half 2021 results. I'd like to welcome our CEO, Dr. Felix Grabert, as well as our new CFO, Dr. Christian Daniger. Have a good start, Christian. As the operator indicated, this call is being recorded by Extron and is considered copyright material. As such, it cannot be recorded or rebroadcast without permission. Your participation in this call implies your consent to this recording. Please take note of our safe harbor statement, which can be found on page two of our results presentation slide deck, as it applies throughout the conference call. This call is not being presented immediately 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 Felix Graves for opening remarks. Felix?

Thank you, Guido. Let me welcome you to our second quarter 2021 results call. I will start with an overview of the highlights in the quarter and then hand over to Christian for more details on our Q2 2021 figures. Finally, I will give you an update on the development of our business as well as our guidance for the year. Let me start by giving you an overview of the key developments in Q2 on slide two. During the second quarter 21, we continue to note a strong order momentum throughout all our business but in particular in GAN power, in LEDs, and in data.

The conference is now being recorded.

With the highest quarterly revenue of 2021. The current level of customer inquiries gives a good indication that orders will also remain very strong in the coming quarter. We therefore have increased our guidance for order intake once again from 420 to 450 million euros to now between 440 and 480 million euros. In Q2, we have fully implemented the structural changes of our OLED subsidiary Apiva as announced in our last earnings call. That is, we have closed the operations of Apiva Korea and reduced the team size in Apiva to a smaller size. This move enables us to focus the Apiva activities on the differentiated key components for the Chinese market, preserving the upside of this technology. At the same time, the running cost to operate Apiva has been significantly reduced to a low single-digit million amount until a customer project starts. Including one of charges, we will keep the overall cost for OLED in 2021 within the high single-digit million range that we have previously mentioned. Now let me give you a quick update on the COVID-19 situation at Extra. Our strong internal safety measures continue to prove effective in mitigating the risk of infection within our premises. We have offered a first vaccination to all interested employees at our premises in Germany and continue to offer a regular testing twice a week, resulting in the execution of more than 1,200 COVID tests, all of which have been a negative result. From July onwards, many of our employees are back to the office. At the present COVID level, we target an occupancy rate of about 50%, and we get feedback from many of our people that the personal face-to-face interaction, always adhering to strict safety standards, is much appreciated as it brings energy and spirit back to the context. We continue to operate all functions of our business without any significant effects related to COVID-19. Also, our supply chain continues to be stable, delivering on the pre-ordered components as agreed. However, we will continue to watch the development of the global pandemic very carefully, and we remain to be ready to take further measures if necessary. Now, I will be handing over to my new colleague, Dr. Christian Danninger, who took up his position as Chief Financial Officer of Extron in May of this year. He will take you through the financials of Q2 and half one. Christian. Thanks Felix and hello to everyone. Let me please quickly introduce myself as this is my first quarterly earnings call for Extron. I joined Extron on May 1st and have used my time here to get familiar with our business and its financials. You to investor relations being part of my responsibilities, I'm looking forward to soon be communicating with many of you on a regular basis. I was born in Austria in 1979. My wife, our three children, and I live in Cologne. I studied business administration in Linz, Austria, and the USA, and earned a doctorate in law. Among other roles, I was a regional CFO in the Austrian Envy Group before joining Extron, our CFO, of the Putzmeister Group. I look forward to playing my part in ensuring that we continue to shape the future, and in doing so, successfully realize our potential and growth opportunities on our addressed markets. But now back to our financial results of the second quarter of 2021. Starting on slide three, our income statement. As expected, total revenue for the quarter was 68 million, compared with 56 million euros in quarter two 2020. Gross margin of 41% this quarter was one percentage point higher than the 40% in the same quarter last year. The difference is mainly due to the higher share of products with better margins in Q2 2021. Operating expenses in the quarter increased from €20 million in Q2 2020 to €22 million in Q2 2021.

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To assure the remaining maturity of the respective financial instruments. Moving to slide five, we chose our cash flow statement. We generated free cash flow of 18 million euros in the quarter, primarily reflecting our current profitability and an overall reduction in working capital, which includes, i.e., an increase in customer deposits of 22 million euros and an increase inventories for future shipments of 28 million Euros. With that, let me hand you back over to Felix. Thank you, Christian. I would like to give you an update on the key developments in our addressed market before concluding with the outlook for the rest of the year. As mentioned at the beginning, we continue to see strong momentum from all our end markets, but in particular for systems for the production of gallium nitride power electronics. Most of our customers from that space have made the decision to adopt GaN power electronics on a broad basis, resulting in substantial capacity investments throughout the industry, from foundries to integrated device manufacturers. Several customers have now placed volume orders in the range of 5 to 15 tools in size. we are already seeing a strong expansion of products being offered based on GaN technology. They range from high-performing chargers for portable consumer electronics to energy-efficient power supplies of data centers and telecom base stations, just to name two prominent applications. In the area of systems for the production of silicon carbide power electronics, we've made further technical progress on the two performance. In addition to that, We have received repeat orders from some customers for our six-inch silicon-carbide solution, and we've been able to win additional customers. Given all that, we expect to benefit from the volume ramp length of some large industry players. We see these developments in power electronics as only the start of a broader substitution wave of silicon power electronics by wide bandgap materials, GAN and SICK. This is the beginning of a multi-year growth opportunity for us. In our optoelectronics business, we have recorded strong demand from the optical data communications market in Q2. The global build-out of optical data communication networks continues in order to serve the massively growing data volume. We expect this momentum to continue throughout 2021 and also in 2022. On the 3D sensing side, we see some moderate demand in 2021 driven by individual tool orders from customers. We expect larger order momentum in this area once the rollout of Vixels for the world side of smartphones begins. This is in preparation today, but it may take one to two more years as a killer application for that functionality is missing as of today. Finally, we have recorded some large orders in the area of red, orange, yellow mini-LEDs, which are used, for example, in fine-pitched LED displays. Our customers are continually expanding their capacities at scale. On the other hand, micro-LED display technologies are still in the R&D phase. We expect significant volume in this area from 2023 onwards, with 22 as a position here with further R&D activities and some pilot line builders. We are happy to be in such a positive environment with strong demand momentum from our addressed market. With that, let me move to our guidance on slide six. In June, we have issued a trading statement in which we increase our annual guidance. Due to the very positive order development, we increase our annual guidance on orders again from between 420 and 460 million euros previously to a new range of 440 to 480 million euros. Revenues are expected to be between 400 and 440 million euros with an EBIT margin between 20 and 22% of revenue. We expect our gross margin to be around 40% of revenue. Out of the 295 million euros backlog, we expect to turn about 235 million euros into 21 revenues. Taking first half of the year revenues of 117 million and the assumed after-sales business of about 30 million into account, we still need about further 20 to 60 million euros of orders to be converted into revenues to reach the expected revenue range. In summary, we are looking forward to significant growth of 2021 revenues and EBIT quarter to quarter within this year as well as compared to the previous year. With that, I will pass it back to Guido before we take questions.

Thank you, Felix. Thank you, Christian. Operator, we will now take questions, please.

Gladly. Ladies and gentlemen, the floor is now open for questions. If you would like to raise a question, please press 9 and star on your telephone keypad. To withdraw your question, press 9 and star a second time. Let me repeat, 9 and star if you would like to raise a question. Let us wait a couple of moments till questions come in. And the first question comes from from Librium. Your line is open, please.

Hi, good morning, or rather good afternoon, and thanks for taking the question. My first question is on the GAN power market, which clearly is doing extremely well for you right now, and there's a lot of demand out there. But I'm just trying to get a comment on how you see this market evolving. Is it likely to be reasonably smooth? Are your customers going a little bit ahead of themselves and ordering too much this year, especially when you say that customers are ordering between five and 50 tools? The high end of that seems quite high. So what I'm trying to get at is, will we see some digestion into 2022, or do you think we're still at a very early stage of the evolution of this technology? and so it will continue to be quite linear for some time to come. And even if we do get some kind of a sort of digestion phase in 2022, I just want to know what your views are on silicon carbide, especially your comment that you would expect to benefit from the ramp of some major industry players. Is there a timing for that? Is that likely to come through by 2022, or will that be further? Yeah. And then I have a very brief follow-up. Thank you.

Thank you very much for the questions, John Arden. Let me take the GANpower question first. So the question about the digestion phase or continued order momentum. I think that very well. I think it's clear. I think we have a view on the market that we all share, right, the starting point with the quick chargers. and the fast charging and now other applications are being opened and being added. Of course, we do not look into the detailed order books of our customers, you know, what orders they get from their customers. But what we do see from the market is that Gallium Nitride Power Electronics is currently experiencing a very broad adoption in the market. The quick chargers for mobile devices was the first market. Now other applications in the high power domain which are efficiency driven are being added. Data centers, telecom base stations, I clearly would expect that that is a multi-year trend because we all see that the desire to go green and to go energy efficient is not only driven by a few companies. We see it across the European Union, say the Green Deal. We see it now by the Biden administration, right? We all see that all the big Silicon Valley players with their data centers want to go zero emissions. So very sure that that's going to take a strong momentum. And furthermore, we do see that our customers are working on opening up additional applications, be it on GaN ICs, integrated circuits, based off gallium nitride for power electronics devices, or be it low-voltage devices. That being said... Very clearly, the adoption of GaN power is at the beginning, and I expect a multi-year trend here. Now, how exactly that translates into orders on a quarter-to-quarter basis, that, of course, I cannot tell you. I can only give you the big picture. But I would like to stay on GaN. On silicon carbide, I took your question a bit related to a timing of potential order momentum. Also here, it's always difficult to predict exactly on a quarter-to-quarter or half-year-on-half-year basis when exactly customers are playing orders. So I look rather on the big picture of the market, and here we very clearly see that we all know that silicon carbide experiences the biggest order momentum from automotive applications, be it charging poles, be it onboard chargers in the car, or be it the main inverter. And we do see that a large number of EV models are going to be launched in 23 and in 24. And with the usual lead times of about nine months or so, our customers will need to get the tools up and running, qualified, and their lines established. When exactly that translates into orders for us or orders placed to Extron, once again, on a quarterly or half-year basis, I would not be able to tell you.

Okay. But you have confidence that you will benefit from the ramp of some major industry players outside of your historical large customer? Yes. And then my follow-up is just two if I can. One is on silicon carbide systems again. Where are you on 8-inch silicon carbide systems? And then a brief follow-up on tax rate is – You know, you have these tax benefits which you have brought forward. If you maintain this sort of profitability, what should we be modeling as an effective tax rate for you over this year and next year?

So 8-inch wafers in reasonable quantity and with good process results are running in our airline and lab. So your first question. And the second question I pass to Christian. Thanks, Paul. To take that question, first time for me, but I would recommend to use, as we do for our internal budgeting, to use a 15% tax rate. That is not taking into account swings that result out of adjustments on different tax assets.

Understood. And just on the silicon carbide side, when do you think it will move into commercial volume or commercially available, your 8-inch system?

We are shipping first volume system in the first half of 2022. Understood.

Thank you very much.

The next question comes from from Deutsche Bank. Over to you.

Yes, good afternoon, gentlemen. I've got two questions, please. on the supply chain and secondly also on the silicon carbide competitive front, if I may. So firstly on the supply chain, can you just comment generally speaking on what you're seeing out there with regard to lead times, given that the constraints that I think we can hear and read about every day in the newspaper. So how have lead times developed lately? Maybe in relation to that, can you also talk about whether certain customers have tried to make sure that they absolutely get the machine in time? In other words, do you think that you have seen double ordering here and there or even on a broader basis? And then secondly, on the silicon carbide and really related to Jonathan's question, I think we have heard now from several competitors that Your main competitor on silicon carbide may have issues on the 8-inch tool. Is that something that you've heard as well and that you would comment on? Probably no is the answer, if I may, but let me put it in a positive way. Do you see a certain chance for you to get a kickstart as this market gets in bigger volume next year?

Thank you. Thank you very much, Uwe, on the question. So let me first comment on the supply chain question. So with respect to constraints, we tend to know our own supply chain and then potentially double ordering of our customers. So we have been preparing very well our own supply chain with respect to order volumes in 2021 and also in 22. And because we have taken precautions and we have taken action, it was an active act from us, proactive activities that we have started. Due to that fact, we are, so to say, well set, so to say, to secure all the volumes for 2021 and also going into 2022. So we have been proactively taking that, and due to this proactivity, we now really benefit from that. The counter side of that is we have been able to communicate to our customers all the time, yes, we are able to ship, and yes, we are able to ship at reasonable lead time. And due to the fact that we have been able to give such messages to customers, I was just two days ago on the phone with a very large North American customer, who also said, well, you know, we see with other equipment vendors, lead times doubling towards 12 months or 12 to 15 months, and said, well, not from Extron. We are well prepared. Give us the order when you need it. And so therefore, I would, I mean, you never know exactly when it's a double ordering, but I would rather, and also given the messages that we give to customers, I would not assume that there is double ordering. I would rather assume it's ordering based on the demand that customers have. Again, this is my own assessment, but I've given you the logic and the reasoning how we come to that and in which perspective on which context I give that to you. Now let me come to the question on silicon carbide. I would not want to comment on the performance or the wafer transition of the competitor. There is always competition in the market and it's always important to take the competitors very serious but very clear. Our aspiration is our equipment is capable of doing both 6-inch and 8-inch wafer size. that allows our customers to buy our equipment now, use it initially for 6-inch, which is today the dominant wafer size in the ramp-up of silicon carbide, and then later on convert the equipment to 8-inch if the customer, for example, decides to switch a line as 8-inch wafers become available. We all are aware that today availability is limited, and therefore we very much encourage expect and target to benefit actually from the wafer size transition to 8-inch.

That's very clear. Thank you, Felix. If I could have a follow-up, please. In previous upturns over the last 15 or 20 years, you met frequently use of the good market environment and adjusted your pricing accordingly. I was just wondering whether on a year-over-year basis or over the last two years, You've done this again and adjusted your prices north, not only to reflect the rising raw material price in food costs.

So I think we need to find good times to adjust prices. meaning at points when we have made an improvement on our equipment or deliver an additional performance such that such a price increase can very well be justified in front of the customer. Rather than just saying you get the same piece of equipment with the same piece of performance, but now a little more expensive. This is not the strategy that we are pursuing. So we rather than just across the board raising prices, link price increases to performance improvements, performance gains, and generation changes of tools, which I think you all are very well aware is what we are actively driving across our portfolio. So, yes, there is opportunities for that, but not just across the board, but on a very well linked also to a customer benefit.

That's very clear. Thank you very much, Felix.

We have another question from Oliver Voijhan from Alta Research. Your line is open, please.

Yes, thank you for taking my question. Can you hear me?

Very well.

Okay, very good. Two questions, if I may. So the first one is a follow-up on the order book. So compared to the end of last year, the order book more or less has doubled in size, the order backlog. And at the same time, prepayments increased like two and a half times. So my question there would be, is it that you are taking higher prepayments on each system or maybe not showing all of the orders you have collected prepayments on in the order book because of execution risks?

Thank you. It's a very good question. So the prepayments or the ratio of prepayments to order book fluctuates simply given due to the fact that we do not have the exact same policies with all customers but that there is a certain range. So like you know also on prices or margins, you have a certain product mix or mixed behavior. There is mixed effects on the payment behavior. In a mix, there's different regional habits, for example. There's different habits by some large key accounts and so on. So it's rather a, so to say, a random or like a mix effect from regions, from customers leading to that one, then a systematic effect out of which you could read a systematic pattern or something like that.

Okay, fair enough. Second question is on your margin guidance. As I understand, the gross margin guidance of 40% was based on an exchange rate of 125 US dollar to Euro. Now we've been around 117, 118 for a while, so if we would extrapolate that into the rest of the year, would that mean that you would consider upgrading the gross margin guidance?

So we will definitely stay with our guidance throughout the year at the X rate of 125. We have fixed that rate for the year, and it's, let's say, our annual, we call it, budget rate. So we will stay on that one. So we will not change the guidance throughout the year. Nevertheless, if, of course, what we would very much appreciate, the euro-dollar exchange rate comes in favorable for us, we will recognize positive effects out of that one. Tristan, do you maybe know how large these effects could be? Right now, as you said, we're planning before 1.25. We are expecting to give you an approximate number of 120 million additional sales in U.S. dollars that we have factored in with 1.25 rate, so you can do your calculation based on your expectation of what the exchange rate will be. The positive thing is that the overall exposure to the U.S. dollar has been consistently going down with shifts depending on customers, but also an increased proportion of revenues and orders coming from Europe that is also limiting that exposure.

Okay. That was very clear. Thank you.

The next question comes from Andrew Gardiner from Barclays. The line is yours.

Good afternoon, gentlemen. Thanks for taking the question. I've had one in terms of the perhaps medium-term outlook and how you're planning for capacity. Felix, the guidance that you've now given us for the second half of the year, as you pointed out, is quarter-on-quarter increase in shipments and revenue in the third quarter and again in the fourth quarter, and quite a steep trajectory at that. It could be perhaps around €200 million or so of revenue in the fourth quarter. How are you then thinking about planning for 2022? You've already told us in the Q&A that you've got your supply chain ready for that. You've got the parts committed. In terms of your own site, are you really stretched at that 200 million or thereabouts in the fourth quarter? Do you need to add more capacity to make it a bit more comfortable in terms of meeting these these larger volumes, you know, just a bit more insight as to what the latest order surge means for your planning in 22 and beyond.

Thank you. Thank you very much. And I think you captured the situation quite well. So we will definitely see the largest output in systems and then, of course, in revenues, meaning in euros in the fourth quarter, as we've indicated and you caught. And also very clear, I think we just need to do the math, yeah, is we still have a nice or we have an excellent and a big order backlog, yeah. Big part of that we will work down and a small part of it goes into next year. And, of course, we just have raised slightly our order intake guidance for the second half of 21. which then, of course, with our typical lead times of six, seven, eight months, and again, we stay, as we discussed, supply chain-wise on the same averages that we had in the past. So we will ship a big part of that. What we are now taking as order intake in the second half of 21, we will ship as revenue in the first half of 22. This is just clear. This is our normal period. So we will have a good start revenue-wise in the year 2022. So capacity-wise, coming to your question, we fortunately have a very flexible production model, which allows us to absorb such high volume. Concretely, let me give you two facts here. We have, out of the current facilities that we as Extron have in the past, many years back, shipped already a total of 450 units. So that, of course, was a big peak with a lot of effort, but, you know, such quantities have been shipped out of our facility. And already now, in the fourth quarter of this year, we take one additional measure, which is we have activated a remote shop floor. So, you know, some part of pre-assemblies, which take time, by taking time, occupy shop floor space. We put that on a remote shop floor, just, you know, some sub-assemblies, some modules, you could say, are being assembled there. which means then that, you know, the big systems, as you all know it from photos, yeah, as big, I would say, like a school bus, yeah, they need a couple of weeks less standing on the shop floor in our facility, and that means more systems in a quarter, so to say, can be finished and being shipped. So you get the idea how with very little add-on measures or flexible add-on measures we can sort of say vary and extend our capacity. And in the fourth quarter we do that and it works quite smooth, quite nice.

Thank you Felix. Perhaps just a quick follow-up related to the same topic. Now that some of the customers are giving you particularly large orders, as you mentioned, in the GAN area, are they – I know, as you said, your normal lead time is six to eight months, but are they giving you longer visibility than that given the – you know, they are planning for significant high-volume ramps themselves and, you know, are going to need consistent tool deliveries, even if it's not committed orders per se. Are you getting better visibility into the long-term plan of your customers?

Yes, you indicate with your question two very good points. If it's such large orders, very often we stretch them so that not all, let's say you mentioned the example of 10 systems, not all 10 are shipped, let's say, within a month because, of course, our customers themselves cannot digest 10 systems to be installed in their factory and then with their people being ramped up and put into volume, right? So it's rather than spread over a certain period of time, let's say whatever, one quarter or so, yeah, that, you know, step by step, every week or every two weeks, a certain number of units leave the factory, go to the customer and start here, yeah, simply from operational standpoints at the side of our customer also. And... Yes, some of our customers do give us a longer-term visibility. However, other customers continue to surprise us with how sudden they make a decision to order a large quantity. Let me put it that way. So, in other words, we can out of that not derive a certain pattern or not derive a certain visibility beyond the six months that we typically give as an indication.

Okay. Understood. Thank you.

And we have a last question which comes from David O'Connor from Exane BNP Paribas. Your line is open, please.

Great. Good afternoon and thanks for taking my question. Felix, I'm just curious, you know, given the broad-based strengths you talk about across the business, I'm just wondering why the order intake for the second half is guided 25% below the first half. Maybe can you give us some of the puts and takes around that, or maybe even if there was any pull forwards in the order intake into the first half, given the tight supply chain across the industry? And I have a follow-up, thanks.

Yeah, thank you. Very good question. So, as said, we typically have a visibility for six months forward, so we have a good visibility now for the Q3. For the Q4, it's a moderate visibility. Based on these data points, this is the estimate. I think you've done the math. If you add it up to the high point of our guidance, is now coming to, you know, 480 is the high point of the guidance for order intake. 260 is shipped, meaning another 220 to go, right, on average 110 per quarter, which is a little below the first half. We believe the first half was characterized by some very large volume orders. There could be some in the second half. Maybe, maybe not. We don't know it yet. However, we would not expect that these volume peak orders that we've seen that also surprised us in the second quarter, hence the trading statement, we do not expect that such effect reoccurs in the second half. And that's the reason why we have given the guidance. This is what we currently see in terms of the volume. And still we believe it's a very good volume and we are here on a long-term trend.

Okay, got it. Understood. Thanks for that. And maybe just within that order, the very strong order intake, was there any pull-ins there by customers? I mean, we did hear about pull-ins from other two vendors. So just wondering if you experienced a similar factor in the Q2 order intake.

So we have not seen a fact that orders that have been placed to us have now been moved forward by a quarter as an order. That effect we have not seen. If that is what you mean as a pull-in. Nevertheless, we have seen that some customers have placed orders with us. and asked us for a very short, selected, some selected customers have asked us for very short lead time, simply saying, dear Extron, we have been surprised by end customer demand ourselves. We have an aspiration to increase our volumes faster than we initially had planned. So could you do us a favor and ship the equipment not within six to eight months, but let's say rather three to four months, yeah? in some selected cases. And in not all cases, but in quite some cases, we have been able to make that possible, which, of course, then really supports our customers and it's our desire to really support them in such a manner.

Okay, got it. Thanks for that. Maybe if I could squeeze in one last question just on the backlog, you know, close to the previous LED peak. Can you just maybe give us a split of that backlog across end applications, LED, opto-telecom and power, just to give us a sense of kind of where the percentage of the backlog, where it lies from an application standpoint. Thank you.

I must admit that I don't have data on the exact backlog split, but I think the backlog that we see is probably strongly correlated to the order intake of the third half. And I have that split here in front of me. And that is to a very large part, a little less than half of it is power electronics, GaN and SICK. Then I think around a 20% is on the LED side, and I would say about a 25, 30% or so is on the telecom side. So very clear also as we have written in the report, power electronics being number one, telecom, data comm number two, and LED being number three.

That's very helpful. Thank you.

Thank you very much. With this, we would like to conclude today's call. Thank you to all of you attending. Please note that our next current call will be on November 5th, 2021 for our Q3 21 quarterly results. Thank you and bye-bye.

The conference is no longer being recorded.