Aixtron Se Unsp/Adr

The conference is now being recorded. Good afternoon, ladies and gentlemen, and welcome to the conference call regarding Q3 2021 results of Agestron SE. 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, Mr. Guido Pickett.

Thank you, Operator. Welcome to our presentation of the Q3 and 9-month figures. I'd like to welcome our CEO, Dr. Felix Grabert, and our CFO, Dr. Christian Danninger. 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 immediately presented via webcast or any other medium. However, we will place an audio file of the recording or transcript on our website at some point after the call. I would now like to hand you over to Felix Graber for opening remarks.

Thank you, Guido. Let me welcome you all to our third quarter 2021 results presentation. I will start with an overview of the highlights in this quarter and then hand over to Christian for more details on our nine-month 2021 figure. 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 Q3 on slide two. During Q3 2021, we saw another quarter of strong order momentum throughout all our businesses, well-balanced across applications. Gallium nitride power was the strongest contributor, but also wireless and optical data communications LED and lasers had sizable contributions. Overall orders in Q3 came in at 114 million euros. Revenues developed as expected. At 131 million euros, they were almost twice the figure we have recorded in Q2. We expect the revenue figures in Q4 to again be higher than the revenues we have recorded in Q3. and we are on track with respect to that value for Q4. Q3 gross margin was at 43%, and Q3 EBIT margin was at 28%. Both are also developing as expected. So overall, we are on track to deliver the full year order revenues and margins as we have guided to them in the market. Now let me give you a quick update on the COVID-19 situation at Extron. With Enxtron, we have had no serious COVID cases, which is very good news. As more and more people have been vaccinated and continue to take advantage of our offer to get tested, we continue to see no disruptions in any of the functions of our business. Now I will be handing over to our CFO, Christian Dunninger. He will take you through the financials of Q3 and the nine-month period. Christian?

Thanks, Felix, and hello to everyone. It really is a pleasure to present these great results, starting on slide three with our income statement. As expected, total revenue for the nine-month period was 248 million euros, compared with 161 million euros in nine months 21. In a sequential quarterly comparison, revenues in Q3 21 almost doubled compared to the previous quarter. Year over year, growth margin of 41% in the first nine months was two percentage points higher. In Q3 21, growth margin was 43% compared to 41% in the previous quarter. The difference is mainly due to a higher share of products shipped with better margins in Q3 versus Q2 of 21. Operating expenses in the quarter increased from 53 million euros in nine months 20 to 60 million in 21. This difference primarily comes from two special effects. First, in H1 21, we incurred restructuring costs for upheaver in the amount of approximately 3 million euros while in the previous year, a change of use for a production facility led to other operating income of 3 million euros. Furthermore, we incurred higher variable compensation and R&D spending, primarily for the development of our next-generation MOCVD tools. SG&A expenses of 25 million euros in the first nine months of 2021 were 4 million euros higher year over year, influenced a higher variable compensation and a payable related restructuring cost. R&D expenses in the first nine months remained roughly stable at $40 million compared to the same period in the prior year. This reflects, on one hand, lower running costs for the OLED technology, as we have indicated previously, which were, on the other hand, offset by increasing expenses for our next generation MOCVD equipment. During the first nine months of 21, we recorded a net other operating income of 6 million euros, which was below the 9 million recorded a year before. This difference is, as mentioned before, to a large degree due to that already mentioned change of use for production facilities, which resulted in that other operating income of 3 million in the prior year. In the first nine months, EBIT was 41 million euros at a margin of 17% versus an EBIT of 10 million euros at a 6% margin in 2020. This was mainly due to the year-over-year increase in revenues and the corresponding profit. In Q3 2021, we had an EBIT of 36 million euros at an EBIT margin of 28% for the quarter compared to 6 million euros in Q2 2021. This shows the strong leverage effect we have on revenue volume translating into bottom line earnings. Primarily thanks to the mentioned volume and margin effects, we generated a net profit of 43 million euros in the first nine months of 21, compared with 10 million euros in the same period of 2020. This development was also influenced by the capitalization of deferred tax assets on net loss carried forward in the first half of 21 in the amount of 8 million euros. In Q3, the tax expense of almost 5 million euros was incurred and no change in deferred tax assets was recorded. Turning to the balance sheet on the next slide. In line with the expected output, inventories have risen to 137 million euros from 79 million euros at the end of 2020. Advanced payments received from customers increased to 86 million euros from 51 million at the end of 2020. This represents about 32% of backlog. Our cash balance included including other financial assets and post our 12 million euros dividend payment in May increased to 330 million euros at the end of the quarter from 310 million at the end of 2020. Please note that we have shifted financial assets in the amount of 60 million euros from non-current assets to current assets as to June 30th due to a shorter remaining maturity of the respective financial instruments. Moving to slide five, we chose our cash flow statement. mainly due to the buildup of inventories in line with our planned output, as well as due to higher capex into our next-generation MOCVE tools for our laboratories, free cash flow in the third quarter was 19 million negative. Mainly due to the positive result, free cash flow for the nine-month period of 21 was a positive 27 million euros. With that, let me hand you back over to Philipp.

Thank you, Christian. Before concluding with the outlook for the rest of the year, I would like now to give you a quick update on the key developments in our addressed markets. In all of our addressed end markets, we continue to see strong momentum. In the market for gallium nitride power electronics, our customers are adding production capacity to expand into more and more areas of power electronics, which are today still dominated by silicon. We currently see an expansion of the well-established 650-volt devices into additional applications, such as highly efficient power supplies for data centers and telecom base stations. In addition, we see that gallium nitride is making inroads into the automotive market, which is quite a milestone considering the high reliability requirements, with the first 650 volt GaN devices being used in the onboard charger for electric vehicles now. Beyond this, lower voltage devices of gallium nitride are about to be introduced in the market covering applications such as low-speed electric vehicles and some motor drive applications. Overall, we can state that we are at the beginning of a broadening GAN adoption. This makes us confident that with GANpower we are at the start of a multi-year growth cycle. In silicon carbide, we see the market growing rapidly, driven by the fast adoption of electric vehicles. All major carmakers have plans to go fully electric with large shares of their fleet, and it has become industry consensus that the MOSFETs in the inverter of these cars will be made out of silicon carbide. As a result, all players in the industry are expanding capacity, so far on 6-inch wafers. The industry is looking towards the usage of H-inch wafers, once available at required volume and reasonable cost. On our side at Extron, we are in close contact with all industry players. We continue to win additional customers and are in follow-on discussions with those who still use tools of other vendors today. Looking now beyond power electronics, we see continued strong demand from customers addressing the communications market, both from wireless and from optical data communications, both driven by the 5G build out. For the whole year, this might roughly constitute one quarter of our order intake. And we see the momentum continuing. Finally, Also, the momentum for LED applications remains strong. As for order intake and revenues, this is, in 2021, mostly driven by the traditional red, orange, yellow LEDs, which are used in fine-pitch LEDs, but also in horticulture applications, such as indoor farming. At the same time, we are in close collaboration with a number of customers in the area of micro-LED development, and we see ourselves very well positioned to benefit from the commercialization of micro-LED displays. However, we see this application still a bit further away from volume ramps, which might happen from 2023 onwards. You can see that we enjoy a very positive demand momentum from our addressed market. Worldwide, all of us observed significant strain on supply chain and delivery time, as evidenced by the current news flow. At Extron, the situation of the supply chain is tense but stable. We have had no major supply chain issues, unlike other industries, which even had to reduce shipping volume. The tense supply situation has rather resulted in individual short-term issues here or there when parts from a single supplier arrived a few weeks later than desired. Such hiccups have resulted in slight delays in individual cases, but have not affected our overall shipment situation. We continue to watch the development of the global supply situation very carefully, and we remain to be ready to take measures if necessary. With that, let me move to our guidance on slide 6. We confirm our guidance as we are on track to produce and deliver the required number of tools during the final quarter of the year. This means that we confirm the numbers communicated earlier. We had guided for orders to be between 440 and 480 million euros. Revenues are expected in the range of 400 to 440 million euros with an EBIT margin between 20% and 22% of revenues. We expect our gross margin to be around 40% of revenues. In summary, we are looking forward to conclude a growth year 2021. Overall, we are on a path of strong momentum driven by multiple end markets and we see the trend fully intact as of now and beyond 2021. With that, I will pass it back to Guido before we take questions.

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

Yes, thank you. Ladies and gentlemen, if you would like to ask a question, please press 9 star on your telephone keypad. you will hear a short confirmation that you are in the queue. If you would like to withdraw your questions, press 9 star again. Press 9 star to raise your questions right now. And the first questioner is Mr. Stefan Hori of AutoBHF. Please go ahead.

Yes. Hello.

Hello.

Sorry, Mr. Horry, we cannot hear you. Ladies and gentlemen, unfortunately, conference call is being interrupted. We have short technical difficulty. We will get back to you in a couple of moments. Please stay on the call. Thank you very much. Okay, so at the moment, the conference can be continued. Mr. Pickard, can you hear us? Yes, please start. Okay, then Mr. Houri, could you please repeat your question? You're on again. Unfortunately, we are not able to hear Mr. Stefan Hury. Okay, I guess we would need to move to the next question. The next question comes from Mr. Uwe Schub of Deutsche Bank. Please go ahead.

Uwe Schub of Deutsche Bank Yes, good afternoon, gentlemen. Hi there, can you hear me?

Very well, Mr. Schub.

Excellent. Excellent. Three questions, if I may. The first two for Felix and the last one for Christian. Felix, just firstly on the Q4 order outlook. Now, obviously, if we take the midpoint, it would imply a fairly steep decline in Q4. Now, we know you're cautious, but by the sounds of it, the markets are developing in the right direction and quote inquiries look still rather healthy. So, Is the 80 million or so quarterly bookings rate for Q4 something that you would like to imply, or is it also possible that we are seeing rather the upper end of that guidance based on what you're seeing today? Then secondly, somewhat related to that, but really a bigger question, if that's okay, on the longer-term order outlook. I mean, you joined Extron, I think, a little over four years ago. And during most of that period, I remember us talking in those calls, you know, whether orders will be 50, 60, or 70 million. In other words, you know, mid to higher double digits maybe. I was just wondering whether structurally you thought that this number has increased and the water got deeper underneath you, so to speak, because of that sheer breadth of applications that you are seeing going forward. And then the last question. Just on the housekeeping front, Kristin, can you give us an idea about the tax rate? You mentioned these deferred tax assets that you are now building for this year and possibly also next year. Thank you.

Thank you very much for the three questions. Let me get started with the first two. So the first question, I understand whether we could imagine that the order intake will lead us to be on the upper end of the guidance. This is clearly possible. We very much, as mentioned, see that there is strong momentum and we clearly see that this order momentum, which we have seen in the first three quarters of 2021, we would very much expect to continue on a high level also in the fourth quarter of 2021. That automatically gets us to the upper end of the guidance or beyond. That's very clear what we have in mind. And I would also bring that short-term fourth quarter outlook relate to your second question, which I took whether we could imagine on the longer-term horizon whether the order intake, the demand structure, and with that, of course, always with six months delay, the revenue structure has changed. I would clearly also say that, yes, the water got deeper, as you nicely put in your question. We do see that the market that we have served on the optoelectronic side continued to be strong, so on a level where we have seen it in the past years. We continue to have a strong demand on the laser side, on the communication side. We continue to see a strong momentum on the optoelectronic side with respect to the red, orange, yellow, the ROY LEDs out of gallium arsenide, so that is continuing. And on top of that, which lifts us structurally to a higher level, on top of that we now see a continued momentum on the gallium nitride side. As I have indicated a bit in my speech, this gallium nitride has started with one application and is now broadening to multiple other applications, and the adoption in the market continues. That gives us the confidence that this gallium nitride topic is not there for just two or three quarters and then disappearing again. But the Scallium Nitride is a continued level of demand, which has really come on top of the level that we've seen before, and that lifts us, so to say, to a structurally higher level that we see right now, and that we would expect also to continue then in the next quarters to come. With that, Christian, maybe to the third question of Uwe Schub? Yes. Thanks.

for handing over. As indicated in the past, I would recommend to model with a 15% tax rate going forward, taking into account the consumption of our tax loss carried forward. And there's not much more to say. It's pretty consistent as we have indicated it in the past.

That's very clear. Thank you.

We have a couple of more questions received, and the next question comes from Mr. Johannes Ries of APIS Capital. Please go ahead.

Yes, good afternoon. Can you hear me? Very well. Okay, maybe a follow-on question to Uwe. Gallium nitride, you see some deceleration maybe in Q3 and Q4 in the order intake, which was, on the other hand, quite strong in the first two quarters. From what of your end market is coming this year? that you maybe gallium nitride there was maybe a first maybe big push and now um uh some officers uh the new end the guys with new entrance has uh has uh first maybe installed their machines and uh they need maybe next for the next quarters not new ones is uh Because the gallium nitride market is growing, but it's still quite small. It's right in my head. It's below 100 million or so, much smaller than the lithium carbide market. Therefore, how do you see the development in gallium nitride? You mentioned it with some remarks before, but a little bit concrete. Is there maybe a dip in the demand before it picks up again, or do you think it's steadily developing?

I think it's steadily developing, as you indicate. I would not call it a deceleration. I would rather call it a slight seasonal variation, as we always have seen. Yeah, 10%, 15%, 20%, quarter over quarter, up and down is always possible, like waves on the ocean. I would not see any deceleration or digestion or decline or whatever. I think we have a good trend, which will continue and last.

And you are clear by far the leading supplier of the machines for the Gallium Nitride market?

Very clear.

Very clear. On the other side, you are a follower... follower in the lithium carbide market. Can you give us some more maybe information about your success? You mentioned you have some orders. You are in contact with all the major customers. When could we see maybe more traction if you really catch up to your major competitors, especially your Tokyo Electronics?

Thank you very much. Silicon carbide I think is another very interesting growth market for us. In silicon carbide we currently see that the market is massively broadening. This is driven by the adoption of electric vehicles which is now heavily happening. If we remember two years ago, electric vehicles by the German car industry was like exotic and now many car makers have indicated that there will be clear stop and an end of combustion engines, everything turns electric and it's clear that the main inverter, in some cases also the DC to DC inverter will be made out of silicon carbide. That brings with it that in the market, in addition to the established players, a lot of new entrants are entering that market. These new entrants not having any, so to say, legacy, but with open eyes and looking at the tool selection, and we have quite successfully made an entry with these new entrants in the last couple of months. In addition to that, as I indicated, the eight-inch transition is approaching within the next one, two, three years, depending on the company and the player. Some are faster, some slower. And this transition is opening up windows again. So with that, we can say that we continue to win customers and accounts. We are in contact with all the others who are not yet our customers, but there is market windows driven by the technical changes, wafer size changes in the market, which we clearly want to utilize in order to even broaden our customer base. I would say it's a good market.

Remind us very quickly, what is the advantage of your machine compared to the established machines?

A lower cost of ownership, meaning higher productivity per wafer.

Okay. And that's definitely the thing which accounts in the semi-industry. Thanks a lot.

I have a couple of more questions received, and the next questioner is Mr. Malte Schaumann of Warburg Research. Please go ahead.

Yes, good afternoon. First one is a follow-up on the order level. I mean, we implied before guidance that the low end calls for something like 60 million, 60, 65 million, which is more or less half of what you posted in the last quarter. So where does this really come from or why did you not increase the guidance? Do you really see the risk that orders could come in so low? or is that rather that was the guidance and it just remained stable? What are your thoughts around that?

That lower end is out of range. As I indicated, we clearly see it towards the upper range because there are trends which continue to be at work and we see them continuing also in the fourth quarter and beyond.

Exactly. Okay, good. Then on the G&A level, I mean, as it was mentioned that a lot of variable costs was driving G&A higher this year. Is that kind of sustainable or how much of that is linked to the share price? So then, yeah, not a fixed position, kind of fixed position then going into next year.

Did I get your question about the SG&A level?

G&A costs that increased quite strongly this year. How much of that is kind of sustainable going into 2022, that might be linked to the strong share price increase.

I think we are overall in a very low level, right, Christian? Do you have a number for that?

I think we are overall relatively consistent. We are able to get some restructuring expenses in. We have some variable compensation in increasing, but overall I don't see a strong increase going forward.

No, we are on a relatively stable level there. Despite the significant increase in revenue volumes, if you compare to a few years back, or if you compare to 2020 levels, we are on a relatively stable level here. I think there's no reason for concern.

Okay, good. Last question is regarding timeframe, timing. You just spoke about Windows as an opportunity for customer adoption of your tool for silicon carbide. What are your thoughts about what are the upcoming perfect timeframes when your tool might be adopted by customers, new clients?

I think this is a very good question. What we see is that in 2022, meaning in next year, typically we receive an order and it takes between six and nine months between the order intake and the shipment of the tool. Then it takes roughly two months for the tool to be installed. As I just mentioned, we have been winning a number of new customers. So these new customers have placed orders either in, let's say, the second half of 2021. So they have placed or they are about to place an order. That means the first tool to these customers is being shipped. let's say in the first half, or let's say in the Q2 of the next year, 2022, the customer is then working with our tool, developing something on the tool, qualifying with their customers, and then the customer can make a decision towards let's say the second half of 2022 that their product is ready it's developed it's finished and and then the customer goes into volume production places an order at the end of 22 and in terms of volume production that translates into revenue in 2023 so we would see some volume in 22 and significant volume in 23 and i think i've derived how that comes together as a timing sequence

Yeah, makes sense. Thanks.

Mr. Hori wants to raise his question. The floor is yours, Mr. Hori. Please go ahead.

Hello? We can hear you very well.

Hello, can you hear me?

Yes, we can.

Sorry for the problem. Sorry for the problem. I'll change my phone next time. Yeah, I had a quick question about 2022. I wanted to have your view on what we can expect for next year. I know you're not guiding for the moment. Of course, it's too early, but can we expect a year of growth? And if yes, what can you share with us as a trigger for growth next year? That would be my first question. Thank you.

Yeah, thank you. Good question at this point in time of the year. I think you can see that we have a very strong order backlog at this point in time, which gives us a good start into 2022. It indicates a good first half year in 22. And what I also mentioned is that we see ourselves elevated at a higher level of order intake. We have seen it in the last quarter, and as I mentioned before in this call, we expect such a level of order intake to continue. And if you add these things up, then you will see that 2022 will be a very strong year for us again.

Okay. Okay, thank you for that. And when you talk about GAN, basically I heard you say, not here, but at another occasion, that again at multiple applications and notably a fast charging application, but that fast charging application with what you were about to deliver was kind of completed as an opportunity and that you had to wait, let's say, for the next opportunities that you have listed, you know, the servers, telecom, et cetera. So do you think there will be a kind of linearity and that the next opportunities will start very soon, because otherwise you may have a kind of air pocket in GaN applications. Thank you.

Yes, definitely. I think this is all happening at the same point in time. The first adoption, as you have indicated, the first application that really went into revenue was the fast charging, that's consumer electronics. And we know consumer electronics is very fast lived. There is a new idea, a trend, it happens very fast, it comes. But at the same time, we really see now that GAN is being adopted in these high-power application servers, data centers, telecom base stations. It starts now in automotive. You may have seen BMW made a press announcement about gallium nitride devices being used in the onboard charger in the car and so on. So these applications, these additional applications, they are all happening. right now, translating into revenue of our customers and translating into follow-on orders that come to Exxon right now.

Okay, thank you very much.

Next, we have Mr. Juergen Wagner of Schlieffen. Please go ahead.

Yeah, good afternoon. Thank you for letting me on. As a follow-up to the GAN questions so far. Yeah, you mentioned the broadening and that you receive follow-up orders. What is your assumption on how many deposition tools for GAN production are needed, let's say until 2025? Why 2025? Because Infineon last month at their capital markets, they gave us a market forecast of 800 million US dollars in 2025. So the question basically is how many machines would be needed to serve this market if you take that as a base case. Thank you.

I think we can expect something between 50 and 70 tools per year. You can then add it up, multiply it out. Nevertheless, that number is of course based on the applications that are visible today. We see our customers opening up new applications and being creative. So, I could very well be that in one year or in two years, we talk about an even broader base, depending how creative our customers are. For example, there is several customers of ours who are looking not only to apply gallium nitride in the voltage classes up to 600, but really to go all the way to 900 or even to 1,700 volts. There are some ideas in the market to use gallium nitride to attack silicon carbide from the low end. and who knows where that plays out. It could be the case that at some point Gallium Nitride even takes over some part of that market.

And who would be a competitor for those tools to you?

Today we are in the unique situation that there is no real competitor. however a market that's developing fast a market that is big and even growing of course will attract competition so we stay tuned and we see who is coming and who potentially might have a good tool yeah so we stay very much on the watch for that okay thank you and the second question would be on silicon carbide

How many tools are in your order intake in Q3 and your order backlog end of Q3? Thank you.

Honestly, I don't have the number. I simply don't have it.

Okay. You haven't mentioned it in your prepared remarks, but there are some orders, right? Yes. Okay. Thank you.

Well, thank you very much. With this, I would like to conclude today's call. Thanks to all of you for attending and dialing in. Please note that our next earnings call for our full year 2021 results, including our 2022 guidance, will be on February 24th, 2022. In between that, we will be in contact, I'm sure. Thank you, and bye-bye.

The conference is no longer being recorded.