Aixtron Se Unsp/Adr

The conference is now being recorded. Good afternoon, ladies and gentlemen, and welcome to Extran's conference call regarding the Q3 2022 results. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. Now, I hand over to Guido Pickard, VP Investor Relations and Corporate Communications at Extran.

Thank you very much. Welcome to EXTRAN's presentation of our Q3 and 9-month-22 results. I'd like to welcome our CEO, Dr. Felix Grabert, as well as our CFO, Dr. Christian Ganninger. As the operator indicated, this call is being recorded by EXTRAN 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 it over to our CEO for opening remarks. Felix?

Thank you, Guido. Let me also welcome you all to our results presentation. I will start with an overview of the highlights of the quarter and then hand over to Christian for more details on our financial figures. Finally, I will give you an update on the developments of our business and our guidance. Let me start by giving you an overview of the key business developments in Q3 on slide two. Demand for our equipment remains strong with an order intake of 143 million euros, up 25% year on year, driven by the strength of the growth market our customers are operating in. The biggest demand drivers for the quarters are our systems for silicon carbide and gallium nitride power electronics. The single biggest contribution to orders in Q3 22 already came from our newly introduced silicon carbide multi-waiver system. This is very encouraging, as we have just recently launched our brand new next generation silicon carbide system, G10SIG, which our customers are already ordering in volume. To produce optoelectronics, as well as tools to produce LEDs, including micro-LEDs, also remain strong. As a result of all that, we can report a very strong order backlog of €369 million, up 38% year-on-year. Our quarterly revenues are affected by some temporary circumstances, which are mainly due to a few customer-related delivery delays and the granting of export licenses, which were not yet available as of the reporting date. As we have stated during our Q2 results call, we expected our product mix to improve for the remainder of the year compared to the first half of 22. As a result of that, our gross margin improved up to 44%. Now, I will hand you over to our CFO, Christian Dunninger. He will take you through the Q3 22 financials. Christian?

Thanks, Felix, and hello to everyone. Let me start with the financial highlights of our income statement on slide three. As Felix mentioned, orders in the quarter continued to be strong, and our backlog was up, fueled by the mentioned strength in demand. Revenues were at 89 million, gross profit at 39 million, EBIT at 16 million, and net profit was 19 million euros for the quarter, which is below prior year, mainly due to the mentioned temporary effect resulting in a shift of some tool deliveries to Q4. Growth margin improved to 44% from 43%, as mentioned. OPEX in the quarter went up to 23 million euros, predominantly driven by higher variable compensation elements combined with slightly higher R&D spending. We again utilized tax loss carry-forward and capitalized some additional deferred tax assets in the amount of 9.4 million euros due to expected future profits. We expect to realize exceptionally high shipments in Q4 and therefore revenues, gross profit, EBIT and net profit at a corresponding high level, enabling us to reach our upgraded guidance for 2022. Now to our balance sheet on slide four. The previously mentioned shifted tool shipments and the inventory build-up to prepare for the higher expected business volumes resulted in inventories at the end of September in the amount of 209 million euros. The advance payments received from customers we had on our books at quarter end were 122 million, representing about 33% of our order backlog. This led to total cash balance including other financial assets of 339 million euros. Out of this, 200 million euros were invested into funds following a very conservative diversification approach. Just a quick word on our free cash flow on the next slide before I turn back to Felix. Free cash flow in the third quarter was negative 7 million which was up 61% compared to last year's level. With that, let me hand you back over to Felix. Felix?

Thank you, Christian. Before giving you our updated view on the outlook for the remainder of the year, I would like to share some highlights of our market development. The order momentum in most of our addressed end markets remains very healthy. In the area of power electronics, based on the material system of gallium nitride and silicon carbide, the momentum continues to be strong, in particular for our silicon carbide technology solutions. Here we can report very encouraging figures for this quarter, underlining that our strategy for our silicon carbide business is unfolding very well. We believe that our recently launched G10 SICK is the right tool at the right time. This fully automated multi-wafer batch tool processes nine 6-inch wafers or six 8-inch wafers per process run, enabling our customers to produce their wafers at the lowest cost in the market today. Today, most customers are still running the main volume of their production lines on 6-inch wafer size, but nearly all of them have a well-defined roadmap to what 8-inch prepared. Our new tool, G10-SIG, addresses this market need and we are more than happy with the customer feedback and the orders we have received within the first quarter of the launch. At this point in time, we are demonstrating the new system to further customers in order to convince market participants who are not yet using our system. The main driver for silicon-carbide power devices remains electromobility with use cases in the main inverter, the onboard charger, and in fast charging pools on the roadside. In addition, we see more and more customers investigate higher voltage silicon carbide devices at 3 kilovolt or 10 kilovolt, which are going into the very high power applications in green electricity generation, such as large wind and large solar power plants. In the market for gallium nitride power, we observe continued strong momentum. This segment was the second largest contributor to order intake in Q322. We continue to see additional customers in the area of power electronics, enhancing their portfolio by GaN power devices. This is driven to a large part by the tremendous potential of GaN power devices to increase the efficiency of energy conversion. The combination of rising energy prices and increasing awareness for energy savings and going to net zero continues to be the main driver here. In the area of micro LEDs, we see more and more players from the display industry, from the LED industry, and from consumer electronics starting projects. We expect to shift first volume orders in 2023 into one or two application segments, with other segments following at a later stage. Eventually, we will see micro-LED displays penetrate the complete display space, ranging from TVs, notebooks, or smartphones, all the way to automotive and large signage displays. Finally, I would like to give you an update on the portfolio renewal that we are working on for a while. The G10 silicon carbide is the first member of the new series family that we are launching. Also for GaN power electronics and for gallium arsenide lasers and micro-LED, we have new family members in the making. We are planning to launch both of them in the first half of 2023. Today, these products are in the validation at multiple beta customers, and both of them deliver very promising results in all the target applications that we have in mind. With that, let me now give you the update on our full year guidance for 2022 on slide 6. As indicated before, the shift of some tool shipments from Q3 to Q4 2022 will lead to exceptionally high shipments in the last quarter of this year, resulting in a record level of quarterly revenues. Based on this and the strong customer demand, we upgrade our original full-year 2022 guide. Orders are now expected to come in between 540 and 600 million euros from previously 520 to 580. We leave our revenue expectation unchanged at a range between 450 to 500 million euros. The 2022 gross margin we expect to be around 42% compared to 41 before. We expect our EBIT margin to be now between 222 and 24% from 21 to 23% before. As before, these expectations for 2022 are subject to the provision that the challenges of the current environment will not have significant impact on the development of our business. With that, I'll pass it back to Guido before we take questions.

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

Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your telephone keypad. In case you wish to withdraw your question, please press 9 and star again. Please press 9 and star to register for a question. And the first question comes from Michael Kuhn from Deutsche Bank.

Good afternoon, gentlemen. A few questions on a complex topic, and that is the delivery and sales delays that you saw in the first quarter. Firstly, you mentioned some customers.

Just a connection, just a moment please. We don't have him in the line anymore. So I suggest we go to the next question now, just a second. And next up is Olivia Honeychurch from Jeffreys.

Hi, thank you for taking the question. Two from me, if that's OK. So firstly, on the silicon carbide side, it sounds like you're making very good traction here. And that's obviously partly being led by your new tool. You said that a large part of your order intake is coming from this segment. Can I ask, is that coming mostly from existing customers like Wolfspeed and your second big customer here? Or have you been able to sign up new customers elsewhere? just for your silicon carpet tool in the quarter? And I've got a follow-up as well.

Thank you very much. Very good question. Yes, in fact, with our new silicon carpet tools, we have been able to register orders both from existing customers and new customers. It's a good and solid mix. And we can confirm that with this tool, but overall, we continue to make inroads in the silicon carbide market by broadening and further expanding our customer base. And that makes us very positive also for further growth out of this segment.

Great. That's good to hear on the new customer side. I mean, can you give us any color on who the customers might be in terms of geography or potential size or how they could fare in terms of, you know, order tools and size versus your existing customers on silicon carbide?

The new customers are very, very broad in geography. Some is in Europe, some is in Korea, some is in Taiwan, some is in China, some is in the U.S. We are making good progress, I would say, worldwide.

Okay, that's good to hear. Thank you. Finally, my second question was on the export licenses. This may have been what the previous question was going to be about. You said that you didn't have these in time for the end of Q3. Can I ask if you've received them since the end of the quarter? And if not, then when would you expect those to come through? And I guess separately, as a follow-on from that, what risk is there that these issues keep popping up and that in future quarters you see shipment delays coming through because of export license issues?

Thank you. Very good question. No, we have not received the particular export licenses that were the root cause for the push out from Q3 into Q4. So they have not arrived yet. However, we expect them to come in the next weeks. Don't know when exactly it's going to be. And also relating to your question, is there risk of further push out? This is what we have reflected in the lower end of our order guidance, which we have not increased, but in our revenue guidance, which we have not increased as we might have in order to fully reflect that risk. The pattern is that we see that export licenses these days take a bit longer. One of the root causes is that we see that the authorities are very busy. They also have been tasked with additional topics such as distributing funding in the sector of green energy and so on. So it's a capacity and bandwidth topic, one of them. Other topics is a deeper scrutiny that we all see and observed on individual customers, and that is what we have reflected. And we don't see an overall risk here, but it's a timing topic that needs to be taken account, and we have done that in full. It's fully reflected in our numbers.

That makes sense. Thank you. Now we have Michael Kuhn from Deutsche Bank back in the line.

Yes, good afternoon. Sorry, the line collapsed. So as a follow-up on the export license, as you just spoke about it, do you expect those let's say, granting bottlenecks to be solved at some point. So, let's say, more civil servants working on the topic, or could that be something permanent? And also, in that context, obviously, the US is tightening rules of technology shipment to China. Do you see an impact on your business currently or medium term? So do you see any pattern changes in that area? And maybe on the custom and the related delays again, not sure whether this was answered already. Is that more technical reasons or what was the reason for those delays? Thank you.

So let me try to take your question one by one. I think the first question is whether we expect that the bottlenecks will be solved at some point. I think what I mentioned before is that we understand that additional tasks have been put on the authorities. I don't know what the plans of the government are to staff it up. I think we are preparing now for the topic to remain for a while. So at some point, we will get the licenses that we have that we have now been waiting for, and we will wait for others, but we don't, I think it's a manageable topic. It's just a lead time topic that we will take into account. We don't expect here a fundamental issue or like a substantial topic. That's my comment to the first one. The second question you're relating is with respect to the new U.S. regulations. We have, of course, looked into these new U.S. regulations in all depth and all detail. And we did that actually with support of very experienced U.S. subject matter experts to make sure that the conclusions we are drawing is correct. And it's very clear based on that, that these rules and regulations are targeting the segments of AI and super computing, not the segment we are in. Our market segment is not affected. So even if we were a U.S.-based company, we would not have any effects or rules on this one. Also, we have checked none of our active house customers is on this expanded entity list. And hence, we do not expect and also it does not have any implications on our supply chains for US-based parts that of course we are using some of them in our tools. So we do not see that this changes our current business behavior. Does that address your question?

It does indeed. And on the customer-related push-outs, or however you want to phrase it?

Yeah, on the customer-related push-outs, we had the effect that in one particular market segment, this was the consumer-driven segment of red, orange, yellow LEDs, we had some customers push out orders which was, of course, due to the overall weakening in this market segment. That was the reason for the customer topic on this one. We do not expect that that's going to go around across the whole market.

All right. And then maybe one more question on the more financial side. You've obviously built up quite a lot of inventory over the past nine months. Can you quantify roughly what amount of working capital relief you expect for the fourth quarter?

Yes. I cannot, Christian here, I cannot give you the exact number, but we surely expect our inventories to go back to just the run rate we had before. We just, this buildup here of inventory in the quarter is purely driven by this push of shipments from Q3 to Q4. And it's also correlating with the received down payments. So that will be basically resolved by the end of the year.

And we are preparing, as we said before, for our relationship, the record high shipments in the fourth quarter. So I think at the end of the fourth quarter, a tremendous amount of this inventory will leave our company and convert into revenues. Very clear.

Thank you. Then very last question promised on the micro LED side, if I understood you correctly. Recent business was not just about your big launch customer, but also other customers, but that is not yet volume business. Is that correct?

Yes, thank you very much. We see the market at large preparing for the micro-LED topics. We are currently working with a very large number of customers together. We see interest both coming from display makers, from people who were formerly engaged in LEDs, but even also the very big consumer electronics giants. Everybody is working currently on micro-LEDs. As you rightfully say, the majority of these players are still in the stage of development, some of them pilot line production, One of them already preparing now for a volume ramp next year. The others, I would say, in a slightly earlier stage. Perfect.

Many thanks.

And the next question comes from David O'Connor from BNP Paribas.

Great. Good morning. Good afternoon. Thanks for taking my question. Maybe firstly, just a clarification on the license. Can you, Felix, just confirm, it's the German government that you're seeking this license from, this export license, and to which geography are you shipping these tools into?

Okay, yes, let me clarify this. In fact, we need to apply for export licenses for all shipments which is not going or which is going outside of Europe, outside of the United States, and outside of Japan. That means, in other words, we need to apply for shipments which go into semiconductor, big semiconductor markets such as Taiwan, Korea, China, and so on and so forth. All these require an export license. So this is the vast majority of our revenues that goes through an export line. And this is also the reason why these delays that we have experienced now had a visible effect in the P&L. However, we don't expect this is an overall issue.

Very clear. Thanks for that. And maybe as a follow-up question on the micro-LED side, can you talk to the intensity of discussions with the potential micro-LED customers? You have one that you've outlined before, so preparing for volume products. What's kind of the delta there in terms of timing versus kind of the type of discussions you're having with other customers? That would be helpful. And also, if you could tell us the percentage of micro-LED orders I think that'd be useful. Thank you.

I'm not sure whether I got your question in full. With one customer, we are preparing for a volume ramp or volume shipment of Extron tools in the year of 2023. This is also what we had indicated at an earlier point in time. With other customers, we are working on different market segments, different application segments, which may come at a later stage. We don't know exactly whether this is towards the end of 23 or in 24, this depends largely on the technical progress that our customers are making. So I could not give an exact timing at this stage. And I think the second part of the question was on the share of micro-LEDs. Let me have a look on that one. Let me look at my data, what I have here, whether I'm able to get that out for you. I think for the full year of 22, micro-LEDs will be somewhere... in a double-digit percentage range for us of our share of revenues, maybe around 15% for the full year 22. Thank you.

That's very helpful.

Next up is Juergen Wagner from Spiegel.

Yeah, good afternoon. Thank you. I'm actually on silicon carbide. Two more questions. Your new machine, how should we model your market share, your equipment market share next year and longer term? I mean, silicon carbide and what can you say on Cree and their yield issues? Do you see any impact on your equipment rollout with them? And another one on your order backlog, you mentioned $369 million. How much of that would you consider as being exposed to cyclical risks or the push-outs you refer to with your red, orange, yellow customers? And last one, the tax rate keeps falling or going down. What should we model for Q4? Thank you.

There was a number of questions. Let me take them one by one. That's okay. So the silicon carbide market share, I think we have a good chance of next year of approaching somewhere around 50% market share in silicon carbide. I think it remains to be seen whether we are slightly below or slightly above this number. I haven't looked at the most recent data, but very clearly we make very good progress in silicon carbide, to give you a rough indication. The second question you asked was relating to Volspeed, who published their results yesterday. I cannot comment on the topics that they are experiencing in their substrate production or wafer making steps. This is a step which is not related to our equipment, so I don't have any insights on that one and can't comment on that one. And the last question I understood was that you were asking which part of our backlog is exposed to the red, orange, yellow, to the market segment, which was experiencing some disturbance. This is a very minor share. I don't have the exact numbers, but I would call it, in the grand scheme of things, it would be close to negligible.

Okay. And the others, you don't see any cyclical risk?

And we don't see any technical risk. No, in fact, this is a very good question. We do see that the customers on the power electronics side, and we know power electronics, both gallium nitride and silicon carbide, is continuing their investments. This is the confirmation we also hear from our customers. Despite the overall economic situation, simply because there is such a high demand, now driven by the electrification of everything, electrification of mobility, e-vehicles, but also by the drive for energy efficiency, which is the main driving force behind gallium nitride. So we expect these trends to continue.

Okay, and the final one was on the tax rating Q4.

Yeah, that one I would take. As we've As we've recommended in the past, yeah, I would recommend utilizing 15% tax rate that accounts for the utilization of tax loss carry-forwards. It does not include changes in deferred tax assets. That's, anyway, very difficult to predict, yeah, so that's what I would recommend you use for your models.

Okay. Yeah, thanks a lot.

The next question comes from Martin Marondon from AutoBHF.

Yes, thank you for taking my question. Just a clarification, sorry, on the sales guidance. You said that the lower end of the range reflects the risk of not having the export licenses in time, right? So without that, you probably have guided towards maybe the high end of the range. Yes, thank you.

Very good question. So, the high end of the range is achievable if none of the risks is materializing, and the lower end takes into account all potential risks that might be conceivable. One risk you just mentioned, this is the risk of export licenses, a timing delay topic. And the other risk which we have taken into account for the lower end of the revenue guidance is customer push-outs for the following reasons. We see in the area of power electronics that customers are building completely new fabs, really with big constructions going on. Entire new steel structures or concrete structures are being erected. And due to the overall global supply chain topic, not on our side, but on the customer side, Some of these constructions are very well on track. All of them continue, so this has nothing to do with the economy or anything. All of them continue, but we do see that some customers have some challenges with their project plans, and it could be that one or two of these steps may experience a delay of one or two months, and some tools move from December to January or from December to February, and this risk we also have included in the lower end of the guidance. So this does not affect the overall trend, but it's something that we have taken into account. And therefore, at this point of the year, we have an unusually large range of revenue guidance.

Okay, very clear. And on that topic, you know, we saw world speed warm yesterday on supply chain issues. Is that related to what you said on customer push-outs and supply chain constraints?

But I cannot comment on the detail of Wolf's Beats. The reading, the understanding I got from reading the transcripts myself as a third party, so to say, is that this has to do with technological topics in the production process. And if my understanding and my interpretation from what I read is correct, then we are completely independent and not affected with that.

Okay. And just one last question. So, silicon carbide was very strong this quarter. Do you expect the mix to, let's say, silicon carbide to be higher than gallium nitride orders in the next few quarters, in the next few years, so the mix will evolve a little bit?

I think both of these materials will continue to be very strong. I don't have exact numbers ahead of me or in front of me that I could say the one is stronger than the other. This remains to be seen.

Thank you very much.

The next question comes from Lee Meyer from Lord Abbott.

Hi. I have two questions. The first question is, When did you first become aware of the export license issue, which would possibly impair or delay your shift into the quarter? And why did you choose to wait until now to sort of communicate this to the market? That's my first question. I have a follow-up.

Well, as I mentioned before, we are obtaining export licenses for the majority of our business. It is not new that there has been delays with some topics. I think if you have followed us, you will have seen that also in past quarters over the last year, that this happens once in a while. And therefore, we have not seen any need to communicate this to the market, especially as we are very confident that we will stay within our overall guidance, which we have reconfirmed and even increased.

Okay. All right. Understood. And then just... In terms of these new responsibilities that you talked about, the authorities being given additional tasks, as you stated, why do you think these additional tasks are arriving now? Is there a change in the overall climate that's sort of sympathetic to what's coming out of the states? Why the additional tasks now?

I think you need to ask the decision makers within the government who will make their top-down allocations. This is beyond what we can say. We can only pass on here to this group of we learn of what we learn of what we have been told by the counterparts with whom we are working closely together who have signaled to us that there is additional work within the authorities which is consuming bandwidth. and who have indicated to us, hey, Extron, we will have less bandwidth available for all goods being exported out of Germany. That means with the same team size, having more work to be done, yeah, that means you may need to wait a little longer once in a while. That's all I can tell you. That's all information I have.

Okay. Understood. Thank you.

And the next question comes from Olivia Honeychurch from Jeffery's.

Hi, thanks for taking another question. Just on this new family of tools, the new portfolio that you mentioned, Felix, can you give us an idea of what the impact will be there on the gross margins for the group? It sounds like it'll be incrementally positive, but just wondering if you've previously said that you'd expect your group gross margins to get to about 45% in the medium term. Does that guidance already take into account this new portfolio of tools or Would you look to upgrade that outlet given potentially incrementally positive impact from the new portfolio? Thank you.

Thank you very much. Very good question. We, in fact, expect that the gross margin of the group will gradually improve as our new portfolio elements will take more and more share of our total revenues. This comes simply from the point that the new product into which we have invested a tremendous amount of time, effort, and R&D come along with much higher productivity than the previous generation, also with better uniformities, better performance of the individual products. that of course then also reflected in the cost margins of each of the individual products yeah for sure the r d investment needs to pay pay off at some point yeah um and as for the timing which you are asking for um i don't have a financial model ahead of me that i could tell you this largely also depends how fast the new portfolio elements will take over share of revenue As we have seen in the silicon carbide, which we have launched this quarter, there was a very positive start. The other members of the family, we will be launching the first half of 23, and I think we can expect throughout 23 then to take a relevant share of the group revenues, then much more unfolding throughout 2024. And when that is coming, yes, for sure, the cost margins will increase. Nevertheless, I would not want to quantify that effect today here in this call.

Okay, that's fair enough.

Okay, thank you very much to all the listeners and question askers. With that, we will close today's call. Please contact us at IR if you have any remaining questions. We're happy to discuss and find our contact data in the results presentation. Thank you very much.

All stay safe. Bye-bye.