BE Semiconductor Industries

Good morning, good afternoon, ladies and gentlemen, and welcome to Bessie's quarterly conference call and audio webcast to discuss the company's 2022 fourth quarter and full year results. You can log in to the audio webcast via Bessie's website, www.bessie.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer, and Mr. Leon Verweyen, Senior Vice President, Finance. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be followed at that time. As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without written permission from the company. I would now like to turn the conference over to Mr. Richard Blickman. Please go ahead, sir.

Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release we issued earlier today and then are happy to take questions. I would like to remind you that some of the comments made during this call and some of the answers in response to your questions by management may contain forward-looking statements. Such statements may involve uncertainties and risks as described in the earnings release and other reports filed with the AFM. For today's call, we'd like to review the key highlights of our fourth quarter and year ended December 31st, 2022, and also update you on the market, our strategy, and the outlook. First, some overall thoughts on our performance. Bayley's fourth quarter operating results were better than expected in an ongoing industry downturn. Revenue of 137.7 million euros decreased by 18.4% versus the third quarter last year reflecting a number of headwinds including weakness in high performance computing and mainstream electronics applications and ongoing weakness in mobile and user markets. However, our backlog rose 12.2% to reach 270 million euros due to a €55.2 million or 44.1% sequential order increase. Such increase resulted primarily from higher bookings for high-end smartphone applications and hybrid bonding systems. Current order trends reflect customers' continued investment in high-end versus mainstream assembly applications, as well as ongoing weakness in demand by Chinese customers. Basis profitability and efficiency remained at attractive levels despite the downturn with gross margins reaching 62.3 percent net income of 40.2 million euros and a net margin of 29.2 percent this year mark an important inflection point in our strategic development as we position basic for sustainable growth over the next decade Our business model generated revenue and profitability levels substantially higher than peers as we effectively responded to an assembly downturn following large capacity additions over the past two years. For the year, revenue and net income of in total €722.9 million and €240.6 million declined by 3.5% and 14.8% respectively, versus 2021. Orders of 663.7 million euros declined by 29.3%, principally due to decreased demand for high-end smartphone applications post new product introductions in 2021. The decrease also reflected reduced bookings from Chinese subcontractors for mobile and mainstream computing applications linked to softening economic conditions Of note, revenue from Chinese customers declined by 33.5% and represented 25.9% of revenue in 2022 versus 37.6% in 2021. Revenue and order weakness in smartphone applications was partly offset by continued strength in basics computing slash hybrid bonding and automotive end-user markets, as well as increased revenue from spares and service activities, which grew by 25.7%. We achieved peer-leading operating and net margins of 40.7% and 33.3% in a difficult environment as we successfully aligned production to changing market conditions. In fact, gross margins increased to 61.3% this year due primarily to a 77% reduction of temporary headcount from peak first quarter levels, effective management of our supply chains, and price increases implemented to help offset inflationary cost pressures. As you can see in this next chart, Basie's 2022 revenue decrease was almost exclusively due to lower mobile revenue. As a result, its percentage of the total revenue decreased from 43% in 2021 to 28% in 2022, primarily offset by an increase in computing and user market applications from 19% to 30% and increases in automotive and spares and service to 16% and 17% respectively. and profitability has increased significantly since the last industry downturn, as measured by a comparison of the years immediately following cyclical peak levels. As evident in this next chart, revenue, orders and operating income in 2022 grew by 37.6%, 37.4% and 70.3% respectively, versus 2018 and operating margins expanded by 7.8 points. BEZI ended the year with a solid liquidity base consisting of cash and deposits of 671.7 million euros or eight euros and 56 cents per basic share and a net cash of 346.5 million euros. we will propose a cash dividend of €2.85 per share, which reflects a payout ratio of 93%. Including such a dividend, BASI will have returned approximately €1.6 billion to shareholders over the past 13 years, or approximately 25% of cumulative revenue. Shareholders were rewarded for their investment in BASI with an increase in dividends and share repurchases of €236.8 million, or 132%, versus 2021. Of note, we repurchased 2.7 million shares this year for €146.8 million and have bought another 670,000 shares to date in Q1. Our objective is to further reduce basis share count to offset potential dilution from prior convertible bond issuance. Next, I'd like to speak a little bit about the current market environment and our strategy. As seen in this next chart, industry conditions have deteriorated significantly since the second quarter last year, highlighted by slowing memory, mainstream computing and data center markets, continued weakness in Chinese markets, and CapEx reductions announced by many of the largest semiconductor producers. The assembly market was the first to experience the full impact of the current downturn. Tech Insights estimates that our market decreased by about 10.6% in 2022, with an additional decline of 16.8% anticipated in 2023. Thereafter, a new upturn is expected, with the total market reaching $6.9 billion in 2025. We made a number of important R&D and business investments in 2022 to better position ourselves for anticipated growth over the next industry cycle. Development spending was increased by 48% to ramp hybrid bonding for commercial production to introduce two new wafer-level assembly systems and to upgrade our existing product portfolio. Operational resources were utilized to increase clean room production and service support capacity in Malaysia and Singapore, as we prepared for anticipated hybrid bonding growth over the next five years. To prepare for expected hybrid bonding market growth, we have increased development staff in Austria, Singapore, Taiwan, and the US by 26%, over the past two years and expanded capacity to 12 to 15 hybrid bonding systems per month. In addition, we retrofitted our Malaysian production facilities to better protect them against potential climate change-related events. And work has begun on a new tooling facility in Vietnam, as many customers shift a portion of their production outside of China to other locations in the Southeast Asian region. Substantial progress was also achieved to help hybrid bonding become a market reality. Significant improvements in placement accuracy, throughput, yield, and lead times all contributed to its commercial viability. Full-scale production began in the second half of 2022. In total, Basie has shipped 31, of which 10 are demonstration units. Per revenue producing unit, we shipped four in 2021 and 21 in 2022. In addition, we received orders for incremental 14 units from multiple customers subsequent to Q3 last year, of which three orders were received to date in the first quarter of 23. Orders received in Q4-22 are not anticipated to be shipped until Q2 of this year, of which several are to be incorporated into integrated production lines. Of note, the first integrated production line was shipped in the fourth quarter. Interest in hybrid bonding process technology is also gaining significant traction with the development community. We shipped an evaluation system to IMEC in Belgium in Industry Research Institute and received an order in Q4 from a prominent American university for hybrid bonders as part of integrated lines. In addition, chiplet interface standards are now being developed by the industry's largest players to help facilitate its adoption and utilization. Progress also continued on BASIS ESG agenda this year, where 2022 targets set in 2020 were met or significantly exceeded in key carbon emission categories, as well as in the areas of waste hazardous materials and renewable energy. Now, a few words about our guidance. There's a high degree of uncertainty as to the outlook for 2023. The assembly market is in a classic downturn after two strong years of growth. However, we believe there are a variety of potential outcomes for basics prospects this year in the context of the current down cycle including the outlook for smartphone and hybrid bonding demand as well as the impact of the reopening of the Chinese economy. The headwinds we face are many including higher inflation and interest rates decelerating economic growth, geopolitical tensions, and ongoing weakness in mainstream electronics, computing, and mobile handset and user markets. For Q1-23, we forecast that revenue will decrease in a range between 0% and 10% versus the fourth quarter last year, as many orders received in Q4 are scheduled for delivery in Q2 and Q3 this year. In addition, we estimate that basis gross margin will range between 61% and 63%, and that baseline OPEX to decrease by 0% to 5% versus the fourth quarter of last year. Total operating expenses are expected to increase by 15% to 20% due to an incremental $7 million of non-cash share-based compensation expense. Further, we expect an effective tax rate of between $12 and 15% and capex of 8 to 10 million for the year 2023. That ends my prepared remarks. I would like to open the call for questions. Operator.

Thank you, sir. A reminder to the participants, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for question. We will take the first question from Madeline from UBS. Your line is open, please go ahead.