Technoprobe Spa U/Adr

Good afternoon, and thank you for joining us. Today, Stefano Beretta and myself will drive into the first part of 2020, three results, also sharing our view for the third quarter of this year. As usual, Q&A session will follow at the end of the presentation. We closed the first half of the year at €196.3 million, confirming the sequential upward trend in the second quarter we anticipated during our call in May, also beating Q2 guidance in terms of revenue, mainly due to the advanced shipments requested by some of our clients. Our reference markets maintain the same path registered in the first quarter. From the end market perspective, we are still facing a sluggish consumer applications market and inventory adjustments, which seems to be slower than expected. As opposite, automobile and artificial intelligence markets are keeping growing. Since our last call, the big trigger that is shaking the same space is the artificial intelligence potential impact. As mentioned, we have been able to register patents this year and we are confident to be in the best shape to serve this market in the future. Said that, I want to clarify that in our view, the growing path confirmed in the artificial intelligence in the second half of this year will not be enough to offset the overall cyclicality of the business that we estimate will be affected by lower volumes in the consumer market and the related inventory adjustment. Now, let me turn to Stefano Beretta, who will give you more colors on our figures.

Good afternoon, everyone, and thank you for joining us. As you saw in our press release, revenues in the second quarter were approximately 105 million euro, registering a decrease of 18.6% compared to the same quarter of prior year, but with a remarkable 14.9% sequential increase compared to Q1, and approximately 4 million above the high range of the prior guidance. Consequently, gross profit and EBITDA decreased consistently compared to Q2 2022 to 55.7 million and 37.8 million, respectively, but still representing a remarkable 53.1 and 36% on revenues, despite of the already predicted contraction of revenue. As you can notice, gross margin has been confirmed in the mid-range of the guidance, while the EBITDA margin at the high range of the guidance was raised at the end of prior quarter. Moving to the year-to-date figures, total revenues were 196.3 million, with an year-on-year decrease of 21.6%. Gross profit was 101.8 million, 31.7% lower compared to the same period of 2022, representing a margin still close to 52%. EBITDA closed at 64.7 million, down 39.4% compared to the same period of 2022, but still representing a remarkable margin of 33%. Looking at this page, you can see a summary of the comparison between the financials at the end of the first six months in 2022 and 2023. Just to give you some color on that, revenue year-on-year decrease of 21.6% was driven entirely by the market downturn initiated at the end of 2022 that largely impacted the volume of orders and related deliveries. On a gross profit level, we saw a decrease in the margin from 59.6% to 51.9%, which is the result of maintaining a consistent organization of priority, in particular in terms of labor and capacity, together with a significant reduction in revenue. In fact, it's worth reminding that at the end of June 2023, we currently employ approximately 200 people more than at the end of half year 22. Moreover, we registered an expected penalty with a supplier for approximately 1.5 million due to a partial cancellation of a purchase order that we already disclosed during the presentation of Q1 results, as well as a prudent inventory reserve of approximately 5 million recorded in the second quarter of the year. Consistently with this information, the EBITDA reflected the same trend, showing a decrease in the margin from 42.6% to 33% year-on-year, even including a positive Forex impact for approximately 1 million. We wish to highlight in this case that EBITDA is also impacted by a consistent amount of R&D costs approximately 23 million compared to 22 million in the same period of 2022, representing now approximately 12% of the half-year revenues to confirm once again the mindset, the commitment of our leadership to develop products expected to generate higher revenue starting from the end of 2023. Finally, net financial position is down 43 million in the six-month period, due to essentially 31 million generated through the operating activities, together with 1 million generated through the combined impact of financial activities and forex. More than offset in this case by 32 million absorbed by investment of the periods, capex, and 39 million due to the payment of current tax. Still inclusive of 18.7 million in advance and related to fiscal year 2023. So once again, investments in the capacity and R&D are not planning to stop in the remaining part of 2023. But consistently, with a weaker market outlook, we will remain cautious. Now let me turn to Stefano Felici, who will share with you some more comments on the recent acquisition announced yesterday.

Thank you, Stefano. Let me give you more color on the position of Harbour Electronics. We just finalized yesterday. Harbour Electronics, based in Santa Clara, was part of a Chinese group, Passprint, and it is focused on the manufacturing of highly specialized printed circuit boards for the semiconductor industry. Due to the high level of technological evolution of their products, Harbor Electronic was already one of our key suppliers for the most advanced PCB. We know each other very well, and I think this is an edge in the integration process that will follow in the next months. The company serves and will continue to serve the biggest players and pro-car manufacturers in the same space with 180 employees occupied in two plants in California, as well as three design centers in the UK, Philippines, and Malaysia. As reported in the press release published yesterday, the total amount paid for the acquisition, full in cash, has been in the region of 50 million US dollars. The rationale behind the acquisition is to fully integrate our manufacturing process. As you know, we designed PCB, MLO, ceramics plates, and contact probes. But before the acquisition, we fully outsourced PCB manufacturing. During the last quarter, we finally got the opportunity to tackle the market and find suitable targets. which was perfect for our strategy due to their high level of technological footprint. Being fully vertical integrated is definitely a competitive edge, both in terms of costs and process optimization, and also for R&D leverage. You know how the complexity boosts the development of new testing solutions in our industry. We expect to benefit from the acquired skills to foster new product development process. In addition, they also fit one of our growth drivers, entry into the final test market. In fact, Harbour is already involved in the manufacturing of final test board. So we expect also synergies to speed up the development of products to serve this segment. Now I hand over to Stefano Beretta who will comment our guidance for the third quarter of 2023.

So as a preliminary comment, we know that the production adjustments in particular for the consumer electronic application is expected to continue for the time being and the recovery in demand for testing is likely to be milder than originally expected due to the persistent excess capacity in customer supply chain. So as a result of this trend, the market weakness initiated in Q4 2022 is still confirmed throughout 2023 However, despite that, we see volume still below the level of prior year. We are confident to see a shy but sequential improvement also for the third quarter. And finally, it's worth reminding that Arbor performance will impact Q3 group financials starting from the acquisition date, so August 8th, expecting a moderate and temporary dilution of the group profitability, at least until the end of 2023. So for Q3, we expect revenues to be about 111 million plus minus 3%, gross profit in the range of 49% plus minus 2%, and EBITDA margin in the range of 32% plus minus 2% as well. Thanks everyone for your attention. Now we can move to the Q&A session.

Thank you to the speakers today. We now have an opportunity for questions. As a reminder, if you would like to ask a question, please use the raise hand function on your screen or for those dialing in, it's star nine on your keypad. Once your name is announced, please unmute your line, state your company name before asking your question. Thank you. The first question today comes from Mr. Giovanni Selvetti. Please, Giovanni, the floor to you.

Can you hear me?

Yes.

Okay. Hi, everyone, and thanks for taking my questions. So a few on my side. The first two are on H1 results, and the other ones are on the recent acquisition of Arbor. So the first one is on cash absorption. I was wondering if you can help us better understand that the moving parts of the cash absorption in Q2, was that due to a lower cash generation from operating activities or... Also on CapEx, you stated that CapEx amounted to 32 million and mainly related to the upgrading of production line. And I was recently listening to the conference call of your main competitor stating that the CapEx is expected to increase in the second half. And so I was wondering if you foresee a similar dynamic there. The second question is on the guidance for Q3 and specifically about gross margin. I think that maybe you answer at the end of the speech, but I was wondering why the gross margin is expected to be down around 49%, which is sequentially lower than the first half. Is this mainly related to Arbor Electronics? And finally, the last question is on Arbor again. So I was wondering if the current production capacity of Arbor is enough to source PCB for the old group or if Technoprop will still need to buy part of the PCB externally? Then, because in the presentation it says that Arbo now serves the top 10 pro card players, if starting tomorrow, Arbo will just provide PCB to TechnoPro. Thank you.

Thank you, Giovanni. A lot of questions. I hope to remember all of them. Starting from the cash flow statements. What I mentioned before, the absorption in the second quarter of 2023 is essentially due to the tax payment. If we select and we separate and segregate the very stream of the cash generation, we still confirm a 31 million cash generation from the operating activities, offset almost entirely from the CapEx investments, so 32 million investments. But the reduction is due to 39 million as a current tax paid Part of that is due to the remaining part of 2022 that was paid at the end of June. And the other portion for 18.7 million is already the down payment for 2023, for which we do not expect to have to pay more taxes for the rest of the year. So essentially it's a time reduction.

In terms of CapEx, is it fair to assume roughly the same amount in the second half or do you see this number going up?

In the second half, we expect at least the same level. We are currently evaluating how and when to invest more money, especially potentially in restructuring of arbor or even in other investments, especially in Taiwan, where we are still developing our MLO facility. So there are a lot of projects going on. And as also our competitors are doing in the same time, we are not stopping our investment at all. So we're continuing investing in all our technologies and all our facilities, both to increase the capacity, and this is the point number one, but also to renew a part of our machines and our equipments. So absolutely, it's something we really care about. Okay. Okay. Getting to the guidance question. So back to the guidance question. Essentially, the dilution is almost entirely related to the consolidation of Arbor. Arbor currently has a, let me say, breakeven P&L. So a very small gross margin and a breakeven EBITDA currently considering that Arbor together with all the players in the same space are facing probably the worst year in the last 10 years. So their revenues are 25 to 30% lower than prior year. So that's why the dilution on our accounts are probably estimated in the range of 2% for the margin and 1.7% in the bid down.

And finally, I can answer to your last question. So our intention is to keep Arbora kind of independent so they will be able to serve all the semiconductor industry, including all the other pro-carbon manufacturers. Of course, our intention is to load them with more business on our side. And at this moment, so we expect to... to load them at full capacity. And that will be not enough to cover all our needs. And considering also that we have a plan to go in the final test market and to develop more business. So we think that they will not be able to fulfill all our needs, including the needs of all the other players. So as I mentioned just right now from Stefano, we are going to make a business plan and probably to invest more to increase the capacity.

Okay, thank you very much. Maybe just on this point, roughly how much of the, let's just say, PCB needs can Arbor currently cover? Just to have an idea on how much you guys spend in PCB per year and how much this can save by having Arbor internally. Just to have a rough figure, like 30% or I don't know.

So currently Arbora cover all the big players of the space, especially for pro cards. So their turnover is, let me say, more or less equal among Technoprobe, Four Factor, and plus a couple of other players. So in this case, going on and being a part of the group, we will be able to address all our need of PCB through Arbor capacity. So Arbor has already the right capacity to cover the entire need of TechnoPro. So if this is your question.

How much would be the saving?

I mean, rather than going externally and having the capacity inside, I was wondering if you can provide a figure on how much you expect this to come in terms of savings.

Well, I don't want to put a number right now. because this is something we have to evaluate. This is not only a matter of internal saving because we have to respect also transfer pricing rules for the US, between the US and Italy. So we need to work on that.

But we'll definitely have some savings because that will be done internally. And definitely we'll have that part that is... Giovanni D' be saving so maybe we'll. Giovanni D' be more precise. Giovanni D' Next.

Giovanni D' Okay, thank you very much.

Thank you Giovanni for your question, our next question today comes from Mr john Marco bonaccino please don't Marco the floor to you.

Yes, good afternoon. Just a clarification again on the guidance. Given you provided the $50 million for last year for harbor, assuming this will decline by 30% this year. So basically, I calculated the average rate of $3 million per month. So just to clarify, you're 111 million revenue guidance for Q3. Is that kind of 105 on a like-for-like basis? So you are indicating that basically your business excluding Harbour will remain flat, sequential, and then we add a few million, so 5-6 million for Harbour. Is that correct?

Yeah, that's almost correct. It's not really flat. We expected a small growth for the prop car business standalone. So we expected something like 107, 108 millions in Q3, Technoprop standalone. So the contribution of Arbor is very minimal.

Okay. And the other question on Harbor is just to clarify the strategy for next year in the midterm. So clearly, some of the revenues are internal. So I guess you will have an addition because they were providing to you. But in the mid-term, do you expect the factory of Harbour to provide only internal capacity? So it is not likely that we have to increase revenues, but basically you will have an improvement in terms of your cost. So just to clarify how you see the contribution of Harbour in the mid-term and if you expect Harbour to basically provide the PCB also to third party customer or only for internal use.

No, so as mentioned, so Arbor will continue to make business with all the current customers. Okay. So in addition, so as in TechnoPro, we had several suppliers right now for PCB, of course, our intention will be to give priority to, if Arbor, of course, has the right capacity, will be to give priority to Arbor. So, but our intention is to keep all the other customers alive and to avoid any disruption

Okay, clear. And just the last one for me, in terms of the strategy on the final testing, in the last call, you mentioned that you were working to launch on the market in 2024, some new products in final testing. If you can update on the roadmap here, if you are confident to launch these products in the first half, in the second half, and if you have an idea in the kind of range of, let's say, sales from this new product, regardless of the evolution of the rest of the traditional probe card. Thank you.

Yes, so I think we are still in progress with the qualifications. And so we expect to be in production, I mean, in the market, the first half of next year. But it's still too early to, let's say, to disclose the numbers, of course. But probably in the next course, we'll have a better forecast on that.

Thank you. Thank you, Mr. Bonaccina. Our next question today comes from Mr. Adam Angelo. Please, Adam, the floor to you.

Hi, it's Adam here from Bank of America. I hope you can hear me okay.

So firstly on the Q3 guidance, just wanted to double check. I mean, I guess there would have been expected to be some benefits from the seasonal launch of a smartphone in Q3. So just wondering there, is that, you know, anything on maybe lost market share? If you could touch on that and maybe I'll just go in. one by one with the questions.

Okay. At this moment, we are still very strong in market share for that kind of segment, but we still see a weakness of the market. But we haven't lost any market share.

Okay, understood. Second one, just the sequential recovery expected in Q3 versus Q2, I think clearly a little bit lower in terms of sequential growth. I just wanted to understand what's driving that. Presumably the market is further along in the inventory corrections, so just why is it... Lower and maybe kind of tied to that, just I think you said that there was some advanced shipments requested from some clients in the Q2 numbers. So maybe if you could just kind of explain a little bit further what was driving that.

So again, here in the Q3, we still see, as said, the consumer market, especially smartphone and PC, still pretty weak. And on the other side, there are two segments that are picking up very strong, which is still the automobile market and the artificial intelligence. But these two are not enough to offset the weakness of the consumer market. This typically is bigger. So that's why at the end, we see a Q3 that is kind of flat compared to Q2.

And also the cutoff, as we mentioned before, at the end of Q2, we were able to anticipate a couple of supplies. So for about 3 million, that's why we went well above our guidance. So we were 4 million above the high range of the guidance. If you consider that three millions were expected to be shipped in Q3, you can do easily the math. So we would have closed one or two, the second quarter, and we will have a third quarter with three millions more. So on a sequential basis, you will have seen the same growth more or less.

Yeah. And just that three million, can you help us understand what that was related to and why it was earlier than you previously expected?

We were able to manufacture them, to prepare them just right before the end of the quarter. So we agreed with the customer to ship them just on the last couple of days of the quarter. So it was a pity to miss the delivery and to make a favor to our customers. So we decided to move forward. So it's all positive. It's a win-win situation, both for us and for the customer. Simply like that.

Gotcha. And sorry, the market that was in, can you say?

Sorry, say it again?

The market segment, so was that consumer, AI, automotive?

Well, it's a consumer part.

Right. Okay. And yeah, just second last one. If you could just update us on the revenue splits, I think you provided them last year, sorry, last quarter between the different markets. If there's been any major changes there.

No, it's consistent. So we have about 20% in automotive industrials, 50% smartphone and PC, and 20% data center and AI.

Okay, that's great, thanks. And maybe just the last one. I know your visibility doesn't stretch multiple quarters, but if you had any kind of initial thoughts on Q4 and maybe your views into 2024. That's all from me.

Thank you very much.

Q4 is too early, really. It's too early for the Q4. So we are not focused on Q3. We have not that visibility for Q4. But we still believe that the sequential increase will be confirmed also for the end of the year. So this is what is in our mind and in our plans.

Okay. Thank you very much.

Thank you, Mr. Angelo, for your question. Our next question is a follow-up question from Mr. Giovanni Silvetti. Please, Giovanni, the floor to you.

Hello, everyone. Noel, I mean, just maybe a curiosity because I know that historically you guys have decided to stay out of the memory market. But in the last conference call, your main competitors stated that high bandwidth memory, HBM, is one of the key enabling components alongside of GPU for generative AI. And so I was wondering if in the future you may also want to enter this market.

Actually, we are already entering the HBM market. on the very high complexity pro cards. So very fine pitch. And we are also developing technologies for the main memory market. And so that is a work in progress. But we are confident that we are also going to that market probably starting from next year.

Okay, okay, thank you.

Thank you, Mr. Silvetti. Our next question today comes from Luca Bacoccoli. Please, Luca, the floor to you. Luca, can you hear us? Yes. Luca, please write your question in the chat. If Luca cannot hear us, I will now hand back to the speakers for any kind of final comments before bringing this presentation to a close. Please go ahead.

I'd like to thank you, everyone. We'll talk soon, the next three months. Thank you.