Comet Holding AG (COTN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the media and investor conference call and live webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Heinz Kundert, CEO. Please go ahead, sir.

Thank you very much, and welcome to the earnings conference first half of 2020. I shortly go through 4 chapters, give you an overview on the total situation, financial situation of the group. Then we go into the financial review, this is being done by Nicola Rotondo, he's Chief Financial Officer, control -- for financial control in Comet, then we go into the outlook. And of course, you're going to have the opportunity to ask questions. Are we following with the slides? One more. So as an overview, Comet had a solid first half 2020. We have significantly improved the performance versus the previous year. Half year, strong growth in semiconductor markets, the PCT division more than compensated for lower demand in X-rays, which is the division IXM and IXS. Sound financial positions, high level of investment in R&D and strategic projects is maintained where the execution of strategic -- the strategy progress as planned. No relevant impact on operations from COVID-19, thanks to fast and stringent implementation of protective measures. And the top management completed reinforced smooth transition to new CEO and CFO in June. We'll come back to most of these things again. Going to the next slide. The half year results improved on semiconductor sector strength. As you can see that we have increased the sales in the first half by 3%. This mainly came from the PCT semiconductor division. We could double -- more than double the EBITDA to 10.3% compared to 4.8% in the first half 2019. And the free cash flow is almost the same, a little bit less than 2019. This is mainly because of a higher net working capital that is due to the buildup of inventory to safeguard our supply chain. Relative to our suppliers, but also in front of our own customers to make sure that there's no interruption in the supply chain. And we still maintain a sound pace on the equity ratio with about 50%, almost 50%. Then, next slide, where does this come from? PCT owns more than half of the revenue and increased the revenue in the first half by 33% compared to the first half 2019. It's remarkable. And of course, it's also led to a higher EBITDA, which is in the range of 19%. As you know, the goal -- my goal is to have a 25% EBITDA on the group level. So 90.2% is good, but it's still not what we want to achieve. We have to improve that over the next quarters. IXM had a reduction of 18% in sales and still could make a reasonable EBITDA of almost 14% compared to 2019, where we had almost 28% is much lower, but still it's reasonable compared to the reduction in sales they realized. IXS, unfortunately, fell back into the red numbers, after they had a positive EBITDA in the second half of 2019. They realized in the first half, a minus of 2.1%, simply because the end markets were down quite a bit, and we are still in a transition to get away from low-margin products in IXS. This is ongoing. Very positively, the EBB -- the ebeam business has slightly improved sales by 6%, not really remarkable for the size of the expenditures. But the good thing is that they could almost make breakeven. So financially, the ebeam business is not an issue anymore in our group. It's also carved out. So there's no connection anymore to the core business. Next slide. Yes, coming -- going through the PCT in more details. We have seen in the first half, an excellent market situation from our customers. Data storage is improving a lot. We have 5G networks coming along, artificial intelligence, Internet of Things. And I could value all these end users, which were in a positive growth mode and have contributed to the increase of sales. We are also preparing the manufacturing site in Malaysia. We start manufacturing in Penang in October this year. This will, again, help them to improve our bottom line significantly. We also had significant stack wins with our main customers. In fact, the strategy that we announced last year by focusing on the core, getting out of ebeam, putting more money into the semiconductor-related activities has been well received with our customers. And we are now in the situation, we'll get more inquiries for new products of our existing products in higher volumes, very positive development. Going to IXS, the realignment is in full swing. As we told you before that we are in transition. We have to get out of the low volume, low margin, high-mix product portfolios and moving that to high-volume, high-margin and low-mix products, which are mainly coming then from the semiconductor industry. So the semiconductor industry, the semiconductor technology as such and SMT, the need trends will contribute more to the sales in the next couple of years. Fortunately, due to the pandemic as well as the transition, the -- this EBITDA went down to minus CHF 2.1 million and is, of course, a concern that needs to be changed. We are positive that all the changes that have been enacted and are under way are contributing to an improvement in the next couple of months. IXM, as I mentioned before, had a reduction of 18% in sales, but still doing pretty well in EBITDA. We believe that, by the way, both IXS and also IXM has reached the bottom, and we expect a slight improvement of the situation in the next couple of months. Still hard to say because there are a lot of factors that influence the business not only pandemic but also structural changes in the automotive industry and the aerospace and the security sector that do have a negative or positive influence on our business. We'll see in the next couple of months, how these markets are developing. But we are not negative. We see positive signs and believe that the slow hit will go up. Again, EBITDA impressive, the reduction in costs. So we definitely came to breakeven, and we are also cashed out with this division. So it -- yes, if you go to go to next one. Okay. You see that the cost savings and the restructuring that we did in the ebeam business by reducing the manpowers and cutting down the activities to meet the requirements of the future has helped us to save costs. And this will continue in the next couple of months, and we expect that this business is going to be in a new constellation within the next couple of months. Hopefully and expectedly, it's going to be by the end of the year at latest that this division is -- will be in new hands. With that, I'll transfer to Nicola Rotondo, talks about the financial results in details.

Thank you, Heinz. Good afternoon to all also from my side. Before I start with the financial review, let me share some considerations. Like all companies, also, we were hit by COVID-19. First, the supply chain bottlenecks from the pandemic were largely less severe than originally anticipated; second, we were forced to adjust our production lines and work in shifts setup to meet health regulations, which in combination with the short lockdown in San Jose and in Shanghai caused for a few weeks a suboptimal execution of our production processes and those absorbing less fixed costs. Overall, both elements did not have a major impact on our financials. But what had a major negative impact was the market-driven underutilization of our capacities in the x-ray businesses of IXM and IXS. Nevertheless, both the growth of PCT and the cost reductions, which we realized in the second half of 2019, helped us to achieve a decent result. In addition, based on our ongoing strong balance sheet and solid cash position, we did pay back a portion of a loan, which is underlining that we don't have a pessimistic view of the near-term future. But to be clear on this, we remain vigilant in order to react fast in case of a worsening situation in our markets. Next slide, please. Even with only slightly higher sales of 3%, the profitability increased significantly both in absolute and relative terms. But the increase of net income is not visible in our free cash flow, which is slightly below previous year value. I will later explain these KPIs in more detail. Next, please. Despite the slightly increased net debt, the leverage ratio on the last 12-month basis ratio measured as net debt-to-EBITDA is still low at 0.6%. Also, the equity ratio is 49.2% is still solid and on a high level. Economic profit and the return on capital employed increased significantly driven by a higher [ mop-up ] in combination with reduced capital employed. By the strong increase of the economic profit, this is still not meeting our expectations, and our goal is to be at least breakeven as soon as possible. Next, please. This page, we see the P&L, and I'm going to talk about the items which will not be discussed on the next page. The new orders are above prior year level. But this is only driven by PCT. IXM and IXS are showing year-over-year a lower value. The same is valid for our order backlog, which is 30% higher compared to prior year or [ 40% ] higher compared to the beginning of the year. Looking at gross profit and comparing it with the sales increase, we see that we were able to increase it over-proportionally. This was based on a favorable product mix. In fact, we have more high-margin matchboxes from PCT compared to the previous year. As a result, we did both increase our gross profit margin by 1.3 percentage point. Further, I would like to explain what happened in R&D. As you see, we did increase it year-over-year by roughly CHF 1 million, and the increase was in all 3 divisions. This is showing our ongoing commitment to maintain the base to execute on our strategy. Looking at SG&A, is showing the highest cost reduction of CHF 6.2 million. From a divisional point of view, the main reductions was in IXS, followed by ebeam and PCT. Looking it from a cost item view, the main reductions was in consulting, travel, trade shows, sales commissions and also a favorable currency impact. So in total, we reduced our functional costs by CHF 6 million, of which we do completed 2% to 3% to be sustainable, while the rest might be seen as a direct consequence of the travel restriction. Next, please. Here I will explain what were the main driver of the free cash flow. First, driven by higher net income, we have a higher cash flow of CHF 11 million before the change of net working capital, which you cannot see on this slide; second, while in 2019, we did reduce our net working capital by CHF 8 million. In the current year, we did increase it by CHF 9 million, which is a cumulative difference of CHF 17 million. This was the driver that reduced the net cash provided by operating activities with almost CHF 7 million compared to the prior year; third, we had the lower spend for capital investments of CHF 5 million compared to prior year, which helped to have a free cash flow almost at prior year level. Looking at the financing section. While in the prior year, we took a loan CHF [ 8 ] million, in the current year, we repaid an amount of CHF 4 million. So net, we did reduce our cash position by CHF 11 million from CHF 60 million to CHF 49 million, which is still on a high and comfortable level. Let me say something to both capital investments and net working capital management. As you can see, capital investments are at a very low level, as we were very prudent, due to the uncertainties caused by COVID-19. Having now a clearer view of the situation, we will start to increase capital investments again for both replacements and expansions during the second half of the year. Now to the net working capital. On one hand, net working capital requirements grew in the first half to support the large sales increase of PCT. On the other hand, as a percentage of last 12 months net sales, the average net working capital decreased to 23%, in fact, by 3 percentage points lower compared to the previous year. Thus, we are not yet happy with this and are aiming to further optimize our net working capital in the future. Next, please. What we can see here is that our balance sheet looks very solid and straight for all. And so I will just highlight a few points. Current assets increased mainly due to higher inventory and accounts receivable and were offset partially by a lower cash provision. On the liability side, you can see the reclassification of the bond, which is due April next year from noncurrent to current and the higher [ capital ] repayments of CHF 10 million coming from the division IXS. The equity ratio decreased slightly as a combination of lower equity and grossing up the balance sheet compared to the prior year-end. Next, please. We will now see the breakdown for the sales, the EBITDA margin and the net income. So let's start with sales. The positive volume effect and local currency was in total, CHF 12 million or 7%. While PCT had CHF 27 million higher sales compared to the previous year, which is a plus of 37% at constant currencies, the division X-ray systems and the X-ray modules had a shortfall of CHF 11 million and CHF 5 million, which is a minus of 16% and 14% at constant currency. Total negative currency impact of minus CHF 7 million is driven by a negative euro impact of CHF 2 million and a negative dollar impact of CHF 4 million. Next, please. On this page, we have the breakdown of the EBITDA margin. Let me guide you starting from the left-hand side. The higher sales and actually mainly the better product mix in 2020 increased the EBITDA margin by roughly 4 percentage points. In addition, the lower functional cost base compared to the previous year had a positive impact of roughly 2 percentage points. Both on a comparable basis, the EBITDA margin was almost 6 percentage points higher than in the previous year. The negative currency impact was minor with 0.4 percentage points, leading to an EBITDA margin of 10.3%. We can see here that the product mix or ultimately the end market mix has a major impact, which underlines why we want to focus also IXS on the semiconductor and electronics sector. Next, please. At the last breakdown we will see, based on the same structure, how the impact was in million Swiss francs at the level of net income. All impacts are always after tax. Positive sales and mix impact was CHF 6 million, and the cost reduction was CHF 4.9 million, which brings us to a net income at constant currencies of CHF 7.8 million. Both on a comparable basis, the net income was almost CHF 11 million above the previous year. The negative currency impact was CHF 1.3 million, which does lead to a reported net income of CHF 6.5 million. EBIT was even more visible that the sales increase of CHF 5 million was only partially explaining the increased net income of almost CHF 10 million compared to prior year. So with these last slide, I close the chapter related to our past performance, and then hand over to Heinz, so that he can explain how our future performance will look like.

Thank you very much, Nicola. So let's move to the outlook. As we have heard, and we all know the fundamental growth drivers of the semiconductor industry is intact. And can you go to next slide? No, that's too far. One back. Okay. The fundamental growth drivers are still intact, especially in the semiconductor industry due to the acceleration in the digitalization overall. We also continue to focus on our core technology, RF power and X-ray technologies. It's also very welcomed by our customers when we announced the new strategy to focus on these technologies and markets has very much helped to intensify the cooperation and relationship with our key customers. We have a strong financial footing, as we have heard, that gives us flexibility to execute our strategy rapidly. And finally, the Boost initiatives accelerate the growth and increase efficiency of continuing as planned. A good message comes from the executive team, as we have already announced that Kevin Crofton will become new CEO of Comet by September 1. So on September 1, he will start his duty. And he already moved to Switzerland. He is living in Turin. And we are very much looking forward to have Kevin with us. I know, Kevin, for 15 years, and I know that he understands this industry inside out, has been doing that for his whole life. And it will definitely contribute to the success of Comet. It was not an intention. It was kind of a coincidence that the new CFO is not only a woman but is also an American Citizen. However, she has already been living in Switzerland for a year and has been in major functions at Raytheon Technologies in the United States as well as in France, where she had important functions in a joint venture between Thales and Raytheon. She is very much familiar with the global accounting system and situations in larger companies and pretty sure that she will help us as well to become more profitable and more successful. So welcome to both of our new team members. Looking ahead into the second half of 2020. The driving forces, as we know them, are still dynamic, and the industry is growing stronger than ever. This has been confirmed by our customers. We are deeply close with our customers, and there's absolutely no change in what we have seen in the last couple of months. It's going even into the first quarter of 2021, where the order income is already very strong. We continue our current environment in X-ray technology. We see, as I said, brought them out of the orders should become better. However, still a fragile market segment because the main markets, as I said before, the automotive, aerospace and security business at the moment is not in good shape. And we have to wait for a certain recovery. Comet is pushing ahead with a number of promising projects and products in the group, foremost in order to move from the NT from the nondestructive testing into more semiconductor-oriented technologies also in the back end, in packaging, where we see enormous opportunities for the company. Short-term trends in the global economy is much more difficult to forecast. There are uncertainties arising from -- not only from pandemic but also political turbulences. You may have heard that Intel moves apart or wants to move parts of the manufacturing to Taiwan. Taiwan is really the biggest manufacturer of microelectronics and this, of course, raise some concerns. What's going to happen in the future in that respect? That, of course, we cannot influence at all, but all in all, we are very positive into the second half 2020, and we're also looking positively into 2001 (sic) [ 2021 ]. The latest estimations are such as the semi organization expects revenue of approximately CHF 70 billion in 2021, up from CHF 63 billion this year. That means we can expect the growth above 10%, if that is going to happen as well. So that's the outlook, and that brings me to the end of the presentation. And of course, you are now free to ask questions. We will now begin the question-and-answer session.

[Operator Instructions] Gentlemen, there are no questions at this time.

So fine. Thank you very much. And with this, we conclude the session, and thank you very much for attending, and stay in touch. Looking forward to see you again. Bye.

Bye-bye. Thank you all.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.