LPKF Laser & Electronics SE (LPK) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the LPKF Conference Call for the first 6 months of 2020. My name is Bettina Schäfer. I'm Head of Investor Relations and your host today for this call. [Operator Instructions] The conference will be recorded and published for a period of 2 weeks on our website after the call. What's on the agenda for today's call? We published our 6 months report today. Götz Bendele and Christian Witt will give you a quick overview of the business development in the first half year. After that, we are ready for your questions. But before we start, I would like to point out that any forward-looking statements are based on information currently available. These forward-looking statements are not to be understood as guarantees of future performance and results. Ladies and gentlemen, I now give you Götz Bendele.

Yes. Thank you, Bettina. Thank you, everybody, for joining us. And welcome to our Q2 conference call discussing results from the first half of the year. And in addition to that, a few other topics from the past quarter or 2. First topic is where do we stand as a company in August 2020, viewed against the pandemic and the macroeconomic situation worldwide. In addition, I'll make a few comments on what we do to remain strong and stable as a company in addressing the COVID-19 pandemic in our locations. And then finally, I'll say a few words about how our medium-term outlook looks like from today. So where are we today? Our second quarter was better than the first. Revenue at EUR 30 million is still behind 2019, but profit was actually ahead for the quarter versus last year. So that's good, shows that the work of everyone at LPKF to keep improving operations and performance are paying off. For the half year, however, picture is less positive, with only EUR 50 million revenue and a small profit. We are not happy with that result and neither should we be. Viewed against the macroeconomic situation across the world, there's probably more than one way to assess this and look at this. On the one hand, it is a substantial decline in revenue and profit from last year. And it's a much bigger decline than we anticipated even at the beginning of the pandemic. And this needs to be reversed as soon as possible. On the other hand, we are healthy as a company. We are stable. Our business proceeds unimpeded even if at a somewhat smaller pace than pre-COVID. Essentially, all of the revenue decline that we've experienced this year-to-date is from a couple of large customers, one in solar and one in electronics and welding, where projects, in some cases large projects postponed into 2021 for reasons external, not just to us, but even our customers. Those projects haven't been canceled nor have we lost them to competitors. The balance of our revenue is actually on par with 2019, which isn't really great, but it's also not poor, I would say. In spite of the 30% year-on-year revenue decline, we are still profitable, and we are still debt-free with a healthy cash balance. It's a very different picture from an LPKF, revenue declined about 5 years ago, when either 1 or 2, neither the fact that we are now still profitable nor and that we are debt-free were the case. So in a sense, we are proving, even if not willingly, that we can make a profit even with quite strongly fluctuating revenue levels. This is something that we have said to you in the past that we are making our cost base more flexible and with that we should be able to respond to revenue increases or declines quickly and in a fairly responsive way. In some sense, we now have the proof even though we are not necessarily happy that we had to show this to you in an experimental manner. At the same time, our progress with the various applications of our allied technology procedure pace. Other than a short drop in activity around March when some customers of ours were shut down or were business switching to remote work, the number of customers and the volume of engineering samples we process keeps growing. We don't experience any delay in reaching the various milestones on the path to volume production for many of the early applications that we see, for example, in the display industry, in the semiconductor industry or in microfluidics. Last, not least, and it's still early to say this, I feel. We do see a little more light on the horizon than even a month or 2 ago. This varies in degree by market. Main ones for us, of course, are the U.S. China, European Union, including Germany, Japan and Korea, and it varies to a lesser degree by the industry, and there's still a fair amount of uncertainty. But right now, the project pipeline in our segments appears fuller than a month or 2 ago. So it's from these takeaways about our core business and the LIDE applications that we are taking our expectation that LPKF will not only survive this crisis but actually thrive. One central element for us to get through this crisis successfully is, of course, our ability to keep operating, pretty much no matter what happens around us, right? To accomplish that, we have taken a fairly wide-ranging measures starting in China in January and everywhere else in February, and we maintain those measures to date. For example, home office as far as feasible. Still half or more of our people are working from home in the different locations, and this will be continued for the foreseeable future. We have physically separated all of our locations into sections with very limited physical interaction between the sections, various hygiene measures, cleaning protocols and so on, restrictions and close tracking of any outside visitors with outside visitor traffic being minimal in all locations. And finally, beyond the, let's call it, infection control, we have increased safety stock early in the year to be able to maintain operations even in case of supply chain disruptions. It's probably a little bit less of a concern now than it was in March. Nevertheless, we are quite prepared. Well, to date, this has worked well. We have not had any person infected at one of our locations, meaning there has not been any transmission of anyone LPKF person or external person at any of our locations, and we have not had any interruptions of operations because of the pandemic. Even in February in China, for example, when everything was shut down, the whole country was shut down, our colleagues managed to stay in touch with the customers from their homes and continue working on and discussing projects. With this, I am quite optimistic that we can continue to operate well through the pandemic and successfully deliver solutions and services and with that value to our customers. One question that you may have is whether this affects our medium-term outlook and growth forecast for 2024, which we first issued early in February this year. There really are 2 growth elements to this. One is the core business in all 4 segments and then growth from various applications and in a number of industries from our live platform technology. For the latter, I just commented that customer activities, such as engineering sample orders, are growing and have kept growing, and this growth really has not experienced any meaningful change. Milestones continue to be reached, including, for example, us concluding a technology license agreement and initial sale with Japanese specialty glass manufacturer, Nippon Electric Glass back in May. With the former, the core business, we also don't see any permanent or structural changes caused by the pandemic or its economic impact on the customer industries. In other words, we expect the current slowdowns that we clearly see and experience to be temporary, despite the impact of COVID-19 on today's situation. And with that in mind, we have confirmed our medium-term guidance for 2024. With that, I would like to make a full stop and hand over to Christian, who will share the Q2 and first half of the year figures in some more detail. And of course, we'll have plenty of time for questions and answers afterwards. Thank you.

Thanks very much, Götz. Hello, everyone. I will now share with you some more insights on the financials for the first half year 2020 as well as on the outlook for the following quarter in general. When looking at the results of 2020, the first 6 months, then we basically see -- can we go next slide, please? We basically see that we had a decline in revenue of about 30%. And the decline, as Götz mentioned, was mainly due to large projects, which we delivered in the first half '19. The other part of the revenue is stable in the first half of 2020, and we actually expect to grow there in the second half of 2020 versus past year. On the average, we have an increased profitability in the second quarter due to the cost reductions and the higher margin -- contribution margin we could achieve due to the fewer large orders. And even if in the total half year -- first half year, we could only reach an EBIT margin of 5.7%. When you look just at the second quarter, we're even able to surpass the profit margin of 2019. The negative free cash flow is due to the relatively low profitability and the temporary higher net working capital. We'll get to that sometime later. In Q3 and Q4, we clearly expect that we'll have positive free cash flow, so we would also end 2020 with a positive free cash flow. The order situation basically has a similar background as described previously on the sales side. We have delayed the projects due to specific situations of our customers, which are also external to them. That's the fact in the Solar segment. That's also the fact in other large orders in the Electronics and Welding segments with one significant customer. And what we also see is we generally have shorter customer lead times, which we can positively respond to. Next when we look at the revenue for the first 6 months, then we clearly see decline in all areas, but I'd like to go a bit more deeply into where that decline comes from. What we see on all business units is that there's delays due to the COVID-19 crisis and pandemic and the direct and indirect effects of that. But it has very different effects in the different business units, which I'll briefly illustrate. In Electronics, we had some large projects in the first half of 2019 as well as in the second half of 2019. When you take these large projects of one customer out, then we have the rest of the business we have grown despite of the pandemic in the first 6 months of '20 versus first 6 months of '19. In Development segment, the world's a bit different. Here, we have orders from universities, sometimes governmental customers. Here, we see some kind of lost month due to the lockdowns. China and also rest of the world was particularly clear to see in a couple of months. We have moderate delays throughout, but it's a couple of regions where it's more pronounced than others. The uncertainties will be a little bit in the Development segment if there will be a catch-up already this year or to a larger degree next year. In Development, the catch-up for current year is higher than in other areas due to the budget-driven nature of the business. And in most countries, fiscal year has something to do with the calendar year. On Welding, we have lower sales due to large projects in the first half of '19. Same customers, same type of projects as in Electronics. The sales, except for that, are stable. And even in a market and customer segments like Automotive, we were able to slightly grow in 2020 over 2019. In Solar, we had large deliveries again in first half '19, and we had this -- there the shift of one medium-sized order from Q1 '20 to Q3 '20. That order will now be delivered in August. So that is all going according to plan. However, when we look a little bit at the segments, then we have these Electronics and Welding orders on the one hand of one particular customer. And looking at the outlook, we are discussing further projects with the customer, customer demand and that side. And actually, the original plan was to do quite a bit of that already this year. But as the customer has to travel China, United States and that intercontinental travel is, at the moment, not really feasible. That also delays the plans of the customer. And in the same way, we are affected by that. Solar is a bit different. In Solar, we have another large order, which we are discussing and negotiating with the customer. That order, a significant part of it was originally expected to be delivered in 2020. That time line has shifted -- is shifting, and we expect that the project -- if we receive the order to be completed in '21 entirely. So that is the type of shifts of impact, which we see of COVID-19 pandemic directly on our business via the demand and effects from our customers. When we look into Q3, then we see a clear trend that in Electronics and Development, we very clearly have sales above the level of the first half year in second half year. Welding might be on par or better. Solar might be on par or slightly below. But that is basically triggered by timing of the orders. But that is very important for us in order to distinguish between the effects we see on the 2020 slice versus the structural fundamental effects on the demand we see because that is why we say that the structural demand is intact and also the growth perspectives we see for LPKF in the current business as well as in business with LIDE. Looking at profitability and EBIT by segment. Basically, what is common everywhere is that we see the cost saving effects having enhanced the profitability in the second quarter. Not in first quarter because most effects -- most measures weren't effective there but in the second quarter. Looking at the different business units. We have especially Electronics, where we have the fewer large orders, a higher contribution margin, which somehow compensates part of the lower revenue. Development has relatively stable earnings compared to the sales decline. Welding has a -- had a quite a negative first quarter due to the low volume. With an okay volume, Welding managed to get to a profitable second quarter, slightly profitable second quarter, which is good. And Solar, we have seen a very large decline in the revenue of about EUR 13 million in the first half year. But this EUR 13 million have only resulted in a EUR 3 million drop in EBIT. And that is due to the fact that we have less traded components with low margins in there and generally are able to cut costs also where necessary. So altogether, the fact that we have less of the larger orders and the traded components gives us a higher gross margin as a company. We have lower cost. And that is the reason why, given the strong decline in sales, we were still able to come to a profit in the first half year. And we were able to have quite a decent profit in the second quarter of 2019. The third and fourth quarter, by type and character, will be more similar to Q2 than they will be to Q1 of 2020. Looking at cash flow. In free cash flow, we had a negative free cash flow of EUR 12.4 million in the first 6 months, EUR 10 million of which were from quarter 1, EUR 2.4 million of which is from quarter 2. Basically, the key point -- the KEY aspect there is the net working capital effects. We've had about EUR 6.6 million, EUR 6.7 million additional stock in Q1 in order to cover potential supply chain issues. When we've seen about mid-Q2 that we will not have any of those issues and we have all our supply chain under perfect control which we do, then we have decided to decrease that safety stock again, half of that has already been decreased. Second half will be done in the following month. Altogether, we expect a further reduction in Q3, Q4, also below the levels which we've had in the end of 2019. We see higher receivables versus year-end. There is one key reason that we have had very high sales in June during the quarter Q2. The same would applies to stock, also applies to receivables. We will get that to levels off or below 2019 by the end of the year, probably a bit faster. The low advanced payments are mainly related to Solar orders, which come in a bulk. And with the bulk, we get the down payments. So that is something we will also see to normalize in the course of the year when we receive future orders. What's also included is the investment in our LIDE foundry. And when I look at the overall net cash used in investing activities, EUR 5.5 million, part of which goes to R&D and part of which is physical CapEx really very mainly into the foundry operations here in Garbsen. For the LIDE technology, we expect a similar level of investment in the second half of the year in order to complete our LIDE foundry here in Q3, Q4, early Q4, late Q3, as well as further normal other investments. Well, looking again at the guidance. For 2020, we still have a significant range on the sales side how the year should or might end. We have therefore decided not yet to issue a guidance. On Q3, we've issued a guidance of EUR 23 million to EUR 27 million sales and an EBIT of EUR 1 million to EUR 3 million, which when you calculate, if we get Q3 similar from the characteristics to a Q2, there is still some headroom, especially on the EBIT side, if we have a good business there. And as Götz mentioned, since we see the structural components of our demand intact and actually confirmed by the demand of our customers, even despite the current corona pandemic, we are confirming our mid-term guidance of EUR 360 million turnover as well as the EBIT margin of 25% plus in case of a stable growth in the global economy. Of course, that is something we don't -- we shouldn't still be a pandemic in 2024, but in any type of normal recovery scenario, that should hold. Thank you very much from my side. And we are now happy to take your questions.

[Operator Instructions] The first question comes from Florian Pfeilschifter.

I would take a couple of questions one-by-one, if that's okay. And I guess I start with a very obvious one. So the guidance for the third quarter admittedly looks a little weak. I mean, I can understand the circumstances and all the options are not really favorable, but maybe could you give us a little bit more color on how you came up with the guidance and what the assumptions are behind your guidance to get a little bit more clarity on this?

Happy to do so. When you take Q3 of 2020, how do we come up with the guidance? Well, we look at the order book. We look at the pipeline with different business units, and then we come out with the guidance as accurate as we can. We never ever want to miss a guidance, so we'll be rather conservative than aggressive. Looking now at the sales figures. I think what's remarkable there is when we look at the different business units and the amount of larger orders that we've had in there, for example, in Q3 of 2019 versus Q3 of 2020, in Q3 '19, the amount of large orders out of the EUR 36 million net sales was more or less 2/3. So the amount of large orders, which we anticipate here is much, much lower. So we expect that versus Q3 '19, we'll actually grow significantly and not just 10%, 15%, significantly with the orders which are not our big Electronics, Welding customer and not our large Solar customer. So that is a bit to put that into perspective. We have a significant growth there. We do have a timing issue on Solar and the other large orders. And in Solar, we know what will be delivered in this quarter in Q3, that's clear. There's no variance in there. And with the large customer Electronics, welding, we know that we don't have large deliveries there. So we will not forecast them. It's an analytical forecast, which we make. On the EBIT side, we've taken a rather careful approach as it is not 100% sure to predict in which quarter you'll have exactly how many hundred thousands of euro effect of the cost savings in one way or the other. So that effect -- that estimate is rather conservative than aggressive, but we think that is the better way to do that. Does that answer your question?

Yes. That's good. Perfect. Maybe a follow-up here. Would you also expect then that you'll stay profitable in all your business units in the third quarter?

Well, where we -- let's go a bit into the business units from how we expect third quarter. We expect -- and that's a bit also the trends we see. We expect a -- it's quite a good third quarter in the Electronics unit. That's decent. Clearly profitable. We expect an acceptable third quarter in Development. In Welding, we'll have a weak third quarter. That's also clear. And the reason is also quite obvious. As we have quite a few customers from the automotive industry, and that industry was in a short-time work/lockdown mode for 4 to 6 weeks in Q2. And we have order lead times there of 12 to 15 weeks. That is something we, of course, see now and at the moment. So that business unit is suffering there, especially from the time shifting. And in Solar, as I said, it's pretty clear what the revenue will be that is existing orders.

Okay. You also elaborated already a little bit on structural changes across the end market. Maybe could you give us a little bit more detail where you maybe see slight changes in customer behavior that might sustain long term? Or would you firmly say that there are actually no structural changes in any market?

So far...

Well, so...

Okay. You take it.

Yes. Let me just make a few remarks there. So I mean when we talk about structure of the end markets of -- and also our customers' end markets, so one aspect is the size of those. Do we expect any of these to be permanently or semi-permanently depressed from the pandemic? And the answer to that is no. I mean what are the end markets for us? There's a lot of Electronics, which then goes into consumer electronics, medical electronics, automotive electronics. We have additional automotive from Welding, then we have Solar. And of course, any kind of prototyping, that's a very broad set of markets, including government. So none of those really are expected. If you look at third-party studies, from institutes or from McKinsey or BCG or similar, those are the industries that are neutral to maybe positive with maybe slight exception of automotive. But really, that -- whatever happens there isn't caused by long term, I don't think will be caused by COVID, it will be caused by the transition to e-mobility that we've been seeing for a while, and that will affect it. But again, not permanently. The other question is, does the behavior change? And I think you hinted at that. There are some behaviors that we see that may remain permanent because it mirrors some of the behavior changes we exhibit in our own company. So one behavior change that I expect to maybe remain permit is everybody wants to become more agile, and the pandemic has pushed a lot of people to actually do it. We generally see that orders are placed at the last possible moment, and everybody works to reduce that time. So order to delivery, in general, I think, will shorten. Now again, this is not a development that's brand new, but I think the [indiscernible] is accelerating it, and that will be permanent. So fortunately, we are able to be agile and be flexible in ramping up and down production. But that ability will probably be asked for more in the future. The other things are maybe less relevant, except in how we do. I mean, obviously, people will remain more digital. We will do a lot more on the phone or on video rather than with personal travel, things like that. But it doesn't really affect our top line in a direct way. It's just a different way, but we'll do projects. And obviously, we will not -- I don't think -- I think we are ahead of some of our customers right now, and we certainly have no intention of falling behind in that transition.

I think there's one instance where we might see some additional positive effect. We are frequently working with customers where we help them with a new technology and transitioning something they have to something new. And there's a huge advantage when the world becomes faster. Because every transition, which becomes faster, there's an opportunity for us. And we see that working digital online with customers is faster than working with freight fares and personal visits, and that is an opportunity for us as a transforming and solution partner for our customers.

The next question comes from Robert-Jan van der Horst.

So I also have like a small follow-up question on the guidance for Q4 -- for Q3. You mentioned that the share of large orders was actually quite a bit bigger last year. And in the second quarter, the lower share of larger orders had quite a positive effect on your margin profile, while even at the upper end of your guidance, you're more in the 11% EBIT margin. Maybe some background on that. And also, you mentioned that you expect Q3 and Q4 to look more or less like what we've seen -- you expect Q4 to look a little bit like Q3. Will you say that, that's a -- would you expect Q4 somewhere on the level? I know the visibility is still low, but especially regarding Solar. Since you do have quite some order backlog in Solar. And I was just thinking about how will this be distributed within the second half of the year?

That's relatively -- so let me put some things into perspective. The Solar backlog, which we have as a backlog is nearly all of it for Q3 -- delivery in Q3. Q4 will be smaller volumes in Solar rather spare parts, some installations, some improvements. When you look at Q3 and the profitability, and let's start there. Q3 profitability has all chances to be in the same level as Q2 profitability. We are a bit more conservative there on the forecasting side because the structure like in Q2 was an extremely good structure from the order structure. And also from the cost savings, we have some effects where we will have the same effects in Q3 or more. We'll have other cost savings where we'll have slightly lower effects in Q3, for example, because our service guys will travel again. They couldn't travel before. Now they can travel, and they shall travel in order to serve our customers and generate revenue as well for us. So that's where we've been rather conservative on the profit estimate.

And maybe just to add to that, we've made a lot of our cost base very well, but some of the fixed cost is still fixed cost. Some of our costs, I mean, is still fixed cost. And so that's also an effect, of course, if you have EUR 24 million to EUR 27 million versus EUR 30 million revenue.

Yes, of course. Yes. That was very clear. But just a little follow-up. You also mentioned that the project pipeline actually got way more interesting within the last 2 months. And I was just wondering about the time line of such a pipeline. Would this affect then 2021? Maybe later? Could we see some positive effects already in Q4? Just to give us an idea how the time line of this pipeline might look like?

Sure. Happy to. So -- but in reality, we don't really know yet. I don't really know yet. So I did say that it's quite early at this point to see. So for now, I see a little bit more light on the horizon, no question about it. Project pipeline right now looks stronger. At the same time, uncertainty about the COVID situation has also gone up in the last 4 to 6 weeks. So I mean if Europe goes into lockdown again, if or parts of Europe, meaningful parts or if the U.S. really doesn't, it goes completely out of control. I mean, it's half way out of control already there, then I don't know if this light at the end will actually materialize quickly. But if it gets realized the way we see it right now, then I think it varies by business units, some of it might be towards the end of 2020, and quite a bit will be for 2021. I mean our pipeline, well, length, not really the project length, I mean, from initial contractual revenue is obviously longest -- not obviously, but you probably know this is longest in Solar. And also in Welding, it's medium in Electronics, and that's going to be quite short in Development. Whereas in Development, you have the additional feature that a fair amount, not all, but a fair amount of revenue is somehow tied to government budgets and for research and development for universities and so on, which has its own dynamics sometimes.

I think another way to split it, Robert, is when you look at the rather large type order, those are more towards 2021. When you look at the dynamics I explained beforehand in the Electronics industry with orders on our new products, with orders on various customers and initiatives, which we started, there's quite a good chunk, which we already expect for Q4. There are some parts which will, of course, go into 2021. Development, similar; Welding, similar.

Okay. That was very helpful. So if I mix that all together and combine with what you said about how you expect Solar, Electronics and Welding in the second half of the year, it appears that, especially in the current quarter, Solar will be a large chunk of your guidance. And in Q4, you expect a lower sales in Solar to be then compensated or offset by this growth in Electronics, would you expect in the second half of the year, but which we would probably see most of it in Q4. Is that somewhat right?

Somewhat. Let me give you some more flavor there, how we see that. The strongest business unit in Q3 will not be Solar, will be Electronics. That is pretty clear. Solar will not be weak, but Electronics will be stronger. And we've also clearly said that we expect to grow in turnover and profit second half of the year versus first half of the year. And that also gives an indication that Q4 should be stronger than in Q3.

The next question...

Historically, our fourth quarter -- maybe just one last one. Historically, our fourth quarter is usually a pretty strong quarter. We're not relying just on that though, simply because this year has the potential to be different than past years for this reason.

The next question comes from Jan-Erik Schmidt.

This is Jan-Erik from LOYS. I have just a few questions. So the first one would be regarding the gross profit. We've seen in Q2 slightly lower cost of materials. I'm just wondering, is that just a timely effect, basically? Because for the half year, the numbers with about 40% sounds about usual. I'm just wondering, going forward, if we might see some shift, especially with the foundry work? And if we're going to see a shift there in the gross margin?

Okay. Quick and clear answer. The reason for the higher gross profit and raw material ratio in Q2 is that we have less of the large orders, which typically have a lower margin for us. And that is having less of those large orders, the gross margin, gross profit goes up. And that is clearly what we have seen. Solar projects and traded goods, and that's on the one hand, and our larger Electronics customer, on the other hand.

Okay. So in Q3...

Then your question on the foundry, the foundry operations will really start to be significant in size starting 2021, not in 2020. But the material cost of foundry operations is close -- is very, very low. Foundry is a service. And to buy the glass is to buy glass. That's relatively cheap. The know-how, the installations and the people is what adds the value.

Okay. All right. And then if we look at the others cost, we've seen quite a steep decrease there in absolute terms. What's the reason behind that? Is that all travel-related costs due to COVID-19? And it's going to come back in the cost exposure? Or what's the reason there?

A very significant part of travel cost in there. It's not the only part, but it is a larger portion in there. It also includes stuff anywhere from trade fairs to clean off the buildings and whatever. My estimate is that a bit more than half of those cost savings, we'll be able to keep confidently. What will come back is the traveling service guys because they need to be at the customer. What will not come back anywhere close to it is other travel, is trade fairs and so on. The trade fairs is nice; a webinar is more effective. That was -- that's our experience. And if we find an attractive tool and our customers are happy to use that tool as well, it's much better than fairs and physical meetings. So that is the key part in there.

And also just general cost discipline. I mean, obviously, we've not started focusing on that with the pandemic. We've done it since we joined. But we have accelerated this. And I think the mindset, the change of the mindset has also accelerated. And we're not going to say, "hey, now let's spend more when the pandemic is over for sure."

All right. And taxation rate, it's been a little lower as well for the half year, I think roughly 27%. While we were usually at about 30% in the past, is that to last as well? Or are we going to go back up?

You should keep a general 30% taxation rate in your models. That depends on country mix. Yes.

All right. And then last question regarding the mid-term guidance. I think you mentioned again that you're definitely sticking to it. I'm just wondering from the growth path. It seems to be overly optimistic looking ahead for 2020, we're going to have a double-digit revenue decline. Just wondering how you kind of like want to achieve that? I mean, that's going to be a CAGR of above 30% for the next coming year.

Right. So if you look at it from a CAGR, you're saying, wow, there's a big number. No question about it. I know it's even true last year, I think it was just not quite as big a number. But it really has 2 elements. It has the -- basically developing the LIDE platform technology into a very substantial business. And that genuinely hasn't been affected really much at all by the pandemic. So that's just basically that carries on, as usual, the number of engineering samples we make. Again, other than a small dip in March that I mentioned earlier, is -- continues to be on the growth path that we expect. If I look at the different projects and the different industries that we think are early candidates or rather candidates for early conversion to volume production, then we see them progressing at the rate that we expect on average, some a little bit faster, others a little bit slower, but that's all as expected. So net-net, I don't see any reason why this would grow any slower than we imagined it would grow before the pandemic started. For the core business, which, of course, is still a substantial share of our revenue even in 2024, one assumption you do have to make is that we won't have a substantial recession that lasts for the next 4, 5 years. And that's an assumption we're making. But frankly, we're not alone there. So you can argue, is this going to be V-shaped recovery, a U-shaped recovery or an L-shaped or whatever shaped recovery. But by the time 2024 is around, we will not have any lingering macroeconomic effects of this pandemic, which allows us to increase market shares, to compete better with our competitors and to gain additional customers in our core business and develop better solutions that create more value than today's solutions in that core business. So that's what the '24 time horizon also in our view not affected. That's not just say -- yes, go ahead.

Will the LIDE revenues going to be split out? Or are they always going to be in the segment Electronics?

Sorry. Say again. Are they where? No, you mean in which industry, yes, they will spread out. So when we first announced -- when we first made the mid-term guidance, we talked a little bit about what is contained in there and what isn't. Because one thing we said is any application and any potential business from that application that we can't quantify, for example, because the market size is really -- it's too early to estimate the market size. We have not included in the guidance in the first place for that reason because we were very conscious. We did not want to have a thing where we say, well, we come up to X, and then there's another EUR 50 million or EUR 100 million that comes from stuff we don't know yet where it will come from. We very consciously did not do that. So the main industries that we are talking about for the LIDE part of the guidance is semiconductors, display, auto electronics, MEMS and microfluidics. Microfluidics, meaning basically medical tech. And within those, we are aware of which applications we believe have a quantifiable market because the market either already exists or there is enough of a third-party consensus of where it will end up into. And then we can make assumptions on how much of that will be probably served by glass or glass components. Then how much of that will be utilizing LIDE technology and so on. So based on that, it's clear, we're not talking about just Electronics. We're talking about a fairly broad set of industries and an even broader set of applications, which in the confidence of each individual application is, I would say, maybe moderate in terms of time line, when it will launch and when we will have volume production. But the average of these applications, the sum total of these applications, there's a much [indiscernible] confidence for us because we don't really care if you want to put it bluntly, whether application a or application b goes into volume production first will go with the market. Because we know we cannot influence those time lines, we can influence conversion rates and adoption rates much better than we can influence timelines.

Okay. So it's going to be new segment, LIDE revenues basically which contains all the LIDE connected revenues, whether or not they are Electronics, Semiconductors or...

From a reporting perspective, for the time being, we'll report LIDE in the Electronics segment. And it forms part of the Electronics business unit. No? And it also makes sense. Might that change in a couple of years? Maybe.

Okay. Have there been LIDE revenues in the first half year?

Yes.

Yes, absolutely.

As you remember, we published the sale of an -- a LIDE R&D machine to develop further applications to NEG, a leading Japanese specialty glass manufacturer, leading especially for what's called substrate glass or backplanes for displays.

And then there's the foundry revenue. I mean when I talk about these engineering samples that we make in increasing numbers, bear in mind, this is all paid business. We don't do this for free.

The next question comes from Lukas Spang.

My first question is, you talked about the revenue and the earnings expectations for Q3. But can you give us also maybe a little bit insight of your expectations for the order intake in Q3? And so what is your perspective or your watch on this?

So that's a little bit of a hard question, not a hard question, but one thing that we have -- and I have studiously avoided since I joined LPKF is to make any predictions about order intake. I do know some companies, especially in the Solar space, but not only, they'll have a forecast about what order intake they expect and when. I am not a big fan of that, and we have not done that. But I think one thing is clear that if we want to resume growth as a company, which we do, we'll also have to resume. -- I mean we can't -- long term, we can't grow in revenue without growing in order intake either. Literally booked -- we can't remain below 1 forever. And certainly, my intention is that, that will change. When and how quickly, I cannot say.

But it's -- above Q2 is our clear expectation.

Okay. That's a clear answer. Okay. And then on LIDE, should we expect further LIDE news by the end of the year? Or what is your expectation for this?

Again, it's sort of hard to say when do I expect to make an announcement. I mean clearly, if we want to fulfill the guidance that we gave and we have every intention and anticipation to do so, there will be LIDE news from time-to-time. How many and how big announcements we will have this year, I cannot comment on.

I think what's important to understand is 2 aspects. One, we have learned in past projects with LIDE that it's very hard to say when a particular customer you work with for quite a while, when he will come and order. The first semiconductor customer, we expected a year ago that this would be someone else. But that someone else then became slow and someone -- the customer which purchased the first equipment there, and this is now working on that and to working on putting that into quantification and serial production. That first customer was a different one. So it's very hard to predict the exact timing. We've seen the evidence for that. On the other hand, so what we shouldn't expect there is every X weeks or every 2 months or 3 months, having the next news and the next news like a continuous flow, that's just something we cannot produce like that, because it's not driven and driven by specific relevant customer projects. What we can say is that -- and we've said that multiple times, we've seen since the beginning of the year, a strong uptake and uptake in speed in the whole area of displays. So there's various applications on the display side. And that is currently the field where the movement is fastest. And it's movements by very specific customers for mostly also for specific projects, sometimes more R&D phase, but quite a few of them, very specific. And I think that is the general information we can give there, which is important to understand how to -- how the process works. When you understand how the process works and how timing is, I think then it's -- you can interpret news right. But it's not something where you get a continuous flow. It's just against the nature of the business with the customer.

Yes. Okay. And then the third question from my side. In the half year report, you mentioned again that you see the potential to increase revenues and earnings this year compared to 2019. So to make it a little bit more clear what must happen and until when must this happen that you could reach this target?

No, I think we are saying we will have more revenue and profit in the second half than the first half, which is not the same.

We will not have -- the probability to reach 2019 revenues is somewhere close to 0 for this year. To be very clear -- yes. We wanted to -- originally, when we gave our, call it, soft guidance about 4, 4.5-month ago, we mentioned that if things go well, we would like to grow in 2020 over 2019, but if the pandemic has -- causes a longer or deeper recession, we might shrink. And that's exactly what happened. But other than that, we have not made statements comparing the 2019 revenues.

We have got another question from Florian Pfeilschifter.

2 short follow-up questions. Just because you mentioned lower larger orders this year. I just wanted to get some more insight on whether you expect more large orders to come back next year and whether having this in mind, the margin -- the high-margin level from the second quarter will be sustainable? This would be my first question. And the second small question would be that you wrote in your report that you had one order canceled a rather small order. Could you just provide us more info on which segment is coming from and what equipment it was?

Yes. Maybe I'll start with the first question which was about what happens with the larger orders next year. So I mean the hope clearly is -- and if you will, also the anticipation is that some large orders will at some point return or rather large orders with large customers. These are specific customers. I mean if you look at 2020, one way to look at it is the following. When the economies of the world cratered, it was clear to us from the beginning that we will have to work a lot harder for any amount of revenue. And that's, of course, what happened. Now we were able to compensate any delayed revenue in our, let's call it, "retail business," the smaller orders, anything, but those large customers. We were able to compensate that with new leads, further sales activity, more business development, you name it. However, it was -- and maybe this is obvious, but it wasn't possible in that very short time, to replace the revenue decline that came from those 2 big customers. That's one way to look 2020. Everything else, we found a way to compensate at least net-net. But this, we were not able to compensate. Of course, we live from both large and small customers, and that's true for next year as much as for our growth plan as well.

Okay. So it doesn't likely cause that some slight headwinds on the margin level?

No, the question was, will we expect to -- the answer to that is I don't know. I mean, margins are -- it's obviously not strictly large orders, low margin, small orders, big margin. Obviously, there's a range, so between the segments. And there are a number of other factors that affect margin, but there will probably be a quarter-to-quarter variation in gross margin next year as well, just like this year.

And just to give you an idea, for the next 2 quarters, as we have less of lower-margin orders, we expect rather something similar to Q2 than to Q1 from the gross margin situation. For next year, look, when we take additional orders, it's additional sales, and it's -- we have no orders with a bad margin. We have no orders with a bad margin. We don't have that. We don't do that. We also don't need to do that. Yes.

I think that was one question Christian about that one. I mean [indiscernible]...

The orders which were canceled was in the Development segment in the United States. That's -- yes, USD 203,000.

The only reason we really mentioned this is because prior to that, we had, at some point said, we had 0 order cancellations, so we felt when that number went to 1, we should report it and we did.

And it is still a fact that it is and remains the only one.

We have reached the end of this call, and there are no further questions either. So thank you very much for joining this call. Our next regular conference call will take place on October 29 at the release of our 9-month report. Thank you very much, and goodbye from my side.

Thank you, everybody, and take care. And hopefully, talk to you soon.

Thanks very much. Bye-bye.