Mycronic AB (publ) (MYCR) Earnings Call Transcript & Summary

Good morning and welcome to Mycronic's second quarter presentation. My name is Tobias Bulow, and I'm heading Investor Relations. With me today here in Stockholm, I have Mycronic's President and CEO, Anders Lindqvist; as well as our CFO, Torbjörn Wingårdh. After the presentation, there will be time for questions. [Operator Instructions] Our operator for today will guide you on how to ask questions. We will end at least at 11:00. And for your information, this session will also be uploaded on demand on the web afterwards. For this reason, we ask you to stick to English also during the Q&A. With that, I'll lay it over to Anders.

Okay. Thank you very much, Tobias, and start to present the agenda of today. Well, I will first give a short review on the quarter 2 result. Also drilling a little bit deeper into the business areas' performance and also go one step below that, and talk a little bit about our divisions and the development and our view on the market within them. Then Torbjörn Wingårdh, CFO, will guide you through the financial details of the quarter, and I will talk again about our platform for future growth. And as Tobias said, we will end with a question-and-answer session. But to start with, I want to talk about the picture, telling what we do at Mycronic or actually what our customers are doing with our products or what makes our customers possible to do. And at Mycronic, we offer top end solution that makes it possible for our customers and our customers' customers to produce all kind of electronic products. And as an example, if we take our mask writer P800, which is a top-of-the-line mask writer for display applications, it makes it possible for mobile phone producers to offer high-resolution screens in their products. And if we didn't have the -- if we couldn't offer them the mask writer P800 today, it would be very difficult to do that in a cost-effective way. And this is why we say that we enable the future of electronics. So then going to the quarter 2, a short summary. So we can see that we have a stable and diversified business. The order backlog is still very strong. At the end of the quarter, it amounted to SEK 2.4 billion. And compared to the same time last year, quarter 2 last year, you can see that the difference is that the Assembly Solutions business area backlog is up with 38%, and in the Pattern Generators, it's up 135%. We had very limited COVID-19 impact on the sales that amounted to minus 3% compared to the same quarter and with almost no currency impact in that. Within the business area, Assembly Solution, we could see a mixed performance. We had really strong performance in the High Volume division. While in the High Flex division, more impact from virus with lockdowns in Europe and in the U.S. In the division, Global Technologies, we had a mixed performance inside the division where we had very strong performance in the optoelectronics segment and a slower development in the camera module assembly segment. On Pattern Generators, we have a robust development according to plan. I will talk about that more in detail. And because of our local presence globally, we have secured customer support and being able to support and maintain our equipment globally. On the outlook for 2020, we remain, as communicated last quarter, that we will reach sales of SEK 4.1 billion, but we want to point out that the uncertainty in the global economies has further intensified compared to previous quarter. So if we go down one level, to business area, starting with Assembly Solution. We have seen that sales is up 1%, and that is driven by the high division -- High Volume division in China where we have seen strong momentum in dispensing applications in China. Backlog, I already mentioned, up 38%. And we're doing efficiency improvements in the High Flex division and the Global Technology division. And this is to support the realization of our target to reach an EBIT about 10% for the full year of 2021. The EBIT in the business area, Assembly Solution, reached SEK 20 million, which corresponding to 3% margin in the quarter. If we go down one more level then to the divisions, which is a new structure that we implemented in April this year. And starting with the High Volume division, we have seen very good development, especially in the Chinese market where we have the majority of sales and especially with our larger key accounts in that. In the quarter, we had very limited COVID-19 impact. We are expanding this business now into new customer segment such as semiconductor segment and also the automotive segment. The challenge to support growth is actually to find resources in China. The High Flex divisions -- and I should say that we have 3 divisions in Assembly Solutions, so High Flex division. Here, we have seen a large impact from COVID-19. We have had lockdowns of our customers in Europe and the U.S. where we have the majority of sales. It has been a challenge to execute service because of closed borders and also closed factories, especially in May and April. April and May has been very slow, and we saw an improvement in June. However, it was quite stable in the Nordics and Germany. We can also see there's hesitation among the customers to place new orders. So customer investments are a little bit on hold. And we are continuing to do streamlining activities, which means cost reduction activities in this division. We have seen, despite all the negative tone we have where we have seen quite good orders on full line solution, which makes us believe in our strategy to offer full line solution and more comprehensive product offering to our customers. If we move to the Global Technologies division. And here, we have a mixed performance or mixed development within the division. We have seen very good development in the optoelectronics business line, very much supported from an underlying growth trend from data centers and communication rollout, and this is very much because of the 5G implementation. In the other line of business, which is camera module assembly equipment, and the majority of this business is serving the automotive market, we have seen a very slow activity both from COVID-19 and, of course, the negative development of the automotive market. Also, our operations in the U.S. have been locked down or closed for some time due to government regulation. It's now open, but the recovery is very slow. If we now move to the business area, Pattern Generators. We have a very stable development. We delivered 3 systems in the quarter. And one of these systems was a P10 mask writer, Prexision P10, that was originally scheduled for quarter 4. But on the customer request to deliver it earlier, we managed to do that with some effort, and the machine was delivered end of June. On the other hand, we also had one upgrade -- a major upgrade that we couldn't execute in quarter 2 that is now moved to the second half of this year. The sales amounted to SEK 503 million in this business area. And the other 2 systems that we delivered was FPS mask writers, and these were the first with the newly launched Evo-controlled platform. If you look on the delivery plan for the remainder of the year, there is no changes. We have 5 systems to deliver and the 1 major upgrade, and this is according to plan. And no change in that one. EBIT ended at SEK 261 million, which is 52% and the change here in the -- on the EBIT is because of the product mix. The utilization rate, how much our customers are using the machine, is on a very high -- or on a high level, normally high level. We can also see that we have been able to perform all the service activities as planned. So we are able to maintain and support our customers in this business area. Moving then to our targets on long-term performance. So starting with the shorter target, which is the outlook for this year. We remain, as we also communicated in quarter 1, that we will reach a net sales of SEK 4.1 billion, but again with a higher level of uncertainty than before. The long-term target to reach SEK 5 billion at latest by the year 2023 also remains. So no difference there. And on the profitability side, also the same, that we want to be above 15% EBIT margin over a business cycle. On the Assembly Solutions business area, we have a target to reach above 10% for the full year of 2021. So that is next year. And the target for Pattern Generators is to continue on the healthy level that we have. On capital structure, net debt should be less than 3x our average EBITDA calculated over 3 years. So there's actually no change in any of the targets then compared to before. So by that, I will hand over to Torbjörn Wingårdh, CFO, to make a deeper dive on the financials.

Thank you very much, Anders. So looking then at the order backlog, we have a very robust order backlog when we come out of quarter 2. And that is driven by the rolling 12-month order intake at SEK 5 billion. Looking at the quarter in itself, the quarter 2 order intake decreased 28% to SEK 651 million. And driving that was a decrease of 21% for Assembly Solution and Pattern Generators decrease of 49%. And as you know, we talked about many times before, there is a variation in the order intake for Pattern Generators as a natural part of that business. But then looking at the backlog, we ended at almost SEK 2.5 billion, which is almost twice the size, which was at this point in time last year, a 38% increase for Assembly Solutions to a little bit more than SEK 900 million and an increase of Pattern Generators of 135% to a little bit more than SEK 1.5 billion. And for Pattern Generators, the deliverables for the remainder of this year is 5 mask writer systems and 1 major upgrade. Looking then at the development for the net sales. In Q2, we delivered 3 Pattern Generators systems, including a P10 to be compared with 3 systems, the same number in quarter 2, 2019, which then included P800. And the net sales in Q2 decreased 3% to SEK 1.086 billion compared to SEK 1.12 billion last year in the corresponding quarter. And in terms of business areas, the -- for the business area, Assembly Solutions, this was an increase to SEK 583 million, and that is then connected to good momentum in China. And for the business area, Pattern Generators, it was a decrease to SEK 503 million, mainly driven by product mix and the currency effects in this quarter were neutral. Looking then at our margin development. So we have in the quarter 2 a strong gross margin of almost 56%, even though it's a bit of a decrease from the corresponding quarter last year. And that was driven by Assembly Solutions, decreasing to 41.8%, still a good gross margin we consider that to be. And a very good gross margin for Pattern Generators at 71.7%. Also then the decrease there being driven by the mix effect previously mentioned. Looking at the EBIT margin. We are at a very healthy level of 25.8%, even though it is again a little decrease from Q2 last year. But we look then and feel good about the increase for Assembly Solutions in the quarter to 3.4%, although that is a level that we consider to be too low. And you heard Anders talk about our target for next year, which we then see this as being a good trend towards achieving that target in 2021. For Pattern Generators, again, then product mix meant that the very healthy level of 51.8% in EBIT margin still was a bit of a decrease from the corresponding quarter last year. In terms of spending for R&D for innovation and growth, we continue our efforts and activities in that. It was slightly lower in Q2 compared to the corresponding quarter last year. In this quarter, we had capitalizations of SEK 23 million, which was higher than last year. And we want to reiterate that we are still following the same IFRS rules for capitalization. So the increase is not a change in principle. And we are still conservative, I think it's important to stress. And the rolling R&D cost-to-sales ratio was at 13.8%. Then running off, looking at our strong cash position. We had a change in working capital, which mainly was explained by increased trade receivables and decreased customer advances, connected mainly to deliverables during the quarter. We made a drawdown from our SEK 2 billion revolver credit -- revolving credit line, and the revolver was approximately SEK 200 million. And the reason for that is we want to keep our liquidity position at a high level during these challenging times. And it's also good to note that the dividend, which we typically pay in Q2, now will be paid and has been paid in Q3, connected to the delay in our Annual General Meeting. And all this means that we end the quarter at a strong cash position of almost SEK 1 billion. And with that being said, I'd give back the word to you, Anders.

Okay. Thank you. So I have some final remark before we move into the Q&A session, and that is that we believe that we have a very strong platform for further growth. The new organizational structure that we implemented earlier this year is really giving us a scalable structure, clear responsibilities and clear leadership and accountability and the decentralized way of running the business. I think we are good in shape for future growth. Also, we continue to invest in both product development and market development and also in next-generation solutions and products to be on the leading edge of offering. And as you saw, we have a very strong balance sheet, which means that it supports our acquisition strategy, where we actively are looking for adding businesses that fits with our growth strategy. Also an effect of the change in structure that we did earlier this year is that we have got a very, very clear market focus. The new organization is a market-oriented organization, which means that the customer focus has even increased compared to before. And no changes at all in our long-term growth strategy. It remains intact, and both our short-term outlook and as well as our long-term financial targets are confirmed. So that was the end of the presentation. So let me hand the...

Thank you, Anders. That concludes the presentation and move over to the Q&A session. [Operator Instructions] Operator, please go ahead.

[Operator Instructions] Our first question comes from Fredrik Lithell, Danske Bank.

Nice to hear you are in good shape and see your report as well is in good shape. I have 2 questions, please. The first one is if you could sort of elaborate a little bit more on the parts of the AS division in Europe and North America that has been at the standstill, if you could put some maybe some sort of magnitude on that? And you also a little bit mentioned that things were starting to move in the right direction in June. Could you sort of elaborate on that? And the second question is this software upgrade, the [ P8 ] software upgrade that you mentioned in the report. I just want to understand if that has been announced earlier or if this is a new contract. Do you have a press release on it from a year back or so that I could look at it?

Okay. So Anders here. I can answer on the first question to give a little bit of color on the lockdown. So we had -- of course, the majority of the High Flex business is in Europe and the U.S., and those were also the regions that was mostly affected by lockdown. The lockdown has really closed borders, which means difficulties in delivering both machines and spare parts to customers, but also close down of factories everywhere. So we can especially see that on the service activity, which was on a very low level in -- especially in April and May, but good recovery of the service business in June. On the machine sales, we had a backlog, of course, to deliver from, which was -- with some delays. But on the order intake, I think I said it also that we consider that there is -- at least it was a hesitation by customers to place orders. But again, we can see that June was better than April and May, although not at the level which it has been in the past, you can say. And on the second question, do you know?

Yes, you asked about the larger upgrade, when it was announced, and it was announced just before Christmas in Q4 last year.

The next question comes from Mikael Laséen, Carnegie.

I also had a question regarding the Assembly segment. And if you can talk about the High Volume division, what is driving demand for that part? And can you say something about how it is growing year-on-year approximately? That was the first one.

So what is -- so the High Volume division -- so we're serving the High Volume segment, and the High Volume segment is very much related to consumer electronics, which means mobile phone, laptops and other consumer electronics. And by definition, the most part of production of these kind of products is in China. That's the largest country and then the surrounding countries. And the offering we have right now is dispensing application, and the need for dispensing application is growing. So you can see that the amount of dispensing per product is constantly increasing, but also we have seen a good rate of investments in new products and equipment, especially from our larger customers. The plan going forward is to expand in more applications, not only consumer electronics, but also into semiconductor and automotive electronics for this division to expand further. We don't have details on growth levels per division, but it is a good market for us, I can say that.

Did you see any effects of COVID-19, just as a follow-up?

Not in quarter 2. We had...

So if you can...

We had effect in quarter 1, of course, because, first, we had the traditional new -- Chinese New Year effect, which is a planned close, but then we had an additional close of business of 3 weeks, like most have with operations in China. But in quarter 2, that was not visible.

Okay. Are there any sort of structural trends that is supporting that segment and your product categories in dispensing, in particular, that is continuing at a faster rate apart from just the consumer electronics production in China?

I think it's the -- it's several factors in that. So dispensing application, in general, is increasing as part of assembly of consumer electronics. So it's both for assembling equipment but also for protecting equipment. And it's also for coating and filling, which means that the more need for moisture proof and dustproof and durable products, the more dispensing applications there will be. And also instead of assembling with -- as an additional assembling technology, it's also valid. And we can see the share of those applications are increasing per product.

Next call comes from Viktor Westman, Redeye.

I was wondering if you could comment on the -- your recent update on the photomask market volumes. I believe you have -- you recently got a new 1-year -- new prognosis for that.