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Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's quarterly conference call and audio webcast to discuss the company's 2020 second quarter results. You can log into the audio webcast via Besi's website, www.besi.com.Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Ms. Hetwig van Kerkhof, Senior Vice President, Finance. [Operator Instructions]As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced, in whole or in part, without reconfirmation from the company. I would now like to turn the call over to Mr. Richard Blickman. Go ahead, please, sir.
Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release we issued earlier today and then take your questions. I would like to remind you that some of the comments made during this call and some of the answers in response to your questions by management may contain forward-looking statements. Such statements may involve uncertainties and risks as described in the earnings release and other reports filed with the AFM. For today's call, we'd like to review the key highlights for our second quarter and 6 months ended June 30 and update you on the market, our strategy and the outlook. First, some overall thoughts on the second quarter and the six months results. Besi reported strong Q2 in 2020 and the first half year results in an improving industry environment. Revenue and net income for the second quarter were EUR 124.3 million and EUR 39.8 million, respectively, increases of 34.1% and 110.6%, respectively, versus the second quarter last year. Besi exceeded the high end of revenue guidance as we resumed full operations globally, achieved higher-than-anticipated shipments for especially mobile applications and benefited from increased demand by Chinese subcontractors for mobile and other electronics applications continuing a trend starting in the second half of last year. For the quarter, orders were EUR 101.3 million, a 22.5% increase versus the second quarter last year, but a decrease of 14.6% versus the first quarter this year, primarily as a result of reduced spending by high-end mobile customers after the first half capacity built. For the first half year, orders were EUR 219.9 million, an increase of 32.5% versus first half of last year as industry overcapacity lessened and mobile customers increased demand in anticipation of new handset introductions later this year with advanced features and functionality. To a lesser extent, orders also benefited from continued demand growth for high-end logic applications such as cloud infrastructure, artificial intelligence and high-performance computing as we move more rapidly into the digital society. Automotive end market demand remained at depressed levels as consumers react to the economic fallout from the pandemic.Profitability and efficiency also increased significantly in the second quarter of this year and for the first half. Gross and operating margins in the second quarter increased by 62% and 38.9%, respectively, strong increases versus the prior year period. Besi's solid financial performance primarily reflected improved industry conditions, our strong advanced packaging market position and a favorable product mix. On the operational front, it reflected crisp execution in a difficult production environment, labor efficiencies associated with a 5.2% decrease in year-over-year fixed headcount levels and lower travel, service and other overhead costs associated with the shift to a work-at-home business environment. Similarly, the first half of this year revenue of EUR 215.6 million and a net income of EUR 53.7 million grew by 23.8% and 89.1%, respectively, versus the first half of last year, with growth in net margins approaching 60% and 25%, respectively. In addition, there was a marked improvement when comparing basis trough cycle results for 2019 versus 2016 and for the 9 months periods thereafter in each 2016 and 2020. When comparing 2015 to 2019, in 2019, Besi's revenue and operating profit increased by 2% and 58.7%, respectively, versus 2015. Similarly, the analysis shows a 13% revenue and 85% operating profit increase between the 9 months periods of 2020 versus 2016, assuming the midpoint of the third quarter 2020 guidance. Moreover, operating margins grew from 19.6% to 32.3%. Such improvement underscores the significant progress we've made as a company over the past 5 years.Besi ended the first half year with a strong balance sheet and continues to return excess capital to shareholders. At June 30 this year, cash and deposits totaled EUR 366.6 million after the payment of EUR 76.6 million of cash dividends and share repurchases made in the second quarter of this year. Net cash and deposits of EUR 93.6 million at quarter end grew by 8.7% versus the end of the second quarter last year. During the quarter, EUR 7 million principal amount of the 2016 convert notes were converted, resulting in a reduction of the principal amount outstanding from EUR 125 million to EUR 118 million. Our capital allocation policy has been unaffected by the pandemic given Besi's growth and prospects this year. We distributed EUR 79.7 million in the form of dividends and share repurchases in the first half of this year. In addition to the May 2020 dividend payment, we bought back EUR 6.2 million of shares in the first half of 2020 as we approach the maximum amount authorized under the current EUR 75 million share repurchase program. Given continued strong profitability and cash flow generation, Besi will extend the current program until October 30, 2021, and increase its size by EUR 50 million to total EUR 125 million. Next, I'd like to speak a little bit about the current market environment. The trajectory of the semiconductor equipment recovery which began in the fourth quarter of last year was significantly altered by the onset of the global pandemic. As you can see in VLSI's most recent climate index report, there was a dramatic decline in the second quarter 2020 as many governments shut down their economies. This was followed by a retracing of the index back to pre-pandemic levels at quarter end as Asian production resumed and demand for mobile and computing applications expanded versus 2019. Similarly, VLSI upwardly revised its 2020 assembly equipment forecast in June to 11.3% versus an April forecast down 8.3% amidst initial outbreak. We now assume that the market will grow to EUR 3.3 billion in 2020 to reach EUR 4.6 billion by 2023, a cumulative total increase of 53% versus 2019. More robust growth will be driven primarily by 5G network expansion and feature functionality upgrades, continued investment in cloud infrastructure and artificial intelligence applications spurred by the rapid shift to the work-at-home economy and significant investment by the Chinese government to build out its semiconductor production capabilities. Now a few words about our third quarter guidance. Looking ahead, we estimate that Q3 2020 revenue will decrease by approximately 10% to 25% due to typical seasonal influences, lower demand for mobile applications post first half year build and customer caution as to the development of the COVID-19 pandemic. The estimated 17.5% sequential revenue reduction is in line with Besi's 16.3% average Q2 over Q3 revenue decrease over the past 5 years. In addition, gross margin is estimated to range between 58% and 60% based on the forecast of product mix. And finally, operating expenses are expected to decrease by 10% to 15% versus the second quarter of this year as we carefully control cost in an uncertain environment. We are cautiously optimistic about Besi's prospects for the remainder of 2020 given our better-than-anticipated first half results and third quarter forecast. We temper this optimism, however, given the current unpredictable course, recurrence and severity of the pandemic and its implications for underlying semiconductor demand. Longer term, we are encouraged about Besi's prospects in the next investment cycle given our strong performance in a difficult environment and by strong secular growth drivers for our business. Further, we have a leading position in the advanced packaging which is important -- an important enabler of the digital society and the new applications to be generated along with it. That ends my prepared remarks. I would like to open the call now for some questions. Operator?
[Operator Instructions] Your first question is from Mr. Marc Hesselink, ING.
My first question is on the high-end smartphone applications that came in even stronger than you expected ahead of the quarter. What kind of applications are that? And what do you think, is that market strength, or is there also a significant market share gain component in there for you?My second question is on the very strong gross margin. You mentioned the mix. Is it then fair to assume that those new applications that you are in the market that those are higher gross margin products and that is also going to help you considerably going into the coming quarters and maybe even in the coming years? And then finally, third question. You're still a bit cautious on COVID-19. I think that's logical. Is that also the case that the visibility is still pretty short, like lead times even shorter than usual, and that's also something that we saw in the second quarter that your -- actually your revenue numbers were way ahead of what your earlier -- you guided that those orders come in at a very late stage?
Yes. Thanks for your questions. Number one, in the high-end smartphones, next generation, we all know 5G compatibility should be in many of the models, at the same time, improved, yes, face recognition and also other features. So the content has changed, and that has led to different solutions. Also, the wearables, don't forget, AirPods, iWatches. So across the board, this 2020 generation has offered us significant business upside potential. As we have said in many previous calls, the timing of the decision of the contents of a model is stretched to the very last moment feasible. So also with the pandemic kicking in, in February, it was not very, let's say, decided and clear what would be in and what not. But then if you look at our ability to turn around orders, and for many products that is unique, we are able to deliver very fast in 4 to 6 weeks. So turning around that business after the decision is one of the reasons why we have been able to gain some share over the past many cycles. That goes the same for the gross margin improvement. In many instances, the mix, successful new developments with short time to markets, in other words, little delays and certainly no disappointments. But also, we must be -- we must recognize that this quarter and also the first quarter, the first half year, we had many favorable effects simply because of cost reductions, less travel, more efficiencies due to that. Exchange rates, high dollar; lower ringgit; on the other hand, a bit offset by a higher Swiss franc, but overall, some positive tailwind. So yes, it's a favorable mix. Headcount. So revenue per headcount, we are coming out of a downturn. We did not hire more than really necessary staff. So that all tied together into a very effective, cost-effective end result. Then your third question, visibility. You said it already, fully agree. Who is able to predict what is still coming towards us? Will this second round be worse than the first round? Nobody knows. So we definitely see caution at our customers. On the other hand, the semiconductor industry is coming out of a downturn, second half '18 and '19. So inventories are still low. At the same time, automotive is very low, so no support from that business. So that all together. And I should mention, clearly, in the consumer part of the applications, so the mobile handsets, typically, the seasonal effect is capacity built for new features in the first half of the year and into the third quarter, and that should then be sufficient for supporting the introduction of that next generation. So that, altogether, simply leads to caution looking forward.
Your next question is from Mr. Wim Gille, ABN.
Yes. Wim Gille, ABN. My first question would be on some changes, I would say, in the supply chain. On the one hand, we see that Apple is changing its supply chain. Initially moving to ARM for their MacBooks but maybe more stuff pending over there. So can you give us a bit of feeling what potential impact we might see on your business if Apple chooses to move more of its supply chain? That will be my first question.A similar one is obviously related to Intel versus TSMC, where Intel seems to be a bit behind the curve compared to TSMC. What will be the impact on your business if that basically retrace becomes a more one-sided race with only one participant in the race, if that would have an impact on your business? And my third one. On China, we've seen great strength in your results from Chinese subcontractors for a number of quarters. Do you have any feeling how many quarters that demand from Chinese subcontractors can last in basically the coming quarters?
Excellent. Well, the changes in the supply chain, but that is with all end products. In this industry, there is certainly very fierce competition, competition among our customers and also their supply chains and our position in those supply chains. What is key, of course, is that you don't disappoint your customers. And you can say modestly from the first half year results that this organization has done its utmost to satisfy the demand of the ever-challenging end customers that should help us to also continue to support whatever direction those supply chains are going. But again, we have fierce competition, but that has been always the case. So we are happy with strong competitors.On your second question, Intel versus TSMC. This is not new. Everyone knows that there is a delta between the node shrink or next generation for many years. It also has to do with the design of the specific processes, in particular. On the other hand, the end market demand is growing significantly. In the next 5 years, it's expected to grow more than in the previous 5 years, simply because of the artificial intelligence and the whole business model changes. Besi's position at all the leading edge semiconductor developers, producers, however, it will change. Simply, Asia is expected to become an ever-stronger partner, so our organization built in Singapore to support the technology development of our customers in Asia. We are setting up more and more process support in Taiwan directly supporting those customers based in Taiwan, similarly for Korea. So the name of the game is to simply anticipate and follow where the industry growth is happening. We are in an excellent position for that.And that also ties to the third question, China. If you look at the percentage of revenue, it's quite substantial. We have said over the years from below 20% to between 30% and 40% now. Clearly, China is growing faster than the rest of the world. With the high end, we are successfully also growing in that market, and you also see that in our margins. So the broad expected growth in Asia, and in particular, in China, is expected to continue for years to come. So that's basically the answer to your question.
Your next question is from Mr. Nigel Van Putten, Kempen & Co.
Just tacking on to the last question on China. I think there was some talks that maybe some Taiwanese OSATs were a bit hesitant and waiting until you can see have more clarity in what they could produce and what they could not produce for Huawei or HiSilicon. But it also seems that maybe some of the Chinese OSATs accelerated in the quarter. So I guess I'm just speculating if you could provide any additional color on what happened in the quarter or maybe in the current quarter, what you see for FX. That would be helpful.
Well, it's similar to an earlier comment. At this point in time, the visibility is even less than, let's say, in 2016, '17. So it is very last moment decisions, so you have to turn around your deliveries very short. So our operations in China are proving at this moment their unique position to not only participate but to have a leading position in the high end, in the expansion in that market. But again, in this circumstance in the world today, one has to be a bit careful. Let's say it in this way. It may, like in the second quarter, turn out more positively, but it also may face some headwinds. I don't know.
Got it. And then considering the visibility. You've raised the buyback, lengthened it a little more than 5 quarters. Should we assume then EUR 10 million spend on the buyback per quarter into the coming year?
Yes. That's roughly the -- today's target.
[Operator Instructions] And there's another question from Mr. Wim Gille, ABN.
Yes. A follow-up question from my end on, let's say, the guidance that you gave. You mentioned, quite rightfully, that visibility is relatively low given the global situation with COVID and all, and that's also probably why you had such a strong beat in the second quarter compared to the guidance you gave in the first quarter. Would you say that you have build in a similar caution into the guidance for Q3? Or would you expect that the likely outcome of the results in Q3 will be closer to the guidance than basically what happened during this quarter?
Yes, some data points. We mentioned our order intake was EUR 101.3 million. As a rule of thumb, over the years, the order intake in a quarter basically guides to the revenue in the next quarter. In the first 4 weeks of a quarter, many products can still add to the revenue in that quarter. So if you ask the question how does the order intake develop in July, and I mentioned that still in the industry, we are carefully in an upcycle. VLSI is somewhat more positive, as we showed in one of the slides. We are a bit more cautious, simply because of the data points collected from many others. So our guidance, minus 10% to minus 25%, yes, it's a broad range. But with the uncertainty around us, we feel that is the best we can do.I can also add to that, by the way, if you look at the current situation, we have over 1,200 suppliers for all our 18 different platforms. We have been quite fortunate. I can also say lucky that we have been able to accomplish the revenue growth in the first half year as we did. Many parts have been in a very critical path, and we have been fortunate, partly by dual sourcing and also triple, but also using some flexibility with demo systems, taking parts and solving that. We have decided to take on slightly more inventory of those critical parts, which could, let's say, be a bottleneck. That's about EUR 2.5 million in value in extra inventory, simply not to get stuck when we would have, all of a sudden, additional demand. So you have to prepare, in this time, both portion on the downside, be ready for the upside, and that's just giving you a bit more background on how we are. And we manage this 3 days a week, every Monday, Wednesday, Friday.
Your next question is from [ Mr. Maxime Pontois ].
A very simple question from my side regarding China. You mentioned that you are benefiting from -- on gross margin from your expansion over there because it's high end. Could you give us more flavor of that difference between China and the rest of the world in terms of gross margin? And also, in terms of beat, regarding the beat in the second quarter. I'm sorry. I missed the first part of the conference call. But I would like to know if there is also some, I would say, an order to be securing orders from your customers because they were scared about the fact that they couldn't get what they want when they want.
Excellent question. Excellent. Well, the first one, there is not much difference in cost structure, believe it or not, between Malaysia and China. The only difference is if you produce a system outside China and you want to import into China, there's tax. So the big advantage building in China, and also since over 10 years, we've built the whole supply chain in China, is that for China, we are in an ever-stronger position.Your second question...
I'm sorry to interrupt, just a follow-up. So you mean just a matter of taxes. There is no difference in terms of mix, product mix?
No, not significant. I mean there are some -- I mean we have a major tool shop in China, so we built 90% of all the tools in China. So for some tools, we have to import from outside, and that adds to the cost. So it's not all equal. So as I said, we have 18 different platforms, 16 we built in China now. And that is after, especially the impact -- or let's say the anticipated impact of more the trade situation, U.S. and China. China is 100% for China. We don't export machines out of China, and we are very successful to manage that cost in exactly comparable way. So that's no difference. And we have been very successful in the first part of the COVID situation in March especially, then we had to shift production from China to Malaysia because China was locked down. And we send those machines from Malaysia to China with some additional costs. And then China opened up again, and Malaysia closed down until the end of April, so simply to give you some more color. But in the margins, you don't see a negative impact.On your second question, we think that customers certainly are building safety into their structure. So the weakest link with every product can be a very small spare part. So we've seen our spare parts business increase, simply for supporting our customers so that they don't run into any shortage. That will not last forever, but that is still a small part of the business. Whether they buy complete machines to be more safe, we doubt because it is -- we are only a small link in the total supply chain. So they would have to build significant additional CapEx. So that's not what we think happens. So on the spare parts, yes. But on excess capacity in total, that's not the case yet, we believe.
All right. And is it possible to know the size of spare parts in your total sales, please?
Yes. It's about 20% of revenue, yes.
And you were -- sorry, I interrupt you.
Well, in previous years, it was about 15%. So it moved up somewhat. But also, this is a general trend. More and more, we are able out of Asia to support our customers within 24-hour shipment of parts, and that's becoming an ever-stronger part of our business.
Your next question is from Mr. Robert Sanders, Deutsche Bank.
Yes. I was just looking at your geographic mix for the first 6 months of the year, and I saw Korea, apart from China, jumping to over 36% of sales. Looks like Korea is now 16% from 5% a year ago. I was just wondering if any of that was -- any of those increases has to do with flip-chip adoption in DRAM.And my second question would be regarding the VLSI data. I know you said it was a bit more optimistic than what you're thinking about the addressable market, but it does look like VLSI is expecting that back-end TAM is going to grow faster than the front-end TAM. And I was just wondering whether you thought that was a likely outcome of all the various different dynamics that's happening, for example, Intel, what they had announced, et cetera, chiplets and tiles, et cetera.
Well, the first question, simple answer is not yet. It is expected flip-chip DRAM later this year, early next year, and we are in an excellent position with a qualified new system in the last few months and winning that over competition. But Korea today is a mix. Part of it is high-end smartphones. I mentioned already antennas but also many other good things, so expansion also into the Android world.And then your second question, yes. The -- it's not only fashion, advanced packaging. But more and more, the hybrid bonding, chiplets, Foveros, moving from single dies on a substrates to chips on wafers, stacked 2.5D, 3D, that's expected in the next couple of years to be a major growth driver for the interconnect. And that's not only Intel, but I think the golden standard is fair to say is in Taiwan. That is expected to offer significant growth. Let's see.
Your next question is from Mr. Frédéric Yoboué, Bryan Garnier.
So my first question would be around the technologies that have driven your growth in smartphones. You've mentioned 5G and 3D sensing. But is there a development in maybe fan-out for the SoC maybe you benefited -- have you benefited from that also? A second question will be around the gross margin. So 62% is very, very strong. And for the next year, I wonder if do you see growth driven by capacity builds, let's say? Or do you expect even more new technologies to come next year, so it will be a mix between new capacities from the technologies of today and other new technologies to come into the market? And just last question, my third question would be is your guidance includes an adverse impact -- already an adverse impact from the pushback of Intel?
Well, to start with the last, the answer is no. That does not include -- and we don't foresee any immediate changes. It could also be very likely a step-up. Why throw the towel in the ring? I don't see that yet. But anyway, go back to the first. There are many components, features into high-end smartphones, many mentioned, also by you. Some are upgrades. Some are new, so it's a mix of more than the 2 I mentioned, the -- but antenna is brand new. I also mentioned to an earlier question, the wearables is also a major growth business. So that all helps.But your second question, highest margins are always in new successful products. In simple capacity build expansions, it's far more difficult. So finding the ideal mix of successful development on customer road maps in the various applications, so in the process arena, memory, as mentioned, but also for the various features into high-end smartphones, automotive. Although today, very low in volume, but there are many new products on the development road maps of the leading auto companies. So that will offer in a next growth cycle significant capacity expansion from both angles.
Your next question is from Mr. Michael Roeg, Degroof Petercam.
Yes. I have a question about the gross margin, and one of the drivers for the gross margin in the second quarter was labor efficiencies. If I look at your own workforce in Asia Pacific and the number of temps that you had in the second quarter, then the number of temps was about 10% of the total people which is more than in previous quarters. So I was curious what the wage difference is between your own staff and those temps? That's the first question. And then the second question, I think 1 or 2 quarters ago, you mentioned that the operating costs had some consultancy costs because you were further fine-tuning the operations. And I was wondering whether future sale growth will basically be driven by expansion of temps or whether you expect to hire more staff for your own operations.
Excellent. If I look at your first question, which is a very important one, of course, temporary labor is more expensive than fixed. But in Asia, the delta is maybe around 20%. The key is to have your fixed staff in every aspect, controlling the business. So your question is, and you see that in the results, those people increased their manufacturing throughput times because it's all ours, and it is materials, the whole supply chain. Don't forget all suppliers today are very hungry because many suppliers do not only serve us but also other industries, so we benefit from the issues in other industries. So that, altogether, has helped us in reducing that cost part of the COGS. But the efficiency of the own organization is a major achievement, especially if you simply bear in mind the disruptions due to COVID, first, the shutdown in China and in Malaysia. And you can simply track every week, every month the amount of hours reduction in every platform we built.On your second question, the consultancy cost. We, every so often, recalibrate or calibrate our strategy, and that is an extensive exercise over 12 weeks and where we have support from outside consultants focused on the 2 main areas, market development and market focus, pick the winners, customers, development road maps. And on the other hand, how can we further improve our operations and reduce our cost? And that exercise we did over Q4, Q1, and that cost we don't have in Q2. Hiring staff, clearly, R&D is increasing. We've mentioned that also in every call that, over time, R&D, simply because of the complexity, is further increasing. So we also have hired staff last year or early part of this year, simply because the complexity, more customer programs. So the hiring and staff will be in the R&D part, less in the operations, the flexibility. And simply take revenue, Q2 was EUR 124 million. Peak revenue in Q3 2017 was EUR 170 million. So we are far from the peak revenue. However, with margins, which were above that in 2017, so we have improved inefficiency significantly. But that is a never-ending working on your business model. I hope that answers your question.
Yes. I don't -- I actually was wondering if you could even shed some light. What if you were to return to that EUR 170 million in sales, do you have something in mind for the potential gross margin on that? Should we think even higher than the 62% given a normal mix?
Yes, yes, given the normal mix, also exchange rates, competitive position. Don't forget, we are in a competitive world. But that definitely offers more upside if we do our homework right.
Okay. Good. Then I have one final question, if I may. It's on the automotive business end market. When I think of automotive chips, and I think most of them are built on mature technology nodes, whereas mobile handset chips are typically on very leading-edge nodes. Is it fair to assume that the packaging equipment is also mature for automotive customers so that means that the gross margins are much lower than the group average?
Well, there's a different phenomena in automotive applications, and that is safety. So any product used, simple thing is traceability. And if a car fails, the risk of life is much higher than if your phone doesn't work. So the requirements to be successful in the automotive world is significantly higher. The qualifications take longer, so the initial cost is higher. And once you have achieved certain positions, your margins are more stable, less volatile than the consumer part of the world.On the other hand, your statement is also right that, from a technology point, it may be less challenging, also from space requirements, the ultra thin, what we need for high-end smartphones. So it's different road maps. But also with the complexity, with the cost, there's a significant cost aspect. But over time, we have accomplished similar margin structures, whether that was in the days of 40%, 50% and now in the high 50s in a similar way because, don't forget, our industry is still very young, maybe 50 years, which is young in the scheme of things with a lot of variety. So our operational efficiency is, in my view, extremely, let's say, low compared to larger-volume industries. So we can achieve a lot of cost savings and improvement to our operations from today onwards still significantly, which is a very positive challenge.
Well, you certainly have done a great job already. So yes, good. That's very insightful.
The next question is from Mr. Nigel Van Putten, Kempen & Co.
Just a quick follow-up on the guidance itself. So indeed, the midpoint seems to be the order book, but then you've also said that you typically do turns business in July, there's also spare parts. Also, historically, you've been able to print more revenue than typically the order book was. So could you perhaps quantify a bit more what the buffer for uncertainty related to COVID is? Is that maybe the mid- to the high point of the range, or I must say, the mid- to the low point of the range that may be an additional buffer? How should we sort of see that?
Well, it's not an exact science. I should also mention, if you look historically, the tide has turned in September, late August, September, in many instances. So the caution is also because of that phenomenon. Maybe it doesn't happen, as I said earlier. Maybe it does. Whether it's 20%, whether it's 10%, I honestly can't tell you. But the underlying message is simply in this uncertain world, you better be cautious than be optimistic, but you have to be prepared if things do turn out more positively. So we handled that in the same way as we do every quarter, every period in time. As I mentioned, we are prepared for a major upturn. We are also prepared for softer times ahead, but I can't give you percentages.
[Operator Instructions] There are no further questions at the moment.
Well, then, I thank everyone for listening and asking questions. And if you have any further questions, don't hesitate to contact us. Thanks again. Bye-bye.
Ladies and gentlemen, this concludes the event call. Thank you for attending. You may now disconnect your lines. Have a nice day.