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Edited Transcript of COTN.S earnings conference call or presentation 15-Aug-19 2:15pm GMT

Half Year 2019 Comet Holding AG Earnings Call

Flamatt Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Comet Holding AG earnings conference call or presentation Thursday, August 15, 2019 at 2:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Beat Malacarne

Comet Holding AG - Interim CFO

* Heinz Kundert

Comet Holding AG - Chairman of the Board & Interim CEO

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Comet Media and Investor Conference Call and Live Webcast. I'm Sara, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

At this time, it's my pleasure to hand over to Heinz Kundert, CEO of the Comet Group. Please go ahead, sir.

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Heinz Kundert, Comet Holding AG - Chairman of the Board & Interim CEO [2]

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Good afternoon, everybody, and welcome to the presentation of the half -- first half report 2019. I'm going to start on the Slide #4. On the Slide #4, you can see that the net sales in the first half of 2019 has been CHF 177 million. So this is a down of 23%, 23.8% versus the H1 2018. So this is a significant reduction of the sales due to the downturn in the industry. It's mainly because of the area -- of the memory sector, where we are very much engaged, and the memory market has been hit hardest in comparison to the total market. These are the big impact on the EBITDA, which is only 4.8%, and mostly, it is driven by the volume. That means less volume gives us a lower -- much lower EBITDA margin.

All the other activities like the improvements of IXS could not compensate, of course, for this -- the loss. On the other side, the cash flow has been increased from 2% to 8%, thanks to rigorous net working capital management and also CapEx freeze and some other cost-saving activities, especially in the field of central costs.

We do have, still, a very robust financial footing with a 48.8% equity ratio. That means from the balance sheet, we look pretty good.

Going into more details on Slide 5, you can see the 4 divisions. As I said, PCT, Plasma Control Technology, with sales of CHF 73.1 million is 40% down compared to H1 2018 and 17.6% down from H2 2018. So in the first half, the sales or the market as such has reached a very low point. And I'm convinced that we have reached the lowest point and from here to become better in the next couple of months and quarters, at least. This is what also the market researchers and our customers are saying. These are the tremendous impact on the EBITDA with CHF 3.2 million or 4.3%, which is, of course, a very unsatisfactory result.

Going to IXM. IXM has a reduction of 10%. This is due to lower business in the field of the security inspection at the airports, which is mainly coming from the freight and large packages. The money in this sector went to the checkpoint, so that means the personal checks, which is a market where we are not very active right now. Of course, we want to improve that in the next couple of years.

Nevertheless, the EBITDA margin with 21.1% has been pretty high. This is because this division is in good shape as far as volume standardization is concerned, and we are absolutely positive that IXM makes progress in the next couple of quarters when the basis, especially on the airport sector, is coming back.

IXS has improved the top line as well as the bottom line compared to last year. Although, of course, with 5.1% of EBITDA, this is not -- it's not a number where we are satisfied, of course. We believe that with certain activities in this segment, and I'll come back to that later, it should be possible to get a much higher EBITDA over the next couple of years.

EBIT -- EBT is another sector where we had changes. You maybe remember there was the divestment of Davenport, which was part of EBT here, and the sales has been reduced from CHF 9.6 million to CHF 7 million in the first half of 2019. On the other side, the EBITDA has improved because of the divestment of Davenport.

So this is the result of the 4 divisions, and I'd like to go to the Slide #8. Slide #8 shows you the situation in the market for semiconductors. The market research is as you can see here on the left side. This is Gartner, Cowen, VSLI Research, IC Insights, UBS, WSTS. They have a forecast that the market is growing, on average, by 7.8%. Again, these are the devices, not the systems. So there's a kind of understanding that from now on, the market will turn up again. The question is how fast and when it really starts.

You can see on the right side some quotes from SIA. SIA is Semiconductor Industry Association. They were surprised of the surprisingly strengths of the memory price stabilization. It clearly shifted certainly from customer depletion of inventory to customer build. So this is a good sign that the memory business as well as the logic and the foundry business is coming back again.

An interesting Slide is on 9. It shows now the direct market. I mean this is the equipment market on the left side where we deliver our systems as a part of these markets, of this equipment. Clearly, 2018, with the highest value of more than $60 billion revenue, it went down in 2019, as we can see, and is expected to go up again in 2020 as a forecast. So that also confirms our opinion that the lowest point in the market has been reached. Of course, we still have some answer to this, maybe not as far as the market is concerned, it's more the geopolitical situation on tariffs, and that effect is -- that makes us a little bit cautious on the interpretation of these numbers.

But what you can also see here, interestingly, is that the majority of the market is reddish, and reddish means is Asia, and that the U.S. is the dark blue part of the bar that is relatively small. So despite all the issues with the tariffs, the main market is still in Asia and will remain Asia.

This year, Taiwan will become the largest market in 2019. China will be the largest market in 2020. So despite all the discussions between the U.S. and China, China is the dominant player in semiconductor manufacturing in 2020.

Going to the financial results, this will be presented by our CFO, Beat Malacame.

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Beat Malacarne, Comet Holding AG - Interim CFO [3]

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Thank you, Heinz. I would like to explain our financial situation of the first half year 2019 based on a few slides only. Before I go in, I would like to draw your attention to Page #11. Page #11 shows you here the first-time application of a new accounting standard, which is IFRS 16, that we, again, as I said before, applied for the first time with the effect 1st of January 2019.

So as a consequence, when you apply a standard in a business year or in a financial year, you also would have, for comparative reasons, to adjust in the previous year, which, in our case now, is the first half of 2018. And you see that here on the right-hand column, IFRS 16 defines that rents and leasing contracts lasting longer than 1 year would have to be capitalized. That means we have to take the assets into our balance sheet and also show the respective liabilities in our balance sheet as well. And also, as a consequence, of course, is that the lease payments, those -- the rent payments that we have in our balance sheet in different functional costs and in COGS as well would have to be taken out and be replaced by a depreciation amount and also by a financial or, let's say, an interest amount. So in our case, taking out all the lease rents and the rent payments out of our functional costs and COGS has a positive impact on EBITDA. That's the first time here that you can see here on the right-hand side. So it increases our EBITDA by 1.1% from 12.7%, as we have reported last year, to the 13.8%. And then, of course, to compensate that we have an increase in depreciation and we have an increase in financial results, as you can see in the slides here. Of course, 2019, we do not adjust as we already applied IFRS 16.

Down on this page, you see also the impact on total assets and total liabilities in taking these particular assets as an asset in our balance sheet and goes as respective liabilities accordingly.

With that, I would like to move to Page #12, which is our income statement here. And here, I have a few comments. So our net sales, as we already heard from our CEO, went down from CHF 232 million to CHF 177 million, which is a decrease by almost 24%. You know that our biggest division that we have in our business portfolio is PCT, the Plasma Control Technologies, and this particular division experienced a downturn of over 40%, to be precise, 41%, and that has even the entire thing here. And whenever we have deviations in our P&L or whatever, this is basically mostly driven by the PCT business.

So this volume impact had also a negative impact on our gross profit margin, which reduced to 36%, roughly about 36%, from about 40% in previous period -- previous year's 6-month period. And that was mainly a volume impact.

Now looking at the functional costs, which are below the gross profit line. Here, I would like to make 2 comments. First, Comet managed to significantly reduce the functional costs. So when you look at development expenses and SG&A together, then you realize that we have sales of about CHF 11 million in functional costs, which is about 40% compared to previous year, the same period. But having done that, we have not stopped any project, which is an important development project, development projects which will generate future cash flows there. We continue to spend and have continued to spend, of course, in a way that we secure our cash flow future also in -- for the next years. But other than that, altogether, CHF 11 million savings.

Below the operating income or the EBIT, as you see here as well, is the financial result, which is a little higher -- a little high because there was higher interest expenses, but also there was a negative impact because of foreign currency developments. Our income/expenses became not an expense here in this particular first half year, and it's a positive amount because we are in a loss situation, as you can see, CHF 3.1 million net income, which is a negative number here, that means a loss, which compares to positive 14.5% last year.

And below here is also the EBITDA, and the EBITDA went down from CHF 32.1 million, which is a margin -- which was a margin last year of 13.8%. It went down to CHF 8.5 million or a margin to 4.8%.

And I would like to give you a few explanations on Page #14, which is the waterfall for the EBITDA. Here, you see again the CHF 32 million goes down to the CHF 8.5 million, mostly driven here by the first column -- or the first column shows it's mostly driven by the PCT business, where we experienced the EBITDA loss of almost CHF 28 million. When you look at IXS, there, you see a positive impact. Last year, there was a restructuring in IXS, which results this year a much lower cost at the end of the day, and that has a positive CHF 3.1 million.

Going further to the right, which is the X-ray Module business, there is a negative impact. This is a purely volume-driven thing. We have heard from the CEO before that there was a drop in sales compared to previous year period of roughly about 10%, and that has caused -- has less -- it traces also on EBITDA, which is a little bit negative here.

And moving further to the right, where we see the EBT. EBT here is clearly the sale of the Davenport business, that means the ebeam system business that we had in the U.S., that took place in 2018 second half. And of course, there is less cost, less process with that sale of that business, and that has resulted to a better EBITDA of CHF 4.4 million. So that leads now to the 4.8% EBITDA margin.

And with that, I would like to move to our cash flow statement, which is on Page #17. Despite the difficult situation that we are in with our operating business activities, we have managed to increase our cash flow margin. Our cash flow margin in the current first half year 2019 amounts to roughly about 8%, which compares to about 2% same period last year in 2018.

So the reason why it came out that good is because of rigorous net working capital management. In the year 2018, we have increased our net working capital, while we decreased our net working capital in 2019. And that, of course, had a -- quite a big impact at the end of the day, and it results in a much better cash flow margin, as we see in 2019.

Looking at the cash flow. You've seen investing activities. That amount has reduced substantially. There are 2 reasons leading to that. First of all, we have introduced the CapEx freeze in 2019, early 2019. And secondly, we still spent quite a bit of money in 2018 for the new building in Flamatt. And these are the 2 reasons why we have a much better situation in investing cash flow than we have had in 2018.

And as a consequence out from these rigorous net working capital management and also the CapEx freeze and lower spending in investing activities, we have achieved the free cash flow. You can see here that our free cash flow is CHF 5.9 million compared to a quite high negative number last year. And that, in turn, also results in lower financing activities, which you see in the line below. So that is quite an acceptable cash flow situation, I must say, but always considering the difficult environment that we are in. I always say that usually, a cash flow margin of a normal business should be at least 10%. Between 10% and 12% would be ideal results that we could achieve. But in that particular year, acceptable result.

So with that, I move to Page #18, which is our balance sheet. This is actually a nice picture to look at. You already see it in the title. We say it's a robust balance sheet. It's definitely a robust balance sheet. Long-term assets are financed with long-term means, short-term assets financed with short-term means. That is always a good situation to be in. Our equity ratio amounts to close to 50%, to be precise, 48.8% here. But the best -- you cannot really read out of these numbers here because they are quite condensed, but we have a good liquidity. I think our equity is good, and our liquidity reserves is also good. And that definitely gives us some room, some room to breathe in a situation that we are in, and we are not quite sure how long it will last. So we definitely have a balance sheet which allows us to be in a rather relaxed situation, balance sheet-wise. So that is a nice picture to look at, at the end of the financial results.

And that's all have I have to tell you at this point in time. With that, I would like to hand back to our CEO, Heinz.

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Heinz Kundert, Comet Holding AG - Chairman of the Board & Interim CEO [4]

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Thank you very much, Beat, for your explanations. So let me talk about the strategic direction. Actually, usually, it's not part of the balance sheet conference here. And -- but as I'm here now for 3 months, let's say, 100 days, I feel obliged to give you some kind of thoughts in what direction the company will develop in the next couple of years.

On the left side, you see the issues that I have discovered during the last 100 days. This is simply that the state of technology in most areas is still there, so we are really competitive on the technology side. We do have highly skilled and motivated people who are eager to outperform. And despite all the shifts we have in the company, they're still fully behind the company, and they want to perform, and they want to go with us in the new direction. We have long-term partnerships with leading companies, and it was one of my first action to visit them, mainly in the United States, and to make sure that they go with us and they invest with us and they give us a chance for more business. And I can only say that this is what they said. They said, "Listen, you are the supplier of choice, and we want to go with you into the next couple of years and having success together."

It's also clear that RF and X-ray technology are key enablers in the progressive digitalization of society. Without those 2 technologies, the semiconductor industry would not be able to achieve the ambitious goals that they have for the next couple of years.

We also have a high potential in services. And please remember, service is repair and parts. Services is more than that. Services also includes software that we need in order to build entire production systems or integration lines that is not only equipped with the scale but also with software. And as we heard from Beat, our CFO, we have a very robust financial basis that gives us some room to maneuver.

On the right side, you see a kind of action list, what we need to do to improve because the financial situation is not satisfactory at all. So we have to take action to increase market share, to increase our sales and also, of course, to increase the bottom line. I would say, next couple of years, we should definitely be between 20% and 30% of EBITDA. Basically, it's possible compared to our peers.

So what are the actions? The biggest issue I have recognized is the complexity of the company. This has to do with the lack of focus. We did too many things, one-of-a-kind systems, long-term delivery time, low profitability, and we have to completely change that into a focused company that is going for profitable market growth.

And the second point is we have to invest into more software. When I talk about software, it's not only operating software for a machine. It also includes artificial intelligence, machine learning and data analysis. In particular, in the X-ray business, this is extremely important to have a feedback system that controls process and is not just showing a nice picture where you can see all the defects.

The third point is expansion in high-volume markets. But as said before, actually, with a high degree of standardization and high probability of remaining or becoming the market leader. This is the condition to have a higher EBIT margin or EBITDA margin in order to really show good results.

The fourth point is operational excellence and the ability to manage the cycles through make-or-buy decisions when you compare to other companies in the same sector. I give you an example, VAT, which is my former company, and it's exactly the same cycle. They have components like us. They are still in the 25% EBIT -- EBITDA range, although are also being affected by the cycle. I do not see a reason why we cannot do the same, and we are working on that with a high priority.

Another issue is expansion of our footprint in Asia. You've seen that most of the equipment are sold or bought by Asian countries, and we have to expand our operations and our activities in general in Asia.

So these 5 points are on top of my agenda, and we have already started to work on them. More details will now follow.

Looking at the Page 21. This just is illustrating again that the market is growing. The CAGR is approximately 7%. And of course, here, you cannot see the cyclicity because it's flattened by the CAGR over 4 years. And that shows that despite the ups and downs, these markets are going to grow in both areas. RF power solutions as well as X-ray solutions are part of this growth. Without them, this industry, as I said before, is not booming anymore. So we are in the middle of this attractive market.

Going to Slide 22. This is the result of a strategic discussion, what we had, how do we go forward, where to focus. So our DNA, so to say, in technology is RF power and X-ray. This is where we are coming from. This is where we have high market shares. In some areas, we are a market leader. And this is what we call the core, and the core should be strengthened. They're also expanding -- expansion in services, what I said before, which is going beyond repair and parts. It's including preventive maintenance and systems control by artificial intelligence and so forth.

Now we can also see that ebeam is disconnected from the core. Here, we are looking to have strategic alternatives on how to reduce the risk to almost 0. We do not want to have risks in this business anymore and also to eliminate the losses. We are in discussion with some of the potential candidates, and we are quite optimistic that we can find a solution to continue this business but with a much lower involvement of Comet and, of course, without any losses for the future.

Then going to Page 23. It shows you a little bit in more details what we intend to do in the RF power business, the PCT division. On the left side, you can see the vacuum capacitors where we are absolute market leader. We're also market leader in matchboxes, and newly, we are entering the generator business with a totally new product. This square here, RF power unit, is a so-called -- kind of increase the share of wallet. We have very good positions at large customers and we're going to expand that and hope to finally have up to 100% share of wallet to be cushioned. This is possible. VAT has achieved that. I do not see a reason why Comet cannot achieve that as well.

The second box is product innovations. Here, we have a new RF power generator, which is unique, which is disruptive and has been presented to key customers in June 2019 in the United States. They're very intrigued on that new generator, but it has to be tested. It has to be adapted to the customer's specification and will take a while to do so because we need a certification for the product that is going to enter the machines of our customers. That will take 1 to 2 years. So we expect to have revenue streams starting from 2001 (sic) [2021] if everything goes right.

We also have to increase the flexibility to buffer cyclical swings more effectively. It's clear that downturns, upturns will come again, sometimes later. And we have to build an operational flexibility that during downturn, we are not losing so much money as we do right now. Also here, we have peers which are doing that, and we will build the structures and the necessary measures in order to achieve this high flexibility.

I already talked about the focus in Asia. This is an important issue for 2 reasons. One are tariffs. We have to get away of these obstacles and invest more in Asia. Also in operation -- not only sales and service but also in operations.

Going to the next slide. This is 24. Here, we have a tremendous change in the repositioning of the X-ray systems business. Up to now, we had 7 markets that we serve. Some of these market services are not really attractive. And we decided to focus on electronic semiconductors. This is one, then aerospace and automotive.

You see in those 3 areas the highest potential to grow the profitability, grow first and to increase our EBIT margin substantially. That also includes, as I mentioned before, artificial intelligence, machine learning, data analysis. This is part of the concept. And I must say at the moment, these skills do not exist sufficiently in our company, and we will have to look to get resources, be that a strategic collaboration, be it that we buy a company or be it that we buy teams with the capability to bring this kind of skills into the scanners and set it as a complete solution.

With those measures, we are sure that if we do that right and we're going to produce or achieve the volumes with standardized systems, we have a plan to -- have just launched standard system with additional modules similar to the car industry, which has maybe 2- or 3-year platforms, that handle software valuations. We do the same. With such a system, we should be able to achieve an EBITDA within the next 3 years of more than 20%. Also here, we have peers who had to ungate this, and no reason why we cannot do it as well.

The third one is X-ray modules and components. Here, we have actually a very good business model based on volume, based on standardization. This is also one of the reason why this division is also making decent EBITDA margins, which is more than 20% last year. It was even 26%. We do not have a radical change here. We just do more of the same, increase the addressable market from a CHF 100 million market to a CHF 300 million market, where we have still room to grow in the area of in-line CT, computer tomography, security, 3D printing and miniaturization. We also moved some components which are, right now, in Hamburg, at YXLON, back to Flamatt because it belongs to the components and makes the whole process less complex.

The outlook -- so as a summary, we can say that the fundamental growth drivers are fully intact. We also believe that there's a moderate recovery of the semi market expected in 2020. Could be more than that, but we have to be careful because there's so many factors which could kick in and make the life much harder. But from a technical point of view, from a market point of view, it should be possible to start growing again in the next year.

We have a strong financial footing. We mentioned that before. The strategic focus is based on plasma control and X-ray, repositioning X-ray systems and the evaluation of strategic options for the ebeam technology. All these activities are in the middle of the transition. And we hope that by November, when we have the (inaudible) Day in Flamatt, we can tell you more about the current status at that time. We also have measures to considerably increase efficiency ongoing, and we will also continuously report on these successes.

Come to the last Slide, on 28, the summary of the outlook. We tend to say that the net sales in Swiss francs will be between CHF 350 million to CHF 370 million. This should be achievable by an EBITDA margin of 7.0% to 8.5%. We believe this is doable. Of course, always under the condition that there's not a geopolitical event or shift that makes our life much, much harder. We firmly believe that the lowest point of the semiconductor industry has been reached, and from now on, it will continuously go up in the next couple of years.

With that, I conclude my presentation here and give back to the moderator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have no questions from the phone, but we have a question from the webcast coming from [Simon Montain], which is asking, "What is the typical time from the IXM order to sales completion? What was the IXM order intake in '19 H1 versus '18 H1? How are IXM sales expected to develop in '19 H1 versus '19 H2?"

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Heinz Kundert, Comet Holding AG - Chairman of the Board & Interim CEO [2]

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It's a very, very tough question. The problem here is that it's really a component that is standardized or is something special. But in case of IXM, order to sales should be relatively months.

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Beat Malacarne, Comet Holding AG - Interim CFO [3]

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Well, then the second part of the question, what was the IXM order intake in '19 in first half year versus 2018, the intake, order intake of IXM in the first half year was about our sales amount, pretty much in line. And that was about the same also for last year. So it's a pretty much stable situation here. How our IXM sales expected to develop in '19 half year versus '19 half year 2, we clearly believe that the slight shortfall that we see in the security business and also in the NDT business, oil and gas, will gradually recover and come back. So this is just a fluctuation that we see, a certain volatility, but we believe that the business there is all intact and that the business will come back gradually in 2019.

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Operator [4]

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(Operator Instructions) Gentlemen, there are no further questions from the phone nor from the webcast. Would you like to conclude the call?

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Heinz Kundert, Comet Holding AG - Chairman of the Board & Interim CEO [5]

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No, in that sense, thank you very much for joining the meeting today, and we're looking forward to have you on the phone or personally in front of us in the next couple of months. Thank you.

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Operator [6]

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