Richard Blickman - CEO Cor te Hennepe - SVP, Finance

Peter Olofsen - Kepler Cheuvreux Nigel van Putten - ING Robert Sanders - Deutsche Bank Edwin de Jong - NIBC Markets

Good morning, good afternoon, ladies and gentlemen. And welcome to Besi's Quarterly Conference Call and Audio Webcast to discuss the Company's 2017 First Quarter Results. The audio webcast is available on Besi's website www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Mr. Cor te Hennepe, Senior Vice President, Finance. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without written permission from the company. I'd now like to hand the call over to Mr. Richard Blickman. Go ahead please, sir.

Thank you. Thank you all for joining us today. I 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 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 evolve 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 of our first quarter ended March 31, 2017, and also spend time updating you on the market, our strategy and the outlook. First, some overall thoughts on the past quarter; in Q1 this year, we realized strong revenue growth in line with guidance, operating profit that exceeded the expectations and a 162.4% order increase versus the fourth quarter last year, reaching €239.8 million. Also, our first quarter results positioned Besi, for a strong first half 2017 financial performance. This substantial order growth in the first quarter was due to a variety of factors. The most prominent of which was a significant expansion by IDMs and their respective supply chains both die bonding capacity for next generation mobile devices. Our leading-edge portfolio of multi-module, epoxy and flip chip die bonding systems are uniquely positioned to capitalize on this capacity build by first movers in the industry will require the most demanding specifications in terms of form factor, pitch, complexity, and production throughput. In addition, Besi also realized broad based order growth for its advanced packaging systems addressing automotive and high-end cloud server applications. We also experienced increased demand by Chinese subcontractors for smartphone and mainstream electronics applications. Order growth in these areas reflects a continuation of trends from 2016. In the first quarter revenue increased by 18.4% versus Q4 last year and 39.5% versus the first quarter last year. Due to the benefits of a more favorable industry environment, that started at the end of the fourth quarter as well as increased demand for smartphone applications. Revenue growth combined with continued improvement in gross margins to 55.7%, and tight control of baseline operating expenses, enabled Besi to generate net income of €24.3 million in the first quarter and a net margin of 22.0%. Net income levels more than tripled versus the first quarter last year while net margins more than doubled versus the year-ago period, reflecting the announced profit potential of our business model. With that, I'll turn the presentation over to Cor te Hennepe.

Thank you, Richard. Our strong Q1 2017, revenue growth was within by this prior guidance of 15% to 20%, as compared to the previous quarter. Perhaps the big story as Richard mentioned, was the substantial growth in our order book, both sequentially and year-over-year. Q1 2017, order growth driven mostly from IDMs, this sequential growth of €145 million or 284%, while subcontractor orders increased by € 3.0 million, or 7.5%. As you know, our mix between IDMs and subcontractors is typically 50-50 or 60-40, so we consider this as more a one of event - shift in our order mix. Besi's gross margin rows up to 55.7% in Q1 2017, an increase of 2.5% versus Q4 2016 and 6.5% versus Q1 2016. This quarter's gross margin exceeded prior guidance of 52% to 54%. We continue to operate at the high-end of our target gross margin 50% to 55% given our leading market precision in advanced packaging applications between [indiscernible] incremental efficiencies from our Asian operations and favorable foreign currency trends. In Q1 2017, improved gross margins were principally due to increased material cost efficiencies particularly in the year-over-year comparison and ForEx benefit related primarily to a decrease in the value of the Malaysian Ringgits versus the Euro. In addition, Besi benefited in the year-over-year comparison from an increase in the value of the U.S. dollar versus the Euro. Besi's Q1 operating expenses increased by €0.7 million or 2.3% versus Q4 2016, this was less than prior guidance of an increase of 5% to 10%. The increase was due primarily to higher bonus and benefit compensation associated with our 2016 financial performance, partially offset by lower advisory costs. As per the chart presented, you can see that baseline OpEx is growing very slowly versus our top-line development given ongoing cost control efforts as well as the benefits of continued functional SG&A transfers to Asia from Europe. Of note, the headcount at March 31st this year increased by 12.8% versus end of last year principally as a result of higher Asian temporary production personnel in support of the large Q1 2017 order increase and expanded Asian operations. The full impact of these headcount increase will be seen in our Q2 2017 OpEx guidance along with increased revenue base variable expenses. Besi's net income reached €24.3 million in Q1 2017, an increase of €7.6 million or 45.5% versus Q4 2016, and €16.3 million or 204% versus Q1 2016. Similarly, net margins increased to 22% in Q1 2017 versus 18% in previous quarter and 10.1% in Q1 2016. And but traditionally is a weak quarter. Net income growth was principally due to our strong revenue development, continued growth margin improvement and operating leverage in our business model from ongoing cost control efforts. The effective tax rate averts on slightly in each of the comparable periods. Our liquidity position continues to improve with net cash rising to €175.7 million at the end of Q4 2017, an increase of €7.6 million or 4.5% versus Q4 2016, and €27.3 million or 18.4% versus Q1 2016. Growth occurred despite €18 million invested in working capital to finance the large order ramp during the quarter, and €7.5 million of cash used for share repurchase. Remember, that we intend to payout approximately €65 million for dividends in Q2 2017 and to reduce net cash balances at quarter-end from current levels. Regular share repurchase activity continued in Q1 2017 with approximately 167 ordinary shares bought at an average price of €35.03 per share. Cumulatively as of March 31, 2017 a total of approximately 293,000 shares has been purchased at an average price of €33.42 per share for a total of €9.8 million. And with that, I'll turn the presentation back over to Richard.

Thanks Cor. Now, I'd like to update you on our strategies, the market and guidance for the second quarter. Looking forward, it still remains much realized potential to increase Besi's market position and profitability in the years' ahead. Last quarter, we laid out our updated strategic agenda which we are pursuing actively. Currently, our principle focus is further scaling our Asian operations and supply chain to support the current order upturn and the on-time customer deliveries this year. We have sufficient capacity to handle this ramp partly due to the efforts of the past three years to qualify additional Asian handlers and increase the production capabilities of our Malaysian and particularly Chinese operations. Now, couple of words about the market and our second quarter guidance. We have witnessed the favorable upward turn of the assembly equipment market in late Q4 last year, which has continued into the first quarter of this year, and to-date in the second quarter. The underlying baseline for semiconductors remains positive with Gartner recently upping semiconductor growth forecast from 7.5% to 12.5% this year. PSI has not revised its 2017 and 2018 forecast for the assembly equipment market yet from the start of the year. They initially forecast growth of 9% in 2017, which could be at the low end of estimates given in the first half of 2017 industry activity. There are many drivers for our market at present, such drivers include anticipated new smartphone and electronic device introductions, the continued shift to smaller geometries and new applications for semiconductors in cars and also in the digital society in general. In addition, we will also benefit from the other move to the cloud and the rapid emergence of the Chinese semiconductor industry. Such applications provide strong underpinnings for growth and the new advanced packaging solutions and place the Besi's technology strength and market leading position. Besi's second quarter this year guidance calls for revenue growth between 40% and 50% versus the first quarter. Gross margin is expected to be in the range of 54% to 56% and OpEx should grow by about 10% to 15% consistent with the recent headcount growth and higher anticipated sales levels. Given our improved 2017 business outlook and the midpoint of the second quarter 2017 guidance, we have forecast the operating income for the first six months will exceed the full year of 2016 levels. This ends my prepared remarks. I would now like to open the call for some questions. Operator?

Thank you, sir. Ladies and gentlemen, we're starting the question-and-answer session now. [Operator Instructions] Our first question is from Mr. Peter Olofsen of Kepler Cheuvreux. Go ahead please sir your line is open.

Good afternoon, gentlemen. Clearly very strong numbers looking at the order intake on the IDM side. Just trying to understand what's driving this demand and you're referring to next generation mobile devices, are there specific applications or features in these devices that are driving the demand like centers or is it pretty broad based for different types of chips going into these devices?

Well, it's not only about smartphone, son, it is as we indicated from all three major markets and the high-end server market, automotive also very strong and also the smartphone arena. There are certainly new applications included with tighter specs and more challenges which have been developed by many customers over the past several years and should be implemented in next generation product, whether that is Sanders [ph] or whether that has to do with other features, it's a very broad based increase. And clearly, IDMs area always leading the way and some contractors tend to follow. But also with the consolidation in the industry more and more transparency is available through direct ordering of IDMs, through the subcoms and installing the capacity either at the IDMs but mostly in some contractors. So, that is the current picture.

And when you say it's broad based, you also mean within the mobile device market meaning you see it in various supply chains?

Yes. And as we mentioned in the call, in February, Besi is more and more strongly represented in the Chinese smartphone world on top of our many years strength in the leading end devices for many years. So, a great broad based smartphone world.

I heard you talk about advanced packaging for high-end cloud server, is that particularly TCB related or what kind of products should I think of?

It's a combination. So, TCB is very low in volume for the very high, high-end and the mainstream you can characterize still using current, but also very advanced technologies in [indiscernible] but also in wire link for that matter. So, it's pushing the envelope of existing technologies and slowly using new technologies, they were existing - I'm not able to fulfill and the technology criteria.

Okay. And maybe then final question on my side, to what extent do you think the very strong order intake from the IDMs is sustainable?

So, as we know very well, the world is cyclical and clearly, we are in a positive second as mentioned. And overall you can read with many of the articles on this industry and normally equipment in particular. But at the same time, there is clearly a next generation technology on the way, if we take [indiscernible] out, which we also mentioned expecting 2017 and 2018 to be positive growth years. What it will continue at the pace we see, we have seen in the first quarter is of course Besi. But as we mentioned, Q2 started of similarly well as Q1. So, we'll have already some significant visibility into Q3. So, and so far, and so good.

And maybe just to clarify on the visibility that you have for Q3 already. If I look at the backlog that you have going into Q2, that's higher than what you are guiding for in terms of Q2 sales, so apparently somewhat that is already for the second half? Is that because that's declined once the machine in Q3? Is that the key reason or is there any indication that your lead times are lengthening?

No, no the customers typically have program installing a certain capacity. When it's one machine, it's easy, but when it's multiple machines the installation is typically organized over a period of time. So, there are certain orders which are partly shift in Q2 and partly shift in Q3.

Okay.

And but that's always the case that you have seen very well that the backlog going into Q2 and the revenue guidance for Q2. Already gives us a very good visibility into Q3.

Okay. That's clear. Thank you.

Our next question is from Mr. Nigel van Putten of ING. Go ahead sir, your line is open.

Good afternoon, gentlemen, and congratulations on the strong executions and the order intake. I have - some of the questions already been answered. Yes, first one is on the market forecast by Peter You said that it's a bit conservative, but if you look around, do you think your growth in 2017 is primarily driven by the market upturn or is it mostly due to market share gains?

Well, it's a very interesting question. I assume, we have seen nowhere the growth in orders forecasted by the independent market organizations. And like our increase, so if you analyze that it could very well be that we are gaining market share and that will then be very significant. How conservative if you say is one never knows but they [indiscernible] for instance in 2016 previously I've guided into a negative year and in the end, it ended with a growth of double-digit. So, this industry is hard to predict, but the conclusion for us is we started off very well, and on a very good base.

Okay, understood. And then one follow-up, Peter just asked about IDMs being larger percent of the order book, I think the U.S. based IDM at its manufacturing day was quite open about its intention to focus more on packaging and I think the major Taiwanese foundry also said, it's going to spend up to a billion on its backend processes besides the cyclicality do you see sort of a longer-term trend where historically called back-end processes or equipment is becoming more important for these leading-edge fairs?

Yeah, first of all more and more advanced packaging is becoming the bottleneck for new product introduction for IDMs, so their focus on developing at the right point in time, the advanced packaging solutions has increased in comparison to the trend over the past years, but still the volume production will be installed at many subcontractors. But the position of the IDMs in that process is more predominant than that used to be in the past simply because it's more critical, even more critical going forward.

All right. And then maybe there is a quick follow-up on that is that, do you think that you are particularly good well-positioned because of the higher currency or equipment typically has to cater to this demand?

Well, currently you could draw that conclusion. We are very well-positioned and very close to the winners in this industry at this moment. But that is a very tight growth to walk on, every day you have to prove your solutions being superior to that of your competitors but it's fair to say that currently we have a very strong position.

Honestly, thanks, and congratulations again.

Thank you.

Thanks.

The following question is from Mr. Robert Sanders of Deutsche Bank. Go ahead sir your line is open.

Yeah, good afternoon, and thanks for taking my question. My first question was just a clarification which was just regarding the big time in foundry do you think that's classified under IDM on your nomenclature ICM I just wanted to double check in my first question.

That's under IDM.

Got it. Okay. And then when you think about the order pattern relative to history what do you think explains this dramatic change in order pattern relative to history, it's very rare that you get this kind of lumpiness is it more driven by technology shift or is it that the stars have aligned, everyone is fully utilized and everyone meets new capacity ASAP?

It is more of the first and clearly, our current set of products is uniquely positioned and in every qualification and that's why we have received such strong amount of orders on the very broad base. This is not one word to customer phenomena. So, realizing that that will put us also in a much stronger position going forward.

Got it. So, we shouldn't read into this that we…

Because it's not true.

Got it. So, we shouldn't read into this that somehow wafer level packaging fan out is suddenly reached an amazing cost performance threshold and is suddenly going to go - busters because that wasn't perspective I got last time we chatted.

No, no, it's more contrary, it's a very important question you are posing. Yet again, the cycle is predominantly using the existing technologies and the new technologies fan out TCB are still pushed out into the next generation in volume. So, it's very interesting to see that this industry has the possibility to push those envelop.

Got it. Okay. Thanks a lot.

Our next question is from Mr. Edwin de Jong from NIBC. Go ahead sir, your line is open.

Good afternoon, gentlemen and couple of questions left. Could you just tell maybe a little bit about pricing developments and volume developments going into Q1, Q2? Is there a little bit about next maybe? And then on the backlog, could you give an idea of how it is split in by geography? And then as a last question then and how much way you have to go before you really are at full capacity?

Excellent. Well, the first question pricing and volume. You can see also in the guidance for the second quarter that pricing is still fairly strong of our products. It depends on several factors of course the competitive position, it depends on the dollar-euro exchange rate. But so far, there are no changes in these trends. Excuse me?

So, it is mostly volume development?

Yeah, but under the current competitive pricing position. And maybe some improvements even because in the current situation in the industry there is a very strong demand, so that always supports pricing of equipment. Your second question, backlog and geographies, it's very much as usually develop some with Asia being a larger part than the rest of the world, so U.S. growth. And...

But within Asia you said, getting more China.

It's more however, if the percentage in China has again gone up to the first quarter compared to the fourth quarter and one can expect it going forward to percentage in China will increase further, and we are well prepared for that with more and more systems we build in China in our own facilities. And then are we at full capacity, no, not yet. We are able to extend our capacity further; we have shared some models in the past. And our current infrastructure is certainly able to focus the current demand but also further increases our possible. So, key is to understand China coming on stream. So, we have shared last year we did close to 140 systems in our China facility, this year that will be certainly close to 300. And we also expanded Malaysia. So that's not the concern at this moment.

Okay, great. And then maybe and so Q2 is great. Any outlook for Q3, and also it still good. and Q4, do you already have any indication or idea where that could be going?

No, that's too early to tell. You can only view some statistics, but that can also surprise in different ways. And we're look ahead usually one quarter, this time we are able to look bit further than one quarter. And but that's it.

Okay. Okay, perfect. Thanks.

We have further question from Mr. Peter Olofsen of Kepler Cheuvreux. Go ahead, your line is open. Mr. Olofsen your line is open.

I had two follow-ups. First, on the gross margin, in the second half in terms of sales the IDM share will be pretty high, does the share between IDM's and subcontractors affect your gross margin, is there are a margin differential between the two?

The answer is no.

Okay, that's all clear. And then just to clarify that the ECMC is classified as an IDM. Is that correct, is that what you said?

Yes.

Okay, because in some of your presentation, you have showed a logo as among those subcontractors, but okay, it's good no doubt, I mean in IDMs. Okay, thank you.

We have another question from Mr. Robert Sanders, of Deutsche Bank. Go ahead, your line is open.

Yeah, just a follow-up question, would be on Intel. They are one of the few; I think it was mentioned earlier in a previous question. I mean they are the one of the few companies that develops its own packaging check. I was just wondering if there is anything in the server or graphics, or whatever area, I mean there has been a lot of talk about for example, HPM that could lead to a significant change in the amount of they spend and whether that could affect you in this way. Because it does seem quite unusual for them to spend so much more, and I am just wondering if there is any technology disruption that could be there, that could benefit you guys? Thanks.

Let me first of all to clarify the company you mentioned is not the only one, developing packaging solutions. The world is developing packaging solutions, all the IDMs and also the fabless companies. And as I responded to an earlier question, more and more the development of assembly solutions is key to the performance of the end product, as opposed to in the years back, assembly was a capacity part of the industry and assembly electronic building blocks. So, there is more to this world than only that company developing on an ongoing basis, new package designs and more complex 3D solutions using different technologies and key is to be engaged with the broad based of the assembly packaging development companies in all the areas, whether that is the server world or the telecommunications, smartphone world, or the automotive world for that matter. And there are no - let's say at this moment significant changes that there is no significant changes, it's even more but the opposite, as I answered to an earlier question. It's again generation, which uses existing technology, where our systems time again prove to be able to fulfill the accuracy requirements, but also with further increase speed, reduced the cost of ownership and on top of that the stability as superior to many of our competitors. So, it's not because of the world's change shift or however you want to call that.

Got it. I mean I just - the reason I mentioned is because ASM specific which is probably your closest peer. I don't think they are seeing this level of strength and if anything, I think they are going to see an order decline in the second half. So, just it seems to be that they are saying that the market is peaked on orders and you guys are even more bullish on them which is unusual, so I was just trying to get to them. But I guess there is not much you can say on that. Thanks.

Okay. Thank you.

We have a further question from Mr. Nigel van Putten, from ING. Go ahead, your line is open.

Hi, thanks. Yeah, I have a couple of housekeeping questions. I was dropped from the line for a bit so, apologies, if I make you repeat, Cor. The OpEx level for the second half, can you give a bit of guidance. Second question is on the interest, for the quarter was a bit higher, part of that was FX. What should we sort of assume for the quarters ahead and then the tax rate for the full year? Could you provide a bit of guidance there as well?

Okay, cost level as you can see in the guidance, we expect an increase of 10% to 15%. That goes along with the increase of revenue. As you know that a number of components of our course related to the volume in revenues, like warranty, like some sales commissions and like some let's say freight cost - outgoing freight cost to customers. So, there will be typically the main driver behind this increase as we guided in Q2. And financial income, basically there is the cost for the convertible. There is also what you call IFRS component in the interest so which not only the 2.5% cash out, it's also partly an IFRS component which has to do its valuation of the possibility to exchange against shares, so against equity. And part of it is ForEx that is mainly related to difference in timing of - we had immediately. But sometimes the rates we have to use are a bit difference from the banks then it's not really loss or gain. But it could show up in other line in the P&L, so that's technicality. But going forward, the financial cost will be more or less in line with Q1 could be somewhat low, because we had somewhat more ForEx, but more or less in line to slightly lower. And the overall income tax - effective tax rate as last year Q1 is slightly higher and the other part is as we have some more LPI cost in our Q1 traditionally. But over the year, we guided between 12% and 15% and for now there is no reason for a change.

Clear. Thanks.

[Operator Instructions] Chairman, we have no further questions at this time. Please continue.

Well, thank you all for joining this call. And if you have any further questions, you know where to reach us.