Richard Blickman - CEO Corte Hennepe - SVP, Finance

Nigel van Putten - ING Peter Olofsen - Kepler Cheuvreux

Good morning, good afternoon, ladies and gentlemen. And welcome to Besi's Quarterly Conference Call and Audio Webcast to discuss the Company's 2017 Second 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. Corte Hennepe, Senior Vice President, Finance. [Operator Instructions]. 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. We will begin by making a few comments in connection with the press release issued earlier today, and then take your questions. I would like to remind everyone 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 the second quarter and first half year and also spend some time updating you on the market, our strategy and outlook. First, some overall thoughts on the past quarter and first half year, this is second quarter and first half 2017 performance substantially exceeded comparable prior year results due to ongoing strength in the assembly equipment industry this year, market share gains by our advanced packaging portfolio and the increased efficiency and scalability of our business model. First half revenue of €280.2 and orders of €369.9 million rose by 49% and 81% respectively reflecting a strong customer build out of advanced packaging capacity in 2017 for leading edge smartphone automotive and cloud service applications. First half net income of €76.7 million rose by a 140% versus the first fall of last year and exceeded by 17.5%, our net income for all of 2016, similarly net margins expanded from 17% in the first half of last year to 27.4% in the first half of this year as a result of higher gross margins combined with tight control of fixed cost overhead development. The second quarter results were also strong as we posted revenue of €170 million and a net income of 52.4 million which were up 56% and 118% respectively year over year. Growth exceeded expectations primarily due to earlier than anticipated customer deliveries, well certain [indiscernible] systems originally scheduled for the third quarter. In addition, orders grew by a healthy 29.5% versus the second quarter of last year as customers increased demand for a broad array of basis [indiscernible] packaging and plating systems serving multiple end user markets. Operating profit growth also exceeded expectations as gross margins reached 57.3% while fixed cost development was well contained. As such basis net margin reached 30.8%, the first time we have crossed the profitability threshold. In addition net cash and deposits increased by 20.8 million or 18.8% versus second quarter 2016 despite a working capital required to support our large revenue ramp and increased dividend payments. With that I will hand over to Corte.

Thank you, Richard. Basically due to '17 revenue increased by 54.3% and 56% versus Q1 '17 and Q2 '16 respectively. Growth was primarily due to a more favorable industry environment and significant expansion by IDMs and their respective supply chain of die bonding and capacity for next generation mobile devices with enhanced features. In addition Besi experienced broad based growth for automotives and high-end cloud sourced application. Orders of €150 million were down sequentially by 45.7% versus Q1 '17 as customers scaled back demand for next generation mobile devices after the large Q1 '17 capacity built still Q1 '17o orders grew by €29.6 million over Q2 '16 reflecting broad based growth across Besi's portfolio for a variety of end user markets, there is a particular emphasis on die bonding systems who cloud server and automotive applications. The customer type, IDM still contracted orders represented 64% and 36% respectively of total Q2 '17 bookings and a percentage most likely return to the market 60:40, 50:50 split in subsequent quarters. But this gross margin of 57.3% in Q2 '17 increased by 1.6 points versus Q1 '17 and exceeded prior guidance of 54% to 56%. Sequential gross margin improvement is mostly due to increased labor efficiencies and a more favorable product mix. Interestingly we achieved higher sequential gross margins despite at first four influences from the decrease in U.S. dollar versus fish the euro. Gross margin increased by 6.4 points versus Q2 '16 and by 6.5 points in the first half year comparison principally due to increased material and labor efficiencies as well as Forex benefits from the increase of the U.S. dollar versus the euro. Q2 '17 operating expenses increased by €3.6 million or almost 12% versus Q1 '17 an we're within prior guidance. The sequential increase is due principally due to higher warranty, service and other variable expenses associated with substantially higher sales levels. Fixed overhead expenses increased very little quarter to quarter, similarly OpEx grew about €5 million or 17.2% versus Q2 '16 due to the same factors along with some hired service [ph] in R&D personnel expenses. At quarter end Besi headcount increased by 6.5% sequentially by 20% for this year and 2016 principally as a result of higher Asian temporary production personnel in support of the large H1 '17 order ramp and expanded Asian operations. As you know scale out production headcount [indiscernible] downwards on a regular basis depending on anticipated order levels. The profitability and increased efficiency of Besi's business model in an industry upturn was evident this quarter. Net income of €52.4 million in Q2 '17 and €76.7 million in the first half year each substantially exceeded prior period comparisons. Profit growth was principally due to substantially higher revenue levels, continued gross margin improvement and on-going cost control efforts. Similarly net margins grew to 30.8% in Q2 '17 and 27.4% for the first half year well exceeding the upper end of internal expectation set at the beginning of the year. The effective tax rate of 13.7% for the quarter and 14.4% for the first half year was within our prior guidance of 10% to 15%. Besi continued to generate strong levels of operating cash flow this quarter even despite internally financing 49% first half revenue ramp versus last year. Excluding the €65.3 million due to '17 dividend payment, net cash increased by €21.1 million sequentially. As compared to Q2 '16 basis net cash increased by €20.8 million or 18.8% even accounting for increased dividend payouts year-over-year. You will also notice that our capital intensity is fairly low is €2 million of total CapEx for the first half year of '17. Our major investments are in our technology and people but our capital investment in bricks and mortar is mostly for fully account of our suppliers. During the quarter share repurchase activity continued on a regular basis, In Q2 '17 we repurchased a total of 20,000 shares at an average price of €45.56 per share. Cumulatively as of June 30, 2017 we have purchased 430,000 shares under the current 1 million share authorization at an average price of $0.03696 per share for a total €15.3 million. And with that I will turn the presentation back over to Richard.

Thanks. I would like to update you on our strategy, the market and the guidance for the third quarter of this year. One of Besi's strategic objective is to achieve a more scalable, flexible and lower cost manufacturing model, we thought it would be helpful to highlight our progress in this area today in light of our first half results and revenue achievements. To put our strategic progress in perspective we examined in this next chart two large revenue ramps over the past three years one in the first half of 2014 and the current ramp in the first half of this year. As you can see due to base his efforts in recent years to shorten cycle times qualify additional Asian fenders and increase the production capabilities of both our Malaysian and Chinese operations. We increased unit production by 40% on a comparable basis. We successfully completed this ramp at a gross margin improvement of approximately 13 to 14 points further highlighting the transformation of our production model. We achieved an annualized production run rate of €680 million this quarter with minimal CapEx investment indicating that we have the production capability to grow our business in excess of current revenue estimates by analysts. We will continue our efforts to enhance the production model in the years ahead by our common platforms initiatives and increased local Chinese production amongst other initiatives. Now a couple of words about the markets and our third quarter guidance, at present the industry environment remains positive with ongoing customer investment in a new technology upgrade cycle and specific applications such as smartphones automotive, cloud server and high end memory. [Indiscernible] recently upgrade its 2017 assembly equipment market growth rate to 16% up from 13% in May and 9% at the start of this year. Currently forecast growth to continue in 2018 with growth rate of 4% down slightly from 5% estimated in May. As most of you know our business has become more seasonal due to the increasing importance of more retail electronics applications as a driver a semiconductor unit growth. Besi's orders ramp in the first half of a year and then decline in the second half as capacity is digested and products are introduced. This year is no different the midpoint of our revenue guidance for the first quarter indicates quarterly, sequentially revenue decline of about 10% which is below the five years historical average decline of 15% albeit from more elevated Q2 revenue levels versus prior years. To summarize our third quarter guidance calls for revenue to decrease between 5% and 15% versus second quarter. This gross margin is anticipated to be in the range between 55% and 57% assuming we're earned forex rates. In addition OpEx should decline by 5% to 10% versus the second quarter levels. Assuming the mid-point of Q3 '17 guidance Besi forecast as revenue and operating income will substantially exceed the third quarter of last year. That ends my prepared remarks. I would like to open a call for some questions. Operator?

[Operator Instructions]. The first question is coming up from Mr. Nigel van Putten, ING. Go ahead, please sir.

My first question is I think we started to see some more meaningful divergence between Besi's performance this year and some of your peers, not that they are doing a bad job but you seem to be taking a lot of share in the first half and also your outlook for the second half seems to be a lot stronger. Can you give us some context on what is sort of driving your outperformance this year versus others?

It's all about choices and focus, so if you look at Besi's focus over the past many years we have focused on the most advanced applications, sometimes also referred to as high end, very selectively and by that focus our market position has strengthened gradually. Some of our peers have either even more focused strategy and into the higher end with different products platform choices, so one could say that our strategic development choices and the advanced packaging arena have been evidently to-date the right ones and less successful with others. There's also a broader market out of the 100% we have a market share of around 30% maybe somewhat more now, the many parts of the rest of the market which we do not focus on sometimes it's the lower end of the market, the middle end of the market so summarizing one could say we have currently the right horses in the race, the right focus as opposed to other which may have at this moment somewhat less successful focus but that doesn't guarantee any future direction because this market as we all know is very technology driven and it's all about choices and that is key to understand for the future.

And then as a follow up on that last point, choices, so could you give us some rough idea on your exposure geocamera and 3D sensing chips, is that very meaningful part of revenue in the first half and how should we expect that to develop going forward?

Well that certainly is and strong art of our involvement in the smartphone world, not also that there are many different solutions, many smartphone manufacturers have different camera concept. We have focused on certain areas and that has been very successful right now but my message is the smart doesn’t have only one solution, there are many diff solutions and overtime Besi has shown that we are able to make the right choices in the areas which grows the most and that is key of course to maintain.

So that one of your peers a sort of into the meaningful slowdown as we I guess look into the next period, next half year, next 12 months. Do you see any similar risks to your outlook towards or 2018, I know you don't want to quantify but just in general?

There's not only we always say there are three pillars to successful strategies so far, one of that is the mobile internet devices which is about 30% to 35% of our revenue then we have the whole computer world, the cloud server world in particular that's about 25% of our revenues are somewhat smaller but also very strong. Automotive has climbed to 20% of our revenue, the focus in the first half of the every calendar year so far has been very much on the new model so if the internet basis [ph] second half is clearly very strong in automotive, that has already developed since the end of last year as well. Also the whole cloud server world is a very positive investment around. So yes the percentages may shift but overall the bottom line for this sector is a positive one.

The next question is coming from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead please sir.

Three questions from my side, first on the demands from IDMs, in the press release you talk about capacity expansion, driving the amount for die bonding equipment in the mobile space, typically these flagships, smartphones are launched in Q3, what does that mean for the die bonding capacity expansion, has that been mostly dumb for this year, will that continue in Q3? Maybe even in Q4, maybe a bit more color there. Then a question [indiscernible] advanced packaging, the assessments took off last year, this year your question seem to be digesting some of this capacity, based on your discussion with clients, do you see the investments potentially picking up next year and then finally a financial question related to taxes for quarter I guess, if I look at the cash flow statement, the tax charge has been lower than what we have seen in the P&L in recent quarters, are we likely to see something similar in coming quarter's and if so why is that?

So let's start with your first question. It ties also to the other question earlier, die bonding equipment is needed for every semiconductor whether that is in mobile internet devices or in the microprocessor arena or whether it's in memory or every chip has to be bonded. So there is always a shift between the first half of the year as you said where it's more focused on the flagship but there are also Chinese smartphone manufacturers in the meantime very much advanced, it has some what different cycles, but as I mentioned automotive is strongly expanding also in the other space in the cloud server arena. So please understand that die bonding is not only related to smartphones. And depending upon how the markets will further develop whether the underlying strength currently leads into 2018, that's of course a question on everybody's table but so far all of our customers, peers are expressing a very positive underlying sentiment. On the wafer level arena, yes last year was a broad scale first round investment. It's clear that there are some digestion and it's also very well possible that that will further expand in the course of the next year still there's a major cost difference between wafer level and using substrates and that battle is ongoing and since cost is the most important factor in this market the end of substrate assembly is certainly not around the corner, so that will continue for years to come and on certain high end there are many advantages in wafer level application especially in the processor arena, still memory is highly viable in the term [ph] and there's a major field in between which is [indiscernible] chip interconnect technology with free flow [ph] and that landscape will change slowly as it has always done similarly to flip chip in the past 15 years. Next question about [indiscernible] you can certainly--

Yes, there is a significant delta between the taxes we are reporting our P&L and the taxes that we actually pay as you can see in our cash flow statement and that has to do the fact that we still have tax laws carry forward available and specifically if you look in our annual report you see specification of tax laws carry forward available in the Netherlands in the U.S. and in Switzerland and as long as we have tax laws carryforwards available in the IFRS you typically report the statutory tax rate for each country but as long as you can offset that tax wise against the tax laws carry forward the cash out charge will be very limited. How will that proceed for this year, we will see a gradual increase of the cash out and cash flow -- with significant but you see that in the annual report in the meantime Switzerland all of it is consumed so in years going forward there will be any increase but still at the level to the statutory rate in Switzerland which is 10% and for the rest only when all tax loss carry forward is consumed you will see that the tax outlook that we hire, so currently that is still limited. So it's a delta between tax laws carry forward, still available and actual payments in countries where we don't have tax losses.

Your next question is from Mr. Nigel van Putten, ING. Go ahead, please, sir.

If we talk about automotive on the surface space and both look are very strong at the moment. If I zoom in on the surfer ramp it seems that the space might be continued to be very exciting next year with strong demand for logic and 3D NAND I guess that’s know but also now what I'm reading at least high bandwidth memory coming on steam. So first question, is this technology move potentially positive into sort of the coming years and then on the automotive space I guess that market is moving towards you as a lot more sophisticated technology is now in those cards, just to make sure I'm making the right assumptions. How does your market share compare in this space compared to your overall level of like you said around 30%?

Let's start with automotive, historically our market position in automotive has been higher than that’s in other markets in general and the reason for that is that automotive requirements are substantially more stringent than that for consumer end products so qualifications in the automotive space are lengthy and all of our products have been evolved in that space for many, many years with the leaders in the European market, [indiscernible] XP, Bosch [ph] and Continental in particular and then in the U.S. any customers in the automotive space but even in Japan. So, with increasing growth in that space our position and our strength only to help us -- will only help us to benefit even more in that growth. In the other questions, yes both on the next generation memory and also the logic ramp for server devices we are definitely benefiting from that and we will benefit in the years to come, but still it's very high end, it's not the largest market in terms of volume, automotive is a much higher volume markets and we've seen that earlier with DCB first rounds and I also answered that to an earlier question. These ramps are steps of not covering the entire industry also because the technologies have different assumptions and variations, the cost predominantly because of yields is still holding these new technologies somewhat back.

[Operator Instructions]. Mr. Blickman no further questions at this moment. Please proceed.

Then I thank everyone for attending this call. In case you have any further questions please do not hesitate to contact us. Thank you. Bye.

This concludes BE Semiconductors' event call. Thank you for attending and you may disconnect your lines now.