Richard Blickman - CEO Corte Hennepe - SVP, Finance

Peter Olofsen - Kepler Cheuvreux Nigel van Putten - Kempen

Good morning, good afternoon ladies and gentlemen and welcome to Besi's Quarterly Conference Call and Audio Webcast to discuss the company's 2018 First Quarter Results. You can login through the audio webcast via Besi's website www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Mr. Corte Hennepe, Senior Vice President, Finance. At this time all participants are in listen-only mode. And later we'll conduct the 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 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 first quarter ended March 31 and also spend time updating you on the market, by strategy and outlook. First, some overall thoughts on the year and Q1 results. Besi's Q1 2018 results were in line with guidance and were positively influenced by continuation of many favorable trends from 2017. Our financial performance benefitted from an extended industry upturn, ongoing customer investments, in advanced packaging applications and Besi’s strong market position with key customers and supply chains. As such, revenue and net income increased by 40.5% and 52.7% respectively versus the first quarter of last year. Q1 2018 orders also grew by strong 37.8% versus Q4 2017 to reach €205.8 million due primarily to capacity additions for smartphones applications both IDMs and Asian subcontractors. First quarter 2018 orders declined by 14.2%, however, versus exception of these strong levels recorded in the first quarter of last year. In addition Q1, '18 gross and net margin showed further steady improvement due to increased production efficiencies and strategic execution of cost reduction initiatives despite adverse influences from the 13.5% average year-over-year decline for the U.S. dollar versus the Euro. Besi's strong year-over-year revenue growth reflected broad based demand across our die bonding and packaging portfolio and was slightly above the midpoint of guidance. In addition, it reflected increased demand by Asian customers for smartphone and higher performance computing applications, and North American and European IDMs for automotive and cloud server applications. Similarly net income increased by €12.8 million or 52.7% and net margin rose 1.9% to 23.9% as continued revenue and gross margin improvement more than offset higher operating expenses related to variable compensations and the build-out of our Asian infrastructure. In fact, baseline OpEx increased by only 1.6% sequentially highlighting our careful or wealth management. Quarterly sequential profit comparisons versus Q1 are highly influenced by the level of favorable compensation in each quarter. As such, reported first quarter 2018 profit levels declined by €6.5 million versus Q4 2017 due to a €5.6 million sequential increase a variable compensation, as well as 5.7 point increase in our effective tax rate to 16.3% as the majority of such expenses are not tax deductable. Excluding such efforts, net income declined by less than 1 million between the two quarters. Similarly net margins on this basis declined slightly from 31% to 30.1% sequentially and has exceeded 30% net for the past four quarters underscoring the successful execution of our business strategy. Besi's cash generation was again strong in the first quarter of 2018 with net cash and deposits expanding to €290.1 million, an increase of €42.5 million or 17.2% versus the fourth quarter of last year, and €114.4 million or 65.1% versus the first quarter of last year. We utilized 6 million of excess cash flow this quarter to announce shareholder value by a regular share repurchases activities. At quarter end, the current 1 million buyback share program was about 70% complete with cumulative purchases totaling €32.4 million as an average price of €47.78. Besi's capital allocation policy seeks to provide a current return to shareholders in form of cash dividends and share repurchases while retaining a capital based sufficient to fund future growth opportunities. Since 2011 we have made distribution of €454.9 million including the 2017 dividend and share purchases to-date in 2018. Further, our dividend yield continues to greatly exceed those of our peers and you see in the accompanying chart. Earlier today we hosted our 2017 AGM at which all agenda items were proved including two for one stock split of basis or in a shares in light of the almost 1400% increase in our stock price since 2013. In this way we hope to increase the liquidity and affordability of Besi’s stock for both retail and intuition of assets. In addition, Mr. [Nick Hook] and Mr. Carlo Bozotti were appointed as a new members of the Supervisory Board. Nick will replace [indiscernible] retiring after nine years of service. Post his retirement from STMicroelectronics, Carlo will join in July and the Board will temporarily expand to six members for this year. Now I’d like to update you on our strategy, the markets and our guidance for the second quarter. One of the keys to Besi's success in recent years has been a disciplined focus on executing strategic initiatives to increase our technological advantage, addressable market and market penetration all while continuing to reduce structural cost and increase efficiency in the cyclical industry. Our 2018 strategic focus centers on the further build-out of our Asian infrastructure with a particular emphasis on Singapore sales and development support, and the expansion of Besi's China production facilities. Towards these ends we will continue to transfer of certain development sales, service and admin personnel functions from Europe to Singapore this year. Similarly, we have started initial production of packaging systems and additional [indiscernible] market systems in China and have recently completed the Lucent capacity expansion which we highlighted last quarter. In this way we aim to further optimize our Asian production and supply chain models and increase Besi's penetration both the emerging Chinese semiconductor market. Now a couple of words about the assembly equipment market and our second quarter guidance. As seen on this next chart, industry analyst continue to expect assembly equipment markets growth into 2018. However, subsequent to quarter end feel as our research downward would revise it 2018 market growth estimates from 18.1% in January to 12.5% based on announcement by several semiconductor manufacturers indicating a softening of the market trends for 2017. For the second quarter 2018 we estimate that Besi's revenue will grow by 10% to 15% versus the first quarter and that H1 2018 revenue will rise approximately 17% versus H1 2017. At the midpoint of the second quarter 2018 revenue guidance we also anticipate that gross margin should remain strong with a range of 55% to 57% in the second quarter. Such guidance implies the gross margin range of approximately 56% to 57% for the first half year 2018 versus 56.7% for the first half of 2017. Further we guide that the Q2 OpEx should decrease by 5% to 10% versus the first quarter levels due primarily to reduce variable compensation expense. As a result we expect significantly higher operating profit both on a sequential quarterly and also half year comparable basis. That ends my prepared remarks. I would like to open the call now for some questions. Operator?

[Operator Instructions] The first question is from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead please sir.

A couple of questions from my side. Maybe best to take them one by one, starting with the sales outlook when I look at your sales guidance for Q2 it’s a bit lower than the backlog at the start of the quarter. Is that because some of the capacity expansion in smartphone will take place later in the year than what we typically see or is it in other markets where you see some clients asking for shipment in H2 rather than in Q2?

Well, there is no quarter ever that all the backlog is delivered in this next quarter. So it is a mix of partly orders out of backlog plus new orders received in the first part of the quarter. So yes, we have orders for Q3 already so that is what it is.

But there is no specific end market where these orders for H2 relate to - it’s for several end markets?

Yes, across the board.

And then a follow up on the [Fearless Eye] forecast and the reduction to that forecast that you referred to based on the discussions you have with clients. Do you also sense that they have become a bit more cautious on their spending intention therefore you agree with the more cautious outlook of Fearless Eye or do you sense that that clients are still optimistic and then have not really changed their minds?

Well, in this world you can look forward about one quarter, three months feasibility and that has not changed, so none of our customers are able to give you a precise forecast further out. If you look back to Fearless Eye reliability and forecasting that also reflects the uncertainties in the end market. They have been both adjusting upwards or downwards during every year, so today we see many companies reporting. Some are reporting cautiously, others are reporting very positively. It's a mixed landscape, but still how many years have we had growth over 10% in two years sequentially. So better question is, how far will this upturn last? And the stock market is right basic value evaporated nearly by 20% today in the past four days close to 30%. So shareholders are always right. So who are we to say that that is not right?

Well, I'm not suggesting you should Fearless Eye just wondering whether you recognize what Fearless Eye but it seems your views are aligned with guys in that sense?

No, our views are irrelevant. We live by orders day-by-day and the best we can forecast for Q2 is what we have guided and that's it.

There may be specific question on your exposure to the Smartphone market. I think in the Q4 goal you indicated that the expectation was that additional players beyond Apple would adopt 3D sensing, do you still see other players adopting 3D sensing this year? And to what extent has the timing and the potential size of that adoption changed since the beginning of the year?

Well we have not released any specific guidance about any component in Smartphones. And also if you look back in 2017, but that is true for every year, the most difficult product to forecast are the Smartphones since the first phones because it’s highly dependent upon retail end markets. So also last year if you look at all of our quarterly press releases and conference calls, we have not been able to give you any stronger guidance than what we have done per quarter and we are able to adjust to any change in the month whether that is up or whether that is down. We have demonstrated 60% increase quarter-over-quarter, but also we had slower quarters. So if you simply look at the revenue per quarter, it is fluctuating. Last year’s peak was Q2 in revenue this year we may well exceed second quarter revenue compared to second quarter last year. What will happen in Q3 and Q4 nobody knows. Last year also the orders for Q3 and Q4 mostly come in, in the quarter preceding that quarter, and that's as good as it gets.

And then final question from me, one of your competitors Asia Pacific last week talked about I think issues with component supply, is that also something you have been facing or have you been well able to secure components?

So far we are certainly able to secure components. If that would have been the case a shortage we would have mentioned it.

The next question is from Mr. Nigel van Putten from Kempen. Go ahead please sir.

I want to discuss maybe some other parts of the business, specifically if you take the pie chart there is also typically a huge server and computing part and the automotive, could you may be give us a bit more indication or an impression on how those markets are evolving this year at least qualitatively?

So far they're developing above expectation and that's not difficult to imagine. If you look at first half year ’17, first half year ’18 guidance, then you will see a growth trend and if the other data points of the Smartphone worlds are correct, you can easily understand that the other two are doing very well.

And then maybe a follow up on this. If I remember correctly these business are a bit less seasonal, does that imply and again without quantifying it that also for the second half of the year we should perhaps see continued order activity?

Well, so far that looks intact and if you follow the major end customers and they're releases that should be the case, but also here the market is fallen down and it's too early to tell. You have one quarter feasibility, but you may be right from Fearless Eye still double-digits forecast growth. That's certainly those end markets are in good shape.

And then perhaps more geographically, you talked about the China infrastructure being built up again this year further, just in terms on the sales outlook or penetration or your activities there, do you see continued growth there or is there anything specific or not specific but just a general sentiment you can share with us?

Well, first of all as a point of note and Q1 revenue 40% was directly to China. And if you remember in the past three, four years that came from below 30% to now 40%. So Besi's position in the major higher end Chinese customers is increasing step-by-step, year-by-year. We've indicated that some of our peers competitors it's about 50-50, but more towards the low end. Besi is very successful in the higher end. So our strategy and building our infrastructure has worked so far very well look at our margins also very well and that is that trend will continue.

[Operator Instructions] There are no further questions. I hand over the conference to you Mr. Blickman. Go ahead please sir. End of Q&A:

Well, thank you all for taking the time to listen to this call and if you have any further questions, don't hesitate to contact us. Bye-bye.

Ladies and gentlemen, this concludes the Besi’s conference call. You may now disconnect your lines. Have a nice day.