AIXTRON's (AIXG) CEO Martin Goetzeler on Q4 2015 Results - Earnings Call Transcript

Aixtron Aktiengesellschaft (NASDAQ:AIXG)

Q4 2015 Earnings Conference Call

February 23, 2016, 09:00 AM ET

Executives

Guido Pickert – Director of Investor Relations

Martin Goetzeler – President and Chief Executive Officer

Bernd Schulte – Chief Operating Officer

Analysts

Guenther Hollfelder – Baader Bank

David Lowish – Generation Investment Management

Kristen Owen – Oppenheimer

Srini Sundar – Summit Research

Malte Schaumann – Warburg Research

Operator

Ladies and gentlemen, welcome to AIXTRON 2015 Annual Results Conference Call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, Director of Investor Relations at AIXTRON, for opening remarks and introductions.

Guido Pickert

Thank you, operator. Good afternoon to the listeners from Europe and good morning to our U.S. listeners. Let me start by welcoming you all to the AIXTRON 2015 annual results call this year. My name is Guido Pickert, Director of Investor Relations at AIXTRON SE. I'd like to welcome our President and CEO, Martin Goetzeler as well as our COO, Bernd Schulte.

As the operator indicated, this call is being recorded by AIXTRON and is considered a copyright material. As such, it cannot be recorded or re-broadcast without express permission. Your participation in this call implies your consent to this recording.

As with previous results conference calls, I trust that all participants have our results presentation slides, Page 2 of which contains the usual Safe Harbor statement. I will therefore not read it out loud, but would like to point out that it applies throughout the call.

You may also wish to have a look at our latest IR presentation, which includes additional information on AIXTRON's markets and its technologies, which is available on our website. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or a transcript on our website at some point after the call.

I would now like to hand you over to Martin Goetzeler, AIXTRON's President and CEO for opening remarks. Martin?

Martin Goetzeler

Thank you, Guido, and thank you all for joining the AIXTRON 2015 annual results conference call. One year ago, on the AIXTRON 2014 annual results conference call, I shared with you our view that 2015 would be a better year than 2014 in terms of revenues and earnings.

On the positive side, we did manage to achieve our earnings goals, despite a difficult environment in our core market, equipment for the production of LEDs. On the other side, we were not able to reach our revenue target of EUR220 million to EUR250 million, which we communicated to the market in February. However, we came in at the high end of our revised guidance range from October 2015.

The good news was that we achieved as we had expected a sequential earnings improvement in both the first half and the second half of 2015. In addition, EBITDA has been positive in the second half of 2015. Our view from a year ago was that the prospects would pick up as 2015 went on and this was certainly the case in many of our markets, in particular equipment for Optoelectronic applications, such as laser, infrared and photovoltaics.

Our revenues tripled to over EUR46 million in 2015. It was the exact same time -- same situation in the power electronics area that users are starting to use wide bandgap materials such as gallium nitride and silicon carbide, which enable much more energy efficient devices and where we have cost effective and highly innovative solution.

Demand for our power electronics equipment more than doubled to over EUR25 million last year. We also saw solid growth in our silicon semiconductor equipment business where revenues increased by 75% to just over EUR29 million. This was largely due to a strong demand for our ALD technology, which has become a key element of the DRAM production of our customer.

Finally, we saw solid growth in solutions for the production of carbon nanomaterials such as graphene and other carbon based materials, even though at lower levels. However, we had a weak year in our core market, MOCVD equipment for LEDs. In fact, sales were at the lowest level for years. There are two major reasons for this.

First, the market environment for LEDs is tough. So, the trend from traditional lighting -- so the trend from traditional lighting towards LED lighting continues, backlighting demand was weak and therefore demand for equipment has been slowed.

A large part of the reason for this is the ongoing overcapacity and the related price competition across the industry which has squeezed the profitability of the various producers which in turn has impacted the willingness to invest in new, efficient production capacity, even if the new production equipment would allow them to improve competiveness. On the other side, most LED manufacturers continue to drive significant efficiency improvement.

Secondly, we have been too slow in qualifying the new AIXTRON R6 Showerhead system which was especially designed for the Asian market. Bernd will elaborate more on the status of AIXTRON R6 later as well as on the San'an agreement.

Let me now take you through our full year 2015 numbers starting with Slide 4, which gives an overview of our revenues and equipment orders. In 2015, we generated EUR197.8 million in revenues, which were 2% ahead of the previous year's EUR193.8 million. 76% of revenues in 2015, namely EUR151 million came from equipment sales with the remaining 24% or EUR46.8 million coming from the sales of spare parts and services. These ratios are more or less in-line with the breakdown in 2014.

There was a very big change in product mix in 2015. Whereas in 2014, LEDs accounted for -- 68% of equipment revenues, representing EUR100.0 million. In 2015 they only accounted for 26% or EUR39.7 million of equipment sales. This was due to the already mentioned qualification delays with the launch of AIXTRON R6 and the difficult market environment for LED. The good news is that we have had strong growth in every other market area as mentioned earlier.

On a regional basis, 60% of total revenues in 2015 were generated by sales to customers in Asia, with the Americas accounting for 22% and Europe, 18%. This was a big change from 2013 and '14 when about 80% of sales were in Asia and is a reflection of the diligent work we have done over the last years in continuously collaborating with customers in these markets.

The total equipment order backlog of EUR42.9 million at December 31, 2015 was 38% lower than 2014 opening backlog of EUR69 million. The 2015 year-end order backlog was revalued at the 2016 budget rate of $1.10 versus euro as per January 1, 2016, leading to an opening order backlog of EUR48.6 million for 2016.

Turning to the next slide. In 2015, we generated a gross profit of EUR49.8 million, which was a considerable improvement on the EUR39.7 million from the previous year. This is reflected in the 5 percentage point increase in gross margin to 25%. The improvement is based on the better product mix, the favourable U.S. dollar exchange rate, our continuing focus on lowering material cost and increasing efficiencies around service and logistics. In Q4 2015, we achieved a gross margin of 31% which is within our target range.

For the full year 2015, operating costs at EUR76.5 million were significantly lower than the previous year's EUR 98 million, and below our targeted annual cost level of EUR80 million. Besides extraordinary impacts, for example from a settlement, this is a reflection of our focus on pushing productivity and efficiency as well as managing overhead costs throughout the organization.

More specifically, we reduced SG&A expenses from EUR33.5 million in 2014 to EUR27.8 million last year and R&D expenses from EUR66.7 million in 2014 to EUR55.4 million in 2015. The operating result for 2015, although still minus at EUR26.7 million was much improved over the EUR58.3 million loss we generated in 2014. I also want to point out that we did break even at an EBITDA level in both Q3 and Q4. Even on EBIT level, we almost achieved break-even with a loss of EUR46,000 in the second half.

Total taxes for 2015 were EUR3.2 million, mainly coming from country specific tax expenses. The net result for the 2015 came in at a loss of EUR29.2 million, which is better than the EUR62.5 million loss we recorded in 2014, but is still at a non-acceptable level.

Moving to the next slide, which shows our balance sheet. With regards to cash we had a negative free cash flow of minus EUR57.3 million, primarily due to a net loss and a partial return of the advanced payment to San'an Optoelectronics. The second part of the advanced payment was repaid in January 2016 to the customer.

AIXTRON continues to have a solid balance sheet with EUR209.4 million in cash and cash equivalents at December 31st, 2015, down from EUR268.1 million at the end of 2014. At the end of last year, AIXTRON had no financial debt and an equity ratio of 82%. There were no other material changes to the balance sheet, but I would also like to add that in January, AIXTRON was named as a defendant in a putative class action commenced in the United States District Court for the Southern District of New York brought on behalf of a putative class of purchasers of the Company's securities between September 25th, 2014 and December 9th, 2015.

The complaint is making reference to an ad-hoc announcement AIXTRON published on December 9, 2015 regarding the substantial reduction in order volume from Chinese customer San'an Optoelectronics from 50 down to 3, AIXTRON R6 MOCVD systems, which caused a strong decline of the share price of our shares and ADR's. The complaint claims in part that AIXTRON made false and or misleading statements, as well as failed to disclose material adverse facts about the Company's business, operations and prospects in connection with the above mentioned order.

AIXTRON disputes the allegations and intends to contest the allegations vigorously. Based on an initial assessment from legal counsel, AIXTRON believes that the above mentioned claim will not be successful.

Now, let me hand over to Bernd who will talk about the most important operational goals for 2016, before I finish with our guidance for the current year. Bernd?

Bernd Schulte

Thank you, Martin. Let me start by talking about the AIX R6, which is currently going through qualification processes at a number of LED producers. Although we're making further progress, the LED market is currently quite difficult and most customers have other more pressing priorities than qualifying new production equipment. We are keeping committed to qualify the R6 to the market, even in this challenging environment.

As you might recall, our announcement from December, we have reached an agreement with our Chinese customer San'an Optoelectronics regarding a substantial reduction in the volume of AIX R6 MOCVD systems ordered from 50 to the 3, which have already been delivered. Despite the efforts made by both parties and the achieved milestone in October 2015, in early December 2015, the technical teams of the two parties concluded that the customer's specific qualification requirements defined as the second milestone could not be met sufficiently.

We agreed with San'an to continue our existing partnership by cooperating on future system generations as well as on systems for other applications. This partnership includes activities in the area of semiconductors, which are expected to play a significant role in China's upcoming 5-year plan.

Going forward, we remain committed to building up on our leadership positions in manufacturing technologies for LEDs, OLEDs, power electronics, silicon semiconductors and carbon nanomaterials. We will continue investing in R&D, but in a much more focused and product orientated way, and I'm convinced that this is the right strategy for AIXTRON going forward. Furthermore, we will focus on cost reduction of our product and efficiency improvements in all areas of our operation.

Now, let me give you our view on some of the markets we serve, starting with the LED market. During 2015, demand for LED chip has grown less than anticipated by market research institutes, while at the same time the production capacity increased, also driven by governmental subsidy programs. These facts resulted in comparatively low utilization rates of LED producers. The currently prevailing overcapacity will have to be absorbed again before meaningful market driven demand for capacity might return, notwithstanding potential strategic capacity investments.

Over the long run, we expect to see select capacity expansions or strategic investments combined with replacement activities of less productive equipment with systems of the latest generation providing significant higher productivity, but in the short term, visibility on LED-driven capacity demand remains very low.

Following our diversification strategy, our goal this year is to continue to drive markets beyond gallium nitride LED. The progress we have made in this space during 2015 was described by Martin before. An important focus for AIXTRON is wide bandgap materials such as gallium nitride and silicon carbide used for power electronics applications. Electronic devices based on these materials are significantly more energy efficient than the established silicon-based technology. They are becoming very important for applications such as electric cars, as well as power inverters and converters, just to name a few. We have already more than 45 different customers in these areas, including the leading player.

In the coming quarters, we see growth opportunities for our AIX G5 planetary systems as an increasing number of power device manufacturers transition from the product development to pilot production phase. Additionally, there is initial demand from foundries and we are closely following the developments in China towards their plans to strengthen their semiconductor industry including power electronics.

We also see a growth opportunity in and around OLED displays and lighting applications. We gained traction in this market last year including receiving our first order for our OPTACAP encapsulation technology. We expect to receive further orders in this area in 2016 for a high growth end-customer market, which the market research firm IHS predicts will be worth $20 billion by 2021.

The good news for our large area OVPD deposition technology is that our Gen8 Demonstrator is about to be demo ready, but we are happy to arrange on-site customer visits already today. For memory chip production, our QXP-8300 ALD deposition tool performs at the highest uptime levels in high volume manufacturing environment. It is production qualified by a major Korean producer with qualification ongoing at two other memory chip manufacturers.

In addition, based on R&D projects and customer feedback, we also see tangible opportunities to support the progression of Moore's law for logic device structures with the use of compound semiconductor materials produced with AIXTRON's MOCVD technology. Here, we strengthened our development partnership with a leading semiconductor manufacturer to enable the development of more efficient future logic devices, a great achievement of our teams in the U.S., U.K., and Germany.

Finally, we are seeing rising interest for our production equipment for carbon nanomaterials including, graphene, these materials which can potentially be used in a broad range of applications such as displays, batteries and semiconductors. Last year, we successfully reinforced our global leadership in academic and industrial research and going forward we are looking to take that into larger scale production together with our customers. Given the significant number of AIXTRON R&D tools already installed and the close alignment with our customers for future production requirements, we feel that we are here in a very good position.

With those final words let me hand you back to Martin.

Martin Goetzeler

Thank you, Bernd. In terms of financial guidance, we see revenues this year, 2016, between EUR170 million and EUR200 million, with a significantly stronger revenue generation in the second half of 2016, compared to the first half of 2016. If we do reach the high end of our guidance range, we expect earnings and free cash flow generation to improve this year compared to last year, but remaining negative. In order to do so, it also is decisive that our qualification processes and market entries are successful. Finally, we see ourselves returning to EBITDA profitability in 2017.

Let me highlight our major priorities this year. First, we need to continue improving and strengthening the diversification of our technology and product portfolio. Secondly, we need to continue refining Company productivity, especially in and around production and service. Thirdly, we need to successfully qualify our tools with our customers, in particular in the areas of AIXTRON R6, Organic and ALD. The past year's figures are evidence that we are on the right path with our diversification strategy and our cost management. Consequently, in 2016, we continue this path in order to return to EBITDA profitability in 2017.

With that, I'll pass it back to Guido before we take some questions.

Guido Pickert

Thank you, Martin and Bernd. Before we take questions, could I ask everyone as always to limit your questions to a maximum of two each time? This would allow everyone to have the chance to get their questions answered. Thank you. Operator, we would now take the questions please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Guenther Hollfelder, Baader Bank. May we have your question please?

Guenther Hollfelder

Yeah, thank you. I have two follow-up questions on wide bandgap. Can you provide us with your estimated market share in this segment today and how you see the difference between single wafer systems and your approach in this market going forward? Thanks.

Martin Goetzeler

Before Bernd answers your second question, on the technology side, basically we are not sharing this detail, market share data today, but I think we always have a view, where we say, we have a GaN LED view and we have the other MOCVD applications where we are, where we have market share which is significantly above 50% and that's the area where also power electronics kicks in. Nevertheless, we would like you to accept that we don't share this data. Bernd, on the technology side?

Bernd Schulte

Yes, you're right. I mean there are different approaches in the market to address this -- you mentioned the batch size concept as well, the wafer size concept. We are convinced about the batch size concept simply because it provides best cost of ownership, in particular, when you keep in mind that these wide bandgap power electronics devices contains of relatively big devices, meaning relatively longer epicycle in this case, the batch tool is the preferred option than even in the silicon fields you see in this area for [indiscernible] market, the customers are using a batch approach. So, it's cost of ownership.

Guenther Hollfelder

Okay, and did you see -- just one follow-up maybe, what do you see -- new plants, you mentioned foundries in China getting more aggressive here or is it mainly still driven by the incumbents in power semiconductors? Thanks.

Bernd Schulte

It's both.

Guenther Hollfelder

Okay, thank you.

Martin Goetzeler

You're welcome.

Operator

The next question comes from David Lowish from Generation Investment Management. May we have your question please?

David Lowish

Yes, hi, good afternoon, Mr. Goetzeler and Bernd. Quick question, just the free cash flow performance in the fourth quarter, obviously you had the return of the prepayment to San'an. Could you give us some sort of guidance as to what would the free cash flow have been without that?

Martin Goetzeler

We agreed with the customer that we don't share this information on the payment and therefore I would ask you to maybe do your estimates based on the size of the order.

David Lowish

Okay.

Martin Goetzeler

I would like to add David, one more thing, we should add is we basically split this payment in two parts, about 50-50. One part was in Q4 and the second part, we paid in Q1.

David Lowish

Right, okay, and follow-up question was, obviously we saw an improvement in the gross margin for the whole of 2015 versus 2014. How much of that is due to cost down, how much of that is due to mix effect and better inherent gross margin in the non-LED segment, which are becoming more prominent?

Martin Goetzeler

In the cost margin, this is, definitely there are -- as I mentioned in my speech, there are four impacts, and definitely the price mix, that meaning, the better product mix has a significant impact. First of all, we also definitely see some impact from the currency because, you know, a lot of our invoices are done in U.S. dollars and therefore we benefit from our euro base and then we see also reduction and improvement in the material cost there. So, it's a broad range of activity and impact. So, that's the major reason for the overall improvement, but also for the improvement in the second half.

David Lowish

Okay, thank you.

Operator

The next question comes from Colin Rusch from Oppenheimer. Please, your line is open now.

Kristen Owen

Good afternoon. This is Kristen in for Colin. Just wanted to touch on what you're seeing in terms of cycle times in the booking and acceptances, if you could build on that for me?

Martin Goetzeler

Yeah, maybe Bernd takes a stab at this.

Bernd Schulte

Yeah, typically depending on product and definition of the individual customers, between four and six months.

Kristen Owen

Okay, thank you for that. Then, any changes that you're seeing in terms of payment terms?

Martin Goetzeler

Basically, I think we discussed this a couple of times during our conference calls. We see definitely a difference between the silicon industry and the LED industry. So, there are differences and that could have a structural impact going forward, but within these industries we didn't see changes lately.

Kristen Owen

No changes within the industries, okay great. Then, lastly if I could, you touched a little bit on this in the last question about the gross margin. Can you talk about any relief you might be seeing on the material sourcing side?

Martin Goetzeler

Basically, as I think -- what we mentioned in my report, but also in our management report, I think in several parts, what we do here is -- we are -- we have set up a small team, which does our design to cost projects, but also the purchasing group is -- they are working, all three together with the technology in order to find solutions with the suppliers in order to reduce our material cost base. This process started last year. We're in the middle of this process and we will continue to push that further and initial results, I think we saw at the end of last year.

Kristen Owen

Okay, great. Thank you for that color.

Operator

The next question comes from Srini Sundar from Summit Research. May we have your question please?

Srini Sundar

Hi, thanks for taking my call. My question is, Veeco seems to say that the market share has gone north of 75% in terms of MOCVD. So, I would like to see whether you have any comments on that and second question is, how much percentage of AIXTRON's revenue will come from non-MOCVD applications in this year?

Martin Goetzeler

Okay, thank you for your question. First of all, I think when our competitor is mentioning this number, they primarily refer to the GaN LED application, and here, if you talk about MOCVD, it's what we call the GaN LED market and we call it the non-GaN LED market which basically is covering power electronics and power optoelectronics areas like solar and laser and so on. In the future also, applications which might move into what we call a process of production and therefore, that's what we call the non-GaN LED part and what we have seen over the last couple of quarters is that we have really, very, very strongly defended our position and actually sometimes, quarter to quarter also sometimes improved our market share in this non-GaN LED part. So, they have to see both and I think if you wait for the next announcement from [indiscernible] you will also see part of that split and then you can also identify the change of the different company.

Regarding the split of the sales, MOCVD and others, that's definitely today a little bit difficult to predict. We also gave quite a broad revenue range out to make a key statement already today. I think it's difficult, on the other side, I would say, if you look at the last year, you can see the split and you can basically believe that we continue to push hard in order to further diversify our portfolio, which does not always mean it must be something like silicon or OLED, we also want to diversify in areas like power electronics which is MOCVD or optoelectronics, which also is MOCVC. So, it depends really on the end markets we are addressing.

Srini Sundar

Thank you so much.

Operator

The next question comes from Malte Schaumann from Warburg Research. May we have your question please?

Malte Schaumann

The first one is regarding the optoelectronics business, which increased significantly in 2015, so maybe could you elaborate on the sustainability of this area? Should we expect EUR40 million revenues going forward in solar and laser applications or is there risk that revenues comes down again going forward? So, how should we view that area?

Martin Goetzeler

I have to say and thank you for the question that definitely 2015 was a very, very strong year in this area, because we definitely have a couple of orders which came in unexpected to us and therefore it will not be easy to keep that ladder and therefore we always say, we have to continue to diversify our portfolio to drive up the power electronics business to get the orders in for organic and continue to qualify for the customers in our QXP business. So, it's definitely a very high year, this 2015 and the focus continues to be in all these applications, we talked about, successful in 2016.

Malte Schaumann

Okay. Risk, will it drop down below 20 again or somewhere in between?

Martin Goetzeler

Generally, I think to have a detailed number here is difficult to predict. Our hope and our expectation is that definitely we will be above 2014, but as I said, this has been a long year and we have to see what happened.

Malte Schaumann

Okay, and then final question just regarding -- what your view is on the potential replacement market coming up in MOCVD LED? How do you then -- and how do you assess the potential risk that former device customers might not turn to the competing system in the markets when they might have to make a new investment decision based on the higher productivity tools?

Martin Goetzeler

Yeah, I would be less concerned about the device that may be earlier generations of tools, that's right. I would see there is an opportunity that customers currently in the situation while utilization rates are not the highest, the first tools, they switch off are those tools which have the highest running cost per outputs and those are typically such tools which are from earlier generations, I'd say generations which should be clearly before 2010 and there is certainly an opportunity what the industry needs to do and what unique tool we have to offer a solution to customers which provide so much higher productivity that you can complete with even written off equipment going forward, but there is definitely an opportunity. To quantify this opportunity is, I think quite difficult. Nevertheless in our business plans, going forward, we also plan with a certain level of replacement business as Bernd mentioned, that's also related to the un-competitiveness of older generations.

Malte Schaumann

Okay, thank you.

Operator

Gentlemen, there are no further questions.

Guido Pickert

Thank you, operator. Okay then, thanks everyone for your interest and your participation in today's call. If you have further questions then you know, please don't hesitate to contact either my colleague, Andrea Su in the U.S. or myself here in Germany. This concludes the call. Good bye to everyone.

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