Aixtron SE (AIXG) Q3 2011 Earnings Conference Call October 27, 2011 09:00 ET Executives Guido Pickert – Director, Investor Relations Paul Hyland – President and Chief Executive Officer Wolfgang Breme – Executive Vice President and Chief Financial Officer Analysts David Mulholland – UBS Günther Hollfelder – UniCredit Janardan Menon – Liberum Capital Adrian Pehl – Equinet Maxime Mallet – Natixis Olga Levinzon – Barclays Capital Andrew Huang – Sterne, Agee Alla Gorelova – Steubing Francois Meunier – Morgan Stanley David O’Connor – RBS Jed Dorsheimer – Canaccord Daniel Amir – Lazard Capital Management Jürgen Wagner – MainFirst Bank Presentation Operator
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You may also wish to have a look at our latest IR Presentation, which includes additional information on markets and technologies as many of you know. 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 Web site at some point after the call.Let me now hand you over to Paul Hyland. Paul? Paul Hyland – President and Chief Executive Officer Thank you, Guido. Ladies and gentlemen, good afternoon to those of you calling in from Europe; good morning to those of you joining us from the U.S., and good evening to investors calling in from Asia. I’d like to welcome you on behalf of Aixtron’s Executive Board, to the presentation of our Q3, 2011 results. By way of introduction, let me say at the very beginning of the call that although the revised guidance news we gave you on September 15th does represent a disappointing set-back for our original targets for this year, it does not in our opinion, detract from the positive longer term market prospects as I have set out for you in previous calls.There can be no doubt in anybody’s mind, that the LED lighting investment cycle will come and will be the biggest end market opportunity this industry has ever seen. It is not a question of “if”; it only remains a question of “when”. Remember that today, less than 5% of all lighting employs LED technology. The range of opinion as to what percentage this will be by 2020, varies from 50% to 80%As we predicted the demand from LED backlighting has slowed significantly as the quantity of equipment installed represents, in all likelihood, close to 80% of the projected MOCVD equipment requirement for this application. So, if we wanted to be brutally realistic, to all intents and purposes, we could argue that the investment cycle for backlighting is all but over, but conversely; we could also say; the investment cycle for LED lighting has only just started.
In the course of the last 12 months, the gap between these two major investment cycles has been bridged to some degree by the significant increase in government subsidies for MOCVD equipment purchases, particularly in China. However, evidently, this bridge is rather more precarious than we might have liked, but that is principally due to a combination of financial volatility pressures and some regional side effects arising from the speed at which that bridge was built.When I spoke to you during our half year call at the end of July, I talked openly then about the choppy waters we had seen in Q2 and the reasons behind the uncertainty we had detected in some customers in Asia. We also said then that we expected those choppy waters to continue into Q3. It turned out that our predictions have come true in a rather more dramatic way than even we had anticipated. But I will stress again today, as I did in July that this market correction linked to the transition between two investment cycles rather than a negative secular trend. We certainly did not expect the degree of deceleration we’ve seen since July, but, even so, the severity of the market correction represents a delay, not a disaster. Neither does it detract from the significant market opportunity that lies ahead. First though, I am going to take you through the key elements of the third quarter and address in more detail the influences behind our decision to revise our guidance for the full year 2011 on September 15. Then I will ask Wolfgang to take you through some more detailed aspects of our financial performance and to expand on our flexible business structure that is a key element in our strategy during this period of a current uncertainty. Finally, I will close the presentation by explaining our 2011 guidance before we open up the call for questions. Let’s look at those key elements on slide three. If we look at the sequential quarterly comparison on this slide, you can see the immediate effect of the rapid deceleration I described earlier. Revenues decreased by 49% from €175.6 million in Q2 to €89.8 million in Q3. This sudden decrease in revenues is principally down to a small number of significant customer delayed deliveries, which affected our gross margin performance, which came down from €76.9 million or 44% in Q2 to €38.7 million or 43% in Q3, a decrease of one percentage point over the prior quarter. Those systems which have been built but not shipped, have been recorded as inventory and are reflected in the balance sheet accordingly, which Wolfgang will talk through with you later on. You can see the effect of all this on our reported EBIT in the quarter, which at €620,000 or 1% of sales, is a significant drop from the 31% we reported in Q2 2011.
Clearly, our Q3 EBIT was strongly influenced by the reduction in sales volume but also by the substantial currency effects we recorded in the quarter. Wolfgang will expand on both of these effects later on.As I’ve already said the principal reason behind both, the decline in revenues, EBIT and margin in the quarter and the decision to reduce the guidance given for 2011, is due to the extent and the speed of which the number of customers particularly in Asia have adjusted their delivery requirements in this period. Artificially high demand driven by substantial government funding has led to an unscheduled but significant slowdown in demand. We don’t believe that these customer adjustments necessitate a change to our positive view of the longer term momentum we see bringing the LED market closer. We perceive these adjustments to be market driven correction to the very aggressive growth targets being pursued in the number of the more prominent Asian markets. These aggressive targets have been coupled with some predictable growth pain issues including customer difficulties in recruiting appropriately qualified personnel, technical inexperience, greater competition for local subsidies, delay in fab completions amongst other issues. To which we can add that we are also beginning to see evidence of capital and financial market pressures many of our customers are experiencing including both sovereign and bank suppression of credit lines and bank loan availability. That we should have been affected first by this market correction should not be a surprise. We are in the front carriage of the food chain. These combined pressures come in parallel with the LED end market price declines of 10% to 15% a quarter, and the fact that there is just not yet the level of end market demand required to support some of the plans in place. Read the rest of this transcript for free on seekingalpha.com