OKMETIC OYJ INTERIM REPORT 22 JULY 2016 AT 8.00 A.M.
OKMETIC OYJ INTERIM REPORT 1 JANUARY - 30 JUNE 2016: STRONG CASH FLOW IN VERY CHALLENGING MARKET SITUATION
APRIL-JUNE IN BRIEF:
JANUARY-JUNE IN BRIEF:
Unless otherwise stated, figures in parenthesis refer to the corresponding period of the previous year.
SHORT-TERM OUTLOOK
The early part of the year saw demand for Okmetic's advanced sensor wafers fall as a result of developments in the smartphone market in particular: the sluggish demand, the declining production volumes and the inventory adjustments that continued across the entire value chain. The market will remain weak through the rest of the year. Due to sluggish demand in the early months of the year, the company anticipates negative development for D&A wafers in 2016. At the same time, there is tighter price competition to win orders.
FINANCIAL GUIDANCE FOR 2016
After the difficult market situation in the beginning of the year, the company revised its guidance for 2016 on 20 July 2016. In 2016, the net sales and operating profit without items affecting comparability (previously operating profit without non-recurring items) are estimated to decline from the levels of 2015. According to the earlier guidance, the net sales were estimated to decline from the level of the previous year and operating profit without non-recurring items was estimated to exceed the level of 2015.
PRESIDENT KAI SEIKKU:
"Some of the leading smartphone manufacturers have cut production during the early part of the year by several tens of percent in response to weakening demand. The underlying reason is that high-end smartphones have now reached saturation in major markets. Manufacturers are also running down their high inventories, built up amid historically high growth rates, and this has led to ongoing adjustment across the whole value chain. In practice, these inventory adjustments have meant that the drop in the number of new orders has been even sharper than the cuts in smartphone production. As a result, order volumes for Okmetic's advanced sensor wafers and certain D&A wafers, among others, have declined.
These challenges in the smartphone market come in the wake of the slow-down in the PC market, and with the exception of steady growth in demand for electronics applications in the automotive industry, there are hardly any glimmers of light in sight in the high-volume segments of the electronics industry. It will likely be a few years before the much talked-about applications for the Internet of Things can make up for the reduction in volumes.
The lacklustre demand was reflected in Okmetic's sales in the North American market in particular, where the drop was approximately 20 percent. Europe has seen a more moderate drop, while Asia, a key strategic market for Okmetic, actually showed sales growth in early 2016 - suggesting that the industry's centre of gravity is shifting to Asia at an increasingly fast pace. Despite the fact that net sales were down, the company was able to maintain its relative market shares in the early part of the year.
For Okmetic, the early part of 2016 has also been characterised by strong net cash flow and major investments in the manufacture of advanced 200 mm wafers, further processing, and crystal growing. The year has been challenging in many ways, but, in line with its strategy, Okmetic's focus is on improving its market position over the long term. The new owner, National Silicon Industry Group, will offer strong support and better resources for Okmetic's future development. Meanwhile, the company will continue to see stronger relative growth in demand in the Chinese and other Asian markets."
KEY FIGURES
1,000 euro | 1 Apr- 30 Jun, 2016 | 1 Apr- 30 Jun, 2015 | 1 Jan- 30 Jun, 2016 | 1 Jan- 30 Jun, 2015 | 1 Jan- 31 Dec, 2015 |
Net sales | 18,969 | 22,068 | 38,597 | 43,680 | 84,540 |
Operating profit before depreciation (EBITDA) | -1,252 | 4,556 | 7,169 | 9,101 | 15,115 |
Operating profit without items affecting comparability (IAC) 1) | 1,838 | 2,914 | 3,220 | 5,837 | 10,972 |
% of net sales | 9.7 | 13.2 | 8.3 | 13.4 | 13.0 |
Operating profit | -2,898 | 2,914 | 3,822 | 5,837 | 7,718 |
% of net sales | -15.3 | 13.2 | 9.9 | 13.4 | 9.1 |
Profit for the period | -3,117 | 2,215 | 3,395 | 4,380 | 4,832 |
Basic earnings per share, euro | -0.19 | 0.13 | 0.20 | 0.26 | 0.29 |
Net cash flow from operating activities | 4,231 | 3,660 | 8,652 | 4,556 | 14,716 |
Net interest- bearing liabilities | 12,382 | 3,826 | 12,382 | 3,826 | 2,283 |
Equity ratio, % | 56.7 | 67.9 | 56.7 | 67.9 | 64.0 |
Average number of personnel during the period | 387 | 412 | 387 | 392 | 394 |
1) New ESMA (European Securities and Markets Authority) guidelines on Alternative Performance Measures (APMs) came into effect on 3 July 2016. Okmetic presents APMs to reflect the underlying business performance and to enhance comparability between financial periods. APMs should not be considered as a substitute for measures of performance in accordance with the IFRS. As of Q2 2016, Okmetic relabels the previously referenced "without non-recurring items" with "without items affecting comparability" (IAC).
MARKETS
Semiconductor industry
Semiconductor industry sales during the first quarter of 2016 were down by around six percent from the levels of the first quarter of 2015, and are estimated at 78 billion US dollars (WSTS). In 2016, the semiconductor sales are projected to fall around two percents from 2015 (IDC, WSTS). Growth for 2017 is projected at around two percents (WSTS).
Sensor industry
The sensor industry is projected to grow around eight percents in 2016 (WSTS, Yole Développement).
Certain silicon-based microelectromechanical (MEMS) products within the sensor segment have higher sales growth than the others. In spite of the slowing market growth, the increasing amount of sensors in mobile devices has accelerated the demand for e.g. pressure sensors and microphones. Silicon-On-Insulator (SOI) technology is increasingly used in the manufacture of these products, among others. Okmetic is a pioneering supplier of SOI wafers for the sensor industry.
Discrete semiconductor and analog circuits industries (Discrete & Analog)
The discrete semiconductor market is estimated to grow less than one percent (WSTS) and analog circuits market around one percent in 2016 (Semi, SIA, WSTS).
Silicon wafer market
According to the estimate published by SMG, a group of silicon wafer suppliers in SEMI (a global umbrella organisation for semiconductor materials and equipment industry), the surface area of silicon wafer shipments declined around three percents during the first quarter of 2016 compared to the level of corresponding period in 2015. According to the company's own estimate, the shipments of 100-200 mm silicon wafers, measured by surface area, were around five percents lower in January-May 2016 than in the corresponding period in 2015 and around three percents lower than the 2015 average. According to SMG, the value of silicon wafer market was 7.6 billion US dollars in 2015 and the estimate for 2016 is 7.4 billion US dollars.
The key customer areas for Okmetic in the silicon wafer market
In line with its strategy, Okmetic seeks niches in the silicon wafer market, where growth exceeds market average and in which the company has special expertise. Okmetic supplies primarily 150 mm and 200 mm wafers.
The sensor/MEMS industry has been a key growth area for Okmetic already for a long time. The use of sensors and their requirement level are expected to keep growing owing to proliferation of sensor applications in the automotive industry, industrial process control and in portable devices like smart phones, cameras, game consoles, and wearable electronics. In future, a central growth driver for the sensor industry will be the Internet of Things, which will utilise sensor-produced data in communication between devices.
Another significant growth area is wafers used for the production of discrete and power semiconductors as well as analog circuits. In these wafer markets, areas for growth include, among others, components used in the production of renewable energy, increasing automotive electronics, electric cars, portable consumer products, as well as different solutions related to power supply and efficiency improvement. Okmetic has launched new products for these areas.
SALES
In January-June, Okmetic's net sales amounted to 38.6 (43.7) million euro. Net sales declined by 11.6 (21.0) percent compared to the corresponding period last year. The decline in net sales resulted mainly from overall weakness of the market and especially the decline of the net sales in North America compared to the strong corresponding period. In the second quarter, net sales declined by 14.0 percent from the corresponding period last year. However, Okmetic's market share remained stable in the product groups important to the company.
As of financial year started on 1 January 2016, the company reports the net sales of its new customer segments, Sensor wafers and Discrete&Analog wafers (D&A wafers), as well as net sales of its market areas instead of value of deliveries.
Net sales per customer segment
1,000 euro | 1 Apr- 30 Jun, 2016 | 1 Apr- 30 Jun, 2015 | 1 Jan- 30 Jun, 2016 | 1 Jan- 30 Jun, 2015 | 1 Jan- 31 Dec, 2015 |
Sensor wafers | 9,530 | 11,233 | 19,750 | 22,024 | 41,202 |
D&A wafers | 9,439 | 10,835 | 18,847 | 21,656 | 43,338 |
Total | 18,969 | 22,068 | 38,597 | 43,680 | 84,540 |
Demand for both sensor wafers and D&A wafers declined in January-June compared to the strong comparison period. The net sales of sensor wafers declined by 10.3 percents and the net sales of D&A wafers 13.0 percents compared to the comparison period.
Net sales per market area
1,000 euro | 1 Apr- 30 Jun, 2016 | 1 Apr- 30 Jun, 2015 | 1 Jan- 30 Jun, 2016 | 1 Jan- 30 Jun, 2015 | 1 Jan- 31 Dec, 2015 |
North America | 7,636 | 9,833 | 15,859 | 19,880 | 38,344 |
Europe | 6,423 | 7,759 | 13,202 | 15,061 | 28,641 |
Asia | 4,910 | 4,476 | 9,536 | 8,739 | 17,555 |
Total | 18,969 | 22,068 | 38,597 | 43,680 | 84,540 |
In January-June, the North American net sales decreased by 20.2 percent from the strong comparison period. Europe's net sales declined by 12.3 percent. In strategically important Asia the demand continued strong and net sales increased by 9.1 percent from the comparison period.
PROFITABILITY
April-June
In April-June, operating profit was -2.9 (2.9) million euro corresponding to -15.3 (13.2) percent of net sales. Operating profit includes expenses affecting comparability of 4.2 million euro related to the tender offer of NSIG as well as other expenses affecting comparability of 0.4 million euro.
Operating profit without items affecting comparability (IAC) was 1.8 (2.9) million euro corresponding to 9.7 (13.2) percent of net sales. The weaker operating profit is resulting mainly from decline in sales, weaker sales mix as well as the increased yield costs of the production in Vantaa.
Profit for the period was -3.1 (2.2) million euro. Basic earnings per share was -0.19 (0.13) euro. Diluted earnings per share was 0.19 (0.13) euro.
January-June
In January-June, operating profit was 3.8 (5.8) million euro corresponding to 9.9 (13.4) percent of net sales. Operating profit includes gain affecting comparability of 6.0 million euro related to the sale of the US-based epi plant announced on 1 April 2016 as well as expenses affecting comparability of 4.8 million euro related to the tender offer of NSIG and other expenses affecting comparability of 0.4 million euro.
Operating profit without items affecting comparability (IAC) was 3.2 (5.8) million euro corresponding to 8.3 (13.4) percent of net sales. The weaker operating profit is resulting mainly from decline in sales, weaker sales mix as well as the increased yield costs of the production in Vantaa.
Profit for the period was 3.4 (4.4) million euro. The low income tax expense (0.4 million euro) in the financial period are explained by the Allen plant's tax losses (approximately 5.7 million euro), which are deductible in full against gain from the sale of the Allen plant. Basic earnings per share was 0.20 (0.26) euro. Diluted earnings per share was 0.20 (0.26) euro.
FINANCING
The company's financial position was moderate at the end of the period. In January-June, net cash flow from operations amounted to 8.7 (4.6) million euro.
The company's interest-bearing liabilities amounted to 16.2 (13.1) million euro on 30 June 2016. At the end of the period, cash and cash equivalents amounted to 3.8 (9.2) million euro. The company's net interest-bearing liabilities amounted to 12.4 (3.8) million euro on 30 June 2016. The company has ensured liquidity with committed credit facilities of 6.0 million euro of which all were in use on 30 June 2016.
Return on equity was 11.5 (14.0) percent and return on investment was 10.6 (15.4) percent. The company's equity ratio was 56.7 (67.9) percent. Equity per share amounted to 2.97 (3.62) euro.
CAPITAL EXPENDITURE
In January-June, capital expenditure amounted to 4.9 (3.1) million euro. The investments focused mainly on increasing capacity and capability for SOI and 200 mm wafers.
PRODUCT DEVELOPMENT
In January-June, the company expensed 1.4 (1.4) million euro in product development projects, corresponding to 3.7 (3.2) percent of net sales. Product development costs have not been capitalised.
During the first half of 2016, Okmetic's product development projects focused on the development of new crystal technology and new SOI applications, deployment of new processes to improve productivity, as well as process development for sophisticated C-SOI wafers. As a result of sustained R&D efforts, the company launched an enhanced SOI wafer, E-SOI, in March.
PERSONNEL
Okmetic employed on average 387 (387) people in January-June. At the end of the period, Okmetic employed 401 (426) people, of which 388 worked in Finland, seven in the US, five in Japan, and one in Hong Kong. As a result of the sale of the Allen epi plant, the majority of the employees of Okmetic Inc., the US-based subsidiary of Okmetic, transfered to the service of the new owner on 1 April 2016.
SHORT-TERM RISKS
There have been no significant changes in the company's near future risks and uncertainties. However, changes in macro economy may indirectly have an influence also on Okmetic's business.
Business is confronted by risks, which may arise from the company's operations or changes in its operating environment. Risks that, if materialised, can have an adverse effect on the company's operations and valuation are described below.
Silicon wafer sales are targeted at the sensor, discrete semiconductor and analog circuit producers in the electronics industry. The demand of discrete semiconductor and analog circuit industries is sensitive to economic fluctuations, and changes in the market situation can be sudden and dramatic. The demand for sensor wafers is more stable. The proliferation of sensors in consumer electronics applications has, however, increased the susceptibility of this market too to economic fluctuations. In addition, the consolidation of customer companies might be a risk for the company's wafer sales.
Okmetic's share of the global silicon wafer market is around one percent, and market prices have a notable effect on the price development of the company's products. The company has considerable pricing power only with its own special products. The pricing of other wafers is largely based on global market price.
Okmetic operates globally, and therefore the company's business is affected by risks due to exchange rate fluctuations, consisting of cash flows from purchases and sales. A significant part of sales is conducted in US dollars. Despite hedging of the forecasted open currency position, the company remains exposed to exchange rate fluctuations.
Substantial volumes of electricity are used in Okmetic's production. Despite hedging, the company is exposed to fluctuations in the price of electricity.
SHARES AND SHAREHOLDERS
On 30 June 2016, Okmetic Oyj's paid-up share capital, as entered in the Finnish Trade Register, was 11,821,250,00 euro. The number of shares was 17,287,500. The shares have no nominal value attached. Each share entitles to one vote at general meetings. The company has one class of shares. The company's shares are included in the Finnish book-entry system.
Major shareholders 30 Jun, 2016
shares, pcs | share, % | |
NSIG Finland S.à r.l. | 16,218,195 | 93.81 |
Okmetic Oyj | 406,129 | 2.35 |
FIM Fenno Mutual Fund | 55,000 | 0.32 |
I.A. von Julins Sterbhus | 50,000 | 0.29 |
Perisalo Asko Matti | 41,583 | 0.24 |
VISIO Allocator Fund | 27,011 | 0.16 |
Tollander Kristina | 17,632 | 0.10 |
Bergqvist Jukka Tapani | 15,000 | 0.09 |
Puolakka Kari Heikki Aukusti | 10,000 | 0.06 |
Mannerheim-Ristin Ritarien Säätiö Sr | 6,700 | 0.04 |
10 largest shareholders total | 16,847,250 | 97.45 |
Nominee registered | 124,551 | 0.72 |
Other shares | 315,699 | 1.83 |
Total | 17,287,500 | 100.00 |
SHARE PERFORMANCE AND TRADING
A total of 19.3 (3.4) million shares were traded between 1 January and 30 June 2016, representing 111.6 (19.9) percent of the weighted average of share total of 17.3 (17.3) million during the period. The lowest quotation of the reporting period was 6.66 (4.80) euro, and the highest 9.69 (7.70) euro, with the average being 9.11 (6.19) euro. The closing quotation for the period on 30 June 2016 was 9.20 (7.05) euro. At the end of the period, market capitalisation amounted to 159.0 (121.9) million euro.
DIVIDENDS PAID
The annual general meeting decided, in accordance with the proposal of the board of directors, to distribute a dividend of 0.65 euro per share (in total 11.0 million euro). In 2015, the company paid a total of 0.45 euro per share as dividends (in total 7.6 million euro).
OWN SHARES
At the end of the period, the company held a total of 406,129 (406,129) own shares, which is approximately 2.3 (2.3) percent of Okmetic's all shares and votes.
OTHER EVENTS IN THE INTERIM PERIOD
Sale of the epi plant in Allen
In a stock exchange release published on 1 April 2016, Okmetic announced that the company has sold its production plant focusing on epitaxial deposition of silicon wafers, located in Allen in the United States, to American company Epitek Silicon instead of the wind-down announced earlier. In line with the agreement, Okmetic Inc. has transferred the plant to the buyer on 31 March 2016.
The purchase price was 9.5 million US dollars (around 8.5 million euro). The financing conditions are as follows: 0.25 million US dollars were paid at the signing of the agreement on 31 March 2016 and the rest of the purchase price is financed by a vendor note. According to the agreement, 1.5 million US dollars of the vendor note is paid back in parts on a monthly basis by the use of inventories mostly or totally during 2016, 5.75 million US dollars in July 2016, 1.0 million US dollars will be paid 12 months after the signing of the agreement and 1.0 million US dollars 24 months after the signing of the agreement. Okmetic recorded a non-recurring gain of six million euro based on the transaction.
As a result of the sale the business, production facility, equipment, inventories as well as majority of the personnel of Okmetic's US-based subsidiary Okmetic Inc. transferred to the buyer. Okmetic Inc. continues as a North American sales office as announced earlier. Okmetic has agreed with Epitek Silicon that Okmetic will deliver wafers for epitaxial deposition at least for five years time after the transaction.
Tender offer
Okmetic Oyj announced on 1 April 2016 that Okmetic and National Silicon Industry Group (NSIG) have entered into a Combination Agreement pursuant to which NSIG, either directly or through a wholly-owned indirect subsidiary of NSIG, will make a voluntary public tender offer to purchase all of the issued and outstanding shares and option rights in Okmetic that are not owned by Okmetic or any of its subsidiaries. NSIG Finland S.á r.l which is a wholly-owned indirect subsidiary of NSIG, commenced the voluntary public tender offer on 22 April 2016. The extended offer period expired on 14 June 2016.
In a press release published on 17 June 2016, NSIG announced the final result of the tender offer. According to the result, the shares tendered in the tender offer represent approximately 95.79 percent of all the shares and votes in Okmetic (excluding the treasury shares held by Okmetic). In addition, approximately 98.52 percent of the option rights have been tendered in the tender offer, which implies, together with the tendered shares, a holding of approximately 95.73 percent of all the shares and votes in Okmetic fully diluted for the outstanding option rights and excluding the treasury shares held by Okmetic.
The completion trades were settled and the offer consideration paid on 22 June 2016 to the shareholders and holders of option rights who have validly accepted the tender offer in accordance with the terms and conditions of the tender offer.
In order to allow the remaining shareholders and holders of option rights the possibility to still accept the tender offer, NSIG decided to extend the tender offer by a subsequent offer period in accordance with the terms and conditions of the tender offer. The Subsequent Offer Period commenced on 20 June 2016 and expired on 4 July 2016.
On 23 June 2016, NSIG Finland informed Okmetic that NSIG Finland holds more than nine tenths (9/10) of all the shares and votes in Okmetic, and as a consequence of exceeding the relevant ownership threshold, NSIG Finland has the right and obligation, based on Chapter 18, Section 1 of the Finnish Companies Act, to redeem the shares held by any other remaining Okmetic shareholders at fair value.
Annual general meeting on 7 April 2016
The annual general meeting on 7 April 2016 adopted the annual accounts and the consolidated annual accounts for the financial year 2015 and discharged the company's management from liability. The annual general meeting decided, in accordance with the proposal of the board of directors, to distribute a dividend of 0.65 euro per share (in total 11.0 million euro). The dividend was paid on 18 April 2016.
The annual general meeting confirmed that the company's board of directors will consist of five members. Mr. Jan Lång, Mr. Hannu Martola, Ms. Riitta Mynttinen, Mr. Mikko Puolakka and Mr. Henri Österlund were re-elected as members of the board of directors until the end of the next annual general meeting. The board of directors elected Mr. Jan Lång as its chairman and Mr. Henri Österlund as its vice chairman in its organisation meeting held immediately after the annual general meeting.
Authorised Public Accountants PricewaterhouseCoopers Oy was re-elected as auditor of the company. PricewaterhouseCoopers Oy has announced that APA, Mr. Mikko Nieminen will be acting as principal auditor.
The decisions of the annual general meeting were published on 7 April 2016 in a separate stock exchange release.
Financing
To ensure liquidity, the company has rearranged its credit facilities. The company has negotiated new committed credit facilities of 6.0 million euro to replace the 6.0 million euro uncommitted credit facilities. All of these new committed credit facilities were in use on 30 June 2016.
Change in the executive management group
On 14 June 2016, Okmetic informed that Juha Jaatinen, Okmetic's Senior Vice President, Finance, IT and Communications and member of the Executive Management Group has resigned to assume a new position with another company. On 5 July 2016 the company announced that Tapio Hyvärinen, M.Sc. (Econ.), has been appointed acting CFO and a member of Okmetic's Executive Management Group as of 15 August 2016.
EVENTS AFTER THE INTERIM PERIOD
Tender offer
NSIG published on 7 July 2016 a press release, according to which the Subsequent Offer Period, the shares tendered during the Subsequent Offer Period represent approximately 0.63 percent of all the shares and votes in Okmetic (excluding the treasury shares held by Okmetic). No option rights were tendered during the Subsequent Offer Period. Together with the shares tendered during the actual offer period, the shares tendered in the Tender Offer represent approximately 96.41 percent of all the shares and votes in Okmetic (excluding the treasury shares held by Okmetic).
Taking into account shares acquired through open market purchases, according to the knowledge at the publication date of the press release NSIG Finland holds approximately 96.78 percent of all the shares and votes in Okmetic (excluding the treasury shares held by Okmetic) after the settlement of the sale and purchase of the shares tendered during the Subsequent Offer Period. Together with the option rights that were tendered in the Tender Offer during the actual offer period (the approximately 98.52 percent of the option rights), this implies a holding of approximately 96.72 percent of all the shares and votes in Okmetic fully diluted for the outstanding option rights and excluding the treasury shares held by Okmetic.
Extraordinary general meeting on 7 July 2016
NSIG Finland requested Okmetic's board of directors to convene an extraordinary general meeting. Notice to the meeting was published on 13 June 2016 and the extraordinary general meeting was held on 7 July 2016. According to NSIG Finland's proposal, three members were elected to the board of directors replacing all members of the board of directors elected in the annual general meeting on 7 April 2016, for a term that expires at the end of the following annual general meeting. Mr. Kai Seikku, President of Okmetic; Mr. Leo Ren (legal name Weidong Ren), Managing Director of NSIG, and Mr. Jeffrey Wang (legal name Qingyu Wang), CEO of Shanghai Simgui Technology were elected as members of the board of directors. According to NSIG Finland's proposal, the general meeting resolved that no remuneration shall be paid to the members of the board of directors, but reasonable travel and other costs incurred by the board members for attending in board work shall be compensated by the company.
CONDENSED FINANCIAL STATEMENTS AND TABLES 1 JANUARY - 30 June 2016 (unaudited)
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