IQE plc Full Year 2019 Results Presentation Disclaimer This - - PowerPoint PPT Presentation

IQE plc Full Year 2019 Results Presentation

Disclaimer

This presentation has been prepared by IQE plc solely for information purposes and should not be considered to be an offer or solicitation to buy, sell or subscribe for any securities, financial instruments or any rights attaching to such securities or financial instruments. In particular, this presentation does not constitute an offer to sell, or the solicitation of an offer to acquire or subscribe for, securities in any jurisdiction where such offer or solicitation is unlawful. This presentation is not comprehensive and does not contain all of the information material to an investor. This presentation may contain forward-looking statements. Forward-looking statements can be identified as anything other than statements of historical fact contained in this presentation and by their nature are subject to uncertainty and risks. Forward-looking statements are statements regarding our intent, belief

• r current expectations and are not guarantees of future performance. Actual performance and results may differ materially from those described in this
• presentation. Readers are cautioned not to place undue reliance on these forward-looking statements.

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FY 2019 Results – 28th April 2020 1

Introduction

Drew Nelson, CEO

Introduction

Positioned for short-term resilience and long-term growth

• Following FCA/FRC guidance due to the general uncertainty created by the ongoing Coronavirus pandemic, IQE’s results

announcement was postponed. On 24 March 2020 we disclosed unaudited summary financials, and today we disclose audited full year results for 2019 in line with our March Trading Update.

• At IQE our principle concern remains the health and safety of our staff and their families.
• Currently all of our production sites around the globe remain operational, we have implemented appropriate safety

measures and are operating with the support of national governments, although there remains an increased risk of business disruption.

• Q1 2020 trading was slightly higher than expectations and the outlook for Q2 2020 remains positive. There is an

increased risk to near-term demand from a global recession.

• Total debt facilities of £57m put in place during 2019. Positive Q1 2020 trading means net debt reduced versus 31 Dec

2019 position of £16m.

• Long-standing and trusted relationship with HSBC, with regular communication. HSBC agreed to formally relax debt

covenant tests at Dec-20 and Jun-21, ensuring continued access to credit in event of severe downside.

3 FY 2019 Results – 28th April 2020

FY 2019 Financial Results

Tim Pullen, CFO

Summary Financials

£’million FY 2019 FY 2018 Revenues 140.0 156.3 Adjusted EBITDA1 16.2 26.4 Adjusted operating profit / (loss) (4.7) 16.0 Reported operating profit / (loss) (18.8) 8.7 Reported PAT (35.1) 1.2 Net Cashflow from Operations (Adjusted) 16.5 17.0 Net Cashflow from Operations (Reported) 8.9 17.0 Capital expenditure2 31.9 30.4 Net cash / (debt)3 (16.0) 20.8 Cash and cash equivalents 8.8 20.8 Adjusted fully diluted EPS (2.46p) 1.38p

1 Adjusted performance measures exclude the impact of certain non-cash charges and one-off or non-operational items fully disclosed in the Accounts 2 Capex stated is Property Plant and Equipment cash capex 3 Net cash / (debt) is defined as borrowings less cash but excluding lease liabilities FY 2019 Results – 28 April 2020 5

* * * * * *

Previously reported in the March Trading Update and now disclosed as audited financials.

*

Financial Performance

Recap of position reported in March 2020 Trading Update

6 114 133 155 156 140 FY15 FY16 FY17 FY18 FY19

Revenue £’m Revenue down 10% YoY

• £140m revenue in line with November

Trading Update (£136m to £142m)

• FX tailwind of £6m
• Year-on-year reduction primarily as a result
• f two key customers:

‒ Wireless customer affected by changes in Global Markets ‒ Photonics customer affected by technical issues independent of IQE

29 32 37 26 16 FY15 FY16 FY17 FY18 FY19

Adjusted EBITDA £’m Loss from operations in line with expectations

• £4.7m Adj operating loss in line with

November Trading Update (“mid-single-digit

• perating loss”)

Adj EBITDA reduced due to high

• perating leverage
• £16.2m EBITDA
• Year-on-year reduction resulting from lower

revenues and the costs associated with increased capacity

19 22 27 16 (5) FY15 FY16 FY17 FY18 FY19

Adjusted Operating Profit £’m

FY 2019 Results – 28th April 2020

Capex, Cashflow and Net Debt

Recap of position reported in March 2020 Trading Update

7

• Cash capex of £32 million at the lower end of

the 2019 guidance of £30 – £40 million

• Expansion capex makes up £29.3m (92%) of

cash capex in FY19

• Underlying cash capex has consistently

reduced year on year since FY16

• In addition, £10.2 million of R&D and acquired

intangibles capitalised in FY 2019 (£12m in FY18)

FY16 FY17 FY18 FY19

Capex Cashflows £’m

Other Expansion Asset Finance £30m £32m £11m £11m FY 2019 Results – 28th April 2020 23 24 31 17 17 FY15 FY16 FY17 FY18 FY19

Adjusted Operating Cashflow £’m

• £16.5m cash from operations before

exceptional items

• 100% Adj EBITDA cash conversion
• £16.0m at lower end of November Trading

Update guidance (£15-20m)

• Access to material debt facilities (increased to

c£57m during FY19)

• IQE will continue to evaluate actions to

balance the preservation of cash with the longer term investment needs of the business

(23) (40) 46 21 (16) FY15 FY16 FY17 FY18 FY19

Net Debt £’m

Reconciliation of Adjusted to Reported Loss

8 FY 2019 Results – 28 April 2020 8

£’million FY19 £m Explanation Adjusted Operating Loss (4.7) Exceptional legal costs (4.3)

An arbitration hearing was held in September 2019. Whilst the specific findings of the Arbitral Tribunal remain confidential, the Tribunal’s ruling was entirely in IQE’s favour but the associated court case is ongoing.

Impairment of CSC preference shares * (4.1)

Re-forecasted business plan which shifts revenue to the right and reduces returns in the context

• f current technology markets and the R&D funding landscape post Brexit (refer to appendix

slide 24).

Impairment of intangible assets * (3.8)

Discontinuation of certain non-revenue earning R&D investments (£2m) and patents (£0.7m) under the governance of IQE’s New Product Introduction process. Legacy IT development costs (£1.1m) written down as IT systems are transformed.

Write down of CSDC right of use asset * (1.6)

Arising from the acquisition of the Group’s Singapore JV (refer to appendix slide 22).

Restructuring costs (0.8)

Minor restructuring undertaken in FY19 to re-size cost base in the context of demand.

Other items 0.5

Includes £0.8m share based payments credit.

Reported Operating Loss (18.8) Loss absorption charge * (4.0)

Recognised within share of JV losses resulting in total CSC pref shares write down of £8.1m (refer to appendix slide 24).

US deferred tax asset write downs * (9.6)

Write down based on assessment of future US cashflows in context of changes in global markets.

Other items (2.7)

Includes share of Singapore JV losses (pre-acquisition), interest charges and other tax items.

Reported Loss after tax (35.1)

* Non-cash items

Business Update

Drew Nelson, CEO

Multi-site operations across 3 continents Input supplies are dual

• r multi-sourced where

possible Govt advice and guidance implemented in each region to protect staff and maintain operations

10

Opportunities driven by 5G and Connected Devices Confidence in supply chains evident in January March 2020 revenue slightly ahead of our internal expectations Critical infrastructure supplier status in all four States in the USA No restrictions on manufacturing in the UK Taiwan and Singapore

• perations currently

unaffected OEMs continue to pursue product roadmaps, evidenced with recent launches Businesses and consumers dependent

• n mobile

communications in a time of social distancing and self- isolation Governments likely to pursue 5G rollout as part of economic stimulus Already evidence of this in Asia Underlying Demand Critical Supplier Status Global Footprint New Handsets 5G Roll Out Stimulus

FY 2019 Results – 28th April 2020

Resilient in the context of short-term uncertainty

IQE is a critical part of global technology supply chains

Well-positioned to scale the business

Significant operational progress made in 2019

11

Infrastructure phase of the capacity expansion programme completed Investment in GaN capacity in Massachusetts to capitalise on forthcoming 5G infrastructure deployments completed Newport Mega-Foundry 3D Sensing Production and Qualification progress Next generation product development Evolution of the Board and Executive Management to support growth ambitions and scalability of operations Increase to credit facilities to support navigation of challenging market conditions

FY 2019 Results – 28th April 2020

5G Infrastructure Rollout:

• 5G Base Stations
• GaN on Si
• GaN on SiC

3D Sensing Proliferation:

• Low end smartphone
• Wearables / consumer devices
• Commercial and industrial

applications

• Quasi Photonic Crystal for module

integration

Well-positioned to grow the business

12

Short Term Medium Term Long Term

High Speed Datacoms:

• 10G & 25G DFBs

(Distributed Feedback Lasers)

• 10G & 25G APDs

(Avalanche Photo Diodes)

• PIN detectors

Asian Market Wireless Demand:

• Power Amplifiers

for handsets

• Introduction of

integrated PA

3D Sensing Proliferation:

• Android Market

(High/Mid end)

• World-facing camera

(ToF)

• Lidar

Environmental & Health Monitoring LiDAR Connected Devices Smart Grids 5G Infrastructure Rollout:

• GaN for mm Wave / small cell networks
• High speed Lasers & detectors for backhaul networks

5G Handset Opportunity:

• Filters and Switches (cREO)
• Higher efficiency Power Amplifiers
• Integrated PA & Switch (BiHEMT)

FY 2019 Results – 28th April 2020

IQE continues to invest in the technology roadmap

Healthcare Big Data Sensing LiDAR Connectivity

Portable Telehealth Monitoring Robotics and Automation Autonomous Driving Connected Vehicles Energy Generation LEDs Solar Energy Industrial Heating Office Communications Satellite Communications 5G Base Stations 5G Small Cell Networks Augmented Reality 3D Sensing Personal Devices Security WiFi Electrification Diagnostics High-Speed Data Centers AI Machine Vision Medical Imaging

Compound semiconductors everywhere

Smart Grids

Leading innovation from within

13

2020: Looking Forward

Tim Pullen, CFO

IQE has responded swiftly and continues to closely manage the rapidly evolving implications of the global pandemic through our Business Continuity Committee

15 FY 2019 Results – 28th April 2020

Business Continuity Committee

Protecting our people Maintaining

• perations

Ensuring liquidity

Coronavirus response

16 FY 2019 Results – 28th April 2020

• The advice and guidance of global health organisations, and national and state

governments has been implemented at all of IQE’s global sites

• Dynamic policy changes have been overseen by the Business Continuity Committee
• Staff are working from home where able
• Increase in cleaning regimes
• Shift segregation planning
• Most importantly – frequent and clear staff communications and support

Business Continuity Committee

Protecting our people

17 FY 2019 Results – 28th April 2020

Maintaining Operations

• Critical Infrastructure Supplier Status in all four states we operate in in the USA
• US Department for Homeland Security: “Suppliers have a special responsibility to

maintain normal work schedule”

• No restrictions on operations in the UK
• UK Business Secretary: “Manufacturing is a critical part of our economy”
• Taiwan and Singapore less affected by the spread of the virus; operations continue
• Social distancing and hygiene measures implemented at all sites
• Daily operational monitoring and status update

Business Continuity Committee

18 FY 2019 Results – 28th April 2020

Ensuring Liquidity

• Total debt facilities of £57m put in place during 2019
• Positive Q1 2020 trading means net debt reduced versus 31st Dec 2019 position of £16m
• Long-standing and trusted relationship with HSBC, with regular communication
• HSBC agreed to formally relax debt covenant tests at Dec-20 and Jun-21, ensuring

continued access to credit in event of severe downside

• Capital expenditure significantly reduced following completion of the infrastructure

phase of the capacity expansion

• Focus on working capital management and cash preservation options

Business Continuity Committee

Market Outlook

Q2 Outlook remains positive Uncertainty over the effects of a global recession on demand for IQE’s products

19 FY 2019 Results – 28th April 2020

Fall in Business and Consumer Spending due to economic downturn Potential delays to OEM product launches Potential business disruption within handset supply chains

Handsets

Negative Demand Drivers

Market

Positive Demand Drivers

Potential maintenance of OEM product roadmaps and launches Business and Consumer demand to refresh phones at a time of social distancing and self-isolation Lockdown measures preventing 5G infrastructure rollout Potential business disruption within communications infrastructure supply chains

Infrastructure

Potential Government acceleration

• f 5G roll out as economic stimulus

Potential business disruption within military supply chains

Military

Continued US Government support to major programmes for reasons of national security and economic stimulus

FY 2020 Financial Outlook

Q1 2020 trading slightly above internal expectations; Unprecedented uncertainty in Global Markets

• Full effects of the Coronavirus pandemic on global economic output in 2020 still uncertain. Impact of an

anticipated downturn on IQE’s markets also uncertain.

• Increased risk to near-term revenues is not currently quantifiable.
• Given unprecedented levels of uncertainty, we are unable to provide explicit guidance.
• Investment in Property, Plant & Equipment will significantly reduce in 2020 to under £10m, following the

completion of the infrastructure phase of our capacity expansion programme.

• Investment in R&D will continue and we anticipate up to £10m of capitalised intangibles in 2020.
• We continue to monitor developments around the pandemic, economic activity and specific market

intelligence very closely and will update the market as situation evolves.

20 FY 2019 Results – 28th April 2020

Appendix

Singapore Acquisition Accounting

£’000 Recognised values on acquisition

Inventory 0.5 Trade and other receivables 1.6 Cash and cash equivalents

• Trade and other payables

(1.9) Net identifiable assets and liabilities 0.2 Consideration paid

• Negative goodwill

0.2

22

• The Group’s share of CSDC’s cash losses prior to acquisition totalled £0.7m

(2018: £2.0m)

• The acquisition enabled the Group to take control of CSDC’s operations in
• rder to:

1. Take the necessary steps to restructure the business which had been loss making in the period prior to acquisition due to the under-utilisation of assets and property lease obligations 2. Pursue Asian market sales opportunities for MBE-based products to return the operation to profitability

• The nominal value of the acquisition consideration paid to the Group’s former

joint venture partners (~£5) reflects the loss making nature and cash funding requirements of CSDC’s operations at the date of acquisition

• CSDC licenced intellectual property and leased equipment from the Group

such that acquired assets and liabilities at the date of acquisition were principally represented by working capital balances

• Acquired net working capital balances of £0.2m exceed the nominal

acquisition consideration paid giving rise to negative goodwill on acquisition

• Negative goodwill has been credited to the income statement in SG&A and

added back as part of the Group’s adjusted profit measures FY 2019 Results – 28th April 2020

Summary impact of IFRS16

23

• IFRS 16 is the new International Financial Reporting Standard for ‘Leases’ and is

effective for annual periods beginning on or after 1 January 2019

• The standard requires operating leases, with limited exceptions, to be accounted

for on balance sheet through the recognition of a right of use asset and a corresponding lease liability

• Application of the standard results in:
• A significant gross up of non current assets (right of use assets - £39.4m net of
• nerous lease provision/impairment) and liabilities (lease liabilities - £48.0m)

in the balance sheet; and

• Straight line operating lease rental expenses previously charged to Adjusted

EBITDA being replaced by: i. A depreciation charge on the right of use asset, charged on a straight line basis over the lease term. ii. A interest charge on the lease liability which reduces over the lease term.

• The impact on earnings is dilutive in FY19 with a ~£0.6m reduction in profit for the

period although the impact on Adjusted EBITDA is positive with an increase of ~£3.6m as lease rentals have been reclassified from operating costs to depreciation and interest *Leases with variable rents based on actual usage of assets, such as the Group’s contractual right to use

the assets of CSC, are excluded from lease liabilities with costs recognised in operating expenses on a consistent basis with prior years

Lease portfolio is EPS dilutive until FY22…. and EPS accretive from FY22 reflecting relative maturity

• f the portfolio of leases in the Group

IFRS 16 Income statement lease profile

Increase in cash rentals reflects end of IQE NP rent free period * Chart illustrates IFRS 16 impact of existing lease portfolio

£’000 Lease Rentals Dep’n Interest Impact Revenue

• Operating loss

3.6 (3.6)

• Adj. EBITDA

3.6

• 3.6

Profit before tax 3.6 (3.6) (0.6) (0.6)

FY 2019 Results – 28th April 2020

CSC Preference Share Write Down – Accounting explained

£’000 Financial Asset

CSC Preference Share (amortised cost) - FY18 7.9 Unwind of Discounting 0.2 CSC Preference Share (amortised cost) – FY19 8.1 Expected Credit Loss (‘ECL’) - Impairment (4.1) Net Carrying Value after ECL 4.0 Loss Absorption – IAS 28 (4.0) Carrying Value

• 24
• Preference shares due from CSC are classified as a financial asset
• Classification as a financial asset reflects the objective and intention to collect the

contractual cash flows from cash generated by CSC

• Credit risk associated with repayment of the financial asset has increased significantly,

based on CSC’s latest financial forecasts which reflect the current market environment and landscape for grant funded projects post ‘Brexit’. These forecasts indicate that repayment of the debt is likely to be significantly delayed compared to previous expectations

• Expected credit losses have been assessed, linked to cash flow forecast scenarios for CSC

with the impairment of £4.1m calculated as the weighted average probability of loss under each scenario

• The increase in the forecasted period over which CSC is expected to generate sufficient

cash to repay the financial asset has led to a reassessment of the preference shares as a ‘long term interest’ in the joint venture

• Reassessment of the financial asset as ‘long term’ requires the Group to apply the loss

absorption requirements of IAS 28 ‘Investment in Associates’ to the carrying value of the preference share debt, after accounting for any expected credit loss impairment

• Unrecognised losses in CSC exceed the net carrying value (£4.0m) of the reassessed long

term financial asset resulting in the recognition of a further share of CSC’s losses of £4.0m and the write-down of the preference share financial asset to £nil.

• The expected credit loss of £4.1m has been charged to the income statement in
• perating loss whilst the IAS 28 loss absorption has been charged to the income

statement in share of joint venture losses FY 2019 Results – 28th April 2020