Elmos Semiconductor SE

XETRA:ELG

Earnings Call Transcript 2018-Q1

[Operator]

Good morning and good afternoon, ladies and gentlemen, and welcome to the Elmos Semiconductor AG conference call regarding Q1 results 2018. [Operator Instructions].Let me now turn the floor over to your host, Mr. Dr. Arne Schneider, CFO.

[Arne Schneider, CFO & Member of the Management Board]

Good morning, ladies and gentlemen. I would like to welcome you to our conference call for the results of the first quarter 2018. Today I host the call as our CEO Dr. Mindl is traveling.So let me start with a short overview of our development. The year started with a positive sales and earnings development in line with our expectation. Sales went up by 4.5% to EUR 63.5 million. The EUR 7.9 million EBIT translates to a margin of 12.4%. The positive sales development is being supported by all 3 business lines. We see that our products are convincing in the market which puts us in a positive mood for the quarters to come.From a regional perspective, we see continued growth in Asia, plus 16%, whereas Europe remains stable at around EUR 32 million, EUR 33 million. The development in the U.S. and other countries mainly shows the relocation of production sites of some customers as well as normal volatility in order behavior.On the segments. Looking at our 2 segments, Semiconductor and Micromechanics, the positive sales and earnings development was driven by the Semiconductor segment. This segment came to sales of EUR 58.9 million and an EBIT margin of 12.9%. The Micromechanics segment accounted for sales of EUR 4.6 million, actually less than last year's Q1 in euro terms, but more than last year's Q1 in U.S. dollar terms which is their kind of home currency. And an EBIT margin of 5.3%.Please bear in mind that the Micromechanics segment always shows higher volatility due to its smaller absolute size. Also with a rejuvenated product portfolio and new product releases, we are convinced that in the medium time frame, SMI will contribute positively to the group's performance. We have to accept that the change from the old to the new product portfolio took longer than originally expected. It also implies the change in the addressed markets with a new focus on medical and industrial. The good aspect of that is that we also see better margins ahead, valuing the specific innovations SMI is now able to deliver.Returning to the group level and coming to profitability. Gross profit in the first quarter 2018 amounted to EUR 25.7 million or a gross margin of 40.5%, almost the same as in Q1 2017. This reflect several and normal positive and negative effects. Just to name some examples, the U.S.-euro exchange rate, the yearly price reductions, the increase in wafer prices, seasonal provisions build up and some more. Also it is noteworthy that product ramps and products changeovers as well as the test expansion, we fired some efforts which are also reflected in the gross margin.Operating expenses are relatively low with EUR 18.1 million or 28.4% of sales which is mainly an effect of the capitalization of development expenses. We have capitalized roughly EUR 2.6 million in Q1 '18 compared to only EUR 0.2 million in the previous year's Q1. As a reminder, we have changed the capitalization policy starting in Q2 2017. So this actually is the first Q1 that is impacted, that's why there's the large change. The capitalization amounted similar to the last 2 quarters, Q3 was EUR 2.5 million, Q4 was EUR 2.7 million. So the EUR 2.6 million that we see now in Q1 is pretty much in line with what we have seen.Adjusted by this effect, we would have seen R&D expenses of 16.4% of sales relative to 16% in the prior year period. So it goes up if you compare it to the Q1 and adjust the capitalization. You might have also noticed that the other 2 positions of operating cost, M&A and G&A contribute positively to our margin situation. As they're quite stable in absolute terms while sales increased, we get almost 1 percentage point positive impact on the EBIT margin from that.ForEx income or expenses in Q1 resulting off a negative EUR 0.4 million play a subordinate role are -- and are the result of hedging activities as well as the evaluation of a country [indiscernible] denominated in foreign currency. Overall as a result of these positions, EBIT came to EUR 7.9 million, corresponding to an EBIT margin of 12.4%. After taxes and minorities, the consolidated net income amounted to EUR 5.4 million or 8.6% of sales compared to EUR 2.9 million or 4.8% in the first quarter of 2017. This equals basic earnings per share of EUR 0.28 versus EUR 0.15 in the respective prior year period.The operating cash flow of the first quarter 2018 reached EUR 4.5 million compared to EUR 8.6 million in the prior year period. Capital expenditures, and this is now excluding capitalized development expenses, amounted to EUR 9 million or 14.2% of sales. The high investment burdened the adjusted free cash flow which came to negative EUR 7.1 million. This is also reflected in the net cash positions amounting to EUR 24.5 million at the end of March 2018.Now coming to our guidance, unchanged. We assume unchanged good economic conditions and we confirm our guidance originally issued in mid-February. We expect sales to grow by 8% to 12% compared to 2017. EBIT margin is expected to be around 13% to 17%. We will continue to expand our test operations also in this year as you know resulting into capital expenditures excluding capitalized development costs of below 15% of sales. Due to these high investments, we expect the adjusted free cash flow to be negative and the guidance is based on $1.20 to the euro.Further information and figures for the first quarter can be found in our quarterly statement available at our home page, and now I would like to open the floor for question.

[Operator]

[Operator Instructions] And the first question comes from Mr. Malte Schaumann, Warburg Research.

[Malte Schaumann, Equity Analyst]

The first question is in regard on your gross margin. It is fair to assume that many ramp-ups and other things offset maybe positive and more positive impact from the renegotiated Duisburg contract? I would have expected kind of a -- to see kind of a slightly higher margin comparison to the last year owing to the Duisburg contracts.

[Arne Schneider, CFO & Member of the Management Board]

There are many effects going into that. So I guess it comes out pretty much like the prior year quarter. We see the dollar development which is generally good, we see the contracts which is generally good, we see price reductions in Q1 which are of course not so good, we see increased wafer prices, we also see some provisions mostly for personnel which are a seasonal things that always burden Q1 and that burden the other quarters not so much or are even reduced like vacation provision. And yet there is a product ramp and changeover effect, and there's also an investment effect in the cost burden we see in this Q1. As you grow, this always leads not only to CapEx, but also to little items that are just cost. So they are also included and they might be a little overlay to what you would otherwise expect.

[Malte Schaumann, Equity Analyst]

So very generally, very broadly, more positive developments so then we expected for the coming quarters?

[Arne Schneider, CFO & Member of the Management Board]

But we've seen the last years and based on history, this seems to be a fair assumption.

[Malte Schaumann, Equity Analyst]

And then on your R&D line, I was wondering could you give us a sense if you capitalize EUR 2.6 million, what is the corresponding amortizations you booked in the first quarter and how will that accelerate in the coming quarters as you -- as the capitalized position -- asset position keeps increasing?

[Arne Schneider, CFO & Member of the Management Board]

Well, these are processes that are rather slow. So we wouldn't guide them, but you shouldn't expect drastic changes there. I mean if you look at how the capitalization after the change in capitalization policy developed over the quarters, there was not kind of a big movements in there. And the same is of course true for all the other aspects around capitalization. I would generally not expect huge movements because it's a, from an accounting standpoint, a slow process.

[Malte Schaumann, Equity Analyst]

And can you share figures for the amortization on capitalized development costs?

[Arne Schneider, CFO & Member of the Management Board]

No, we wouldn't guide that for the year.

[Malte Schaumann, Equity Analyst]

And actual figure for Q1?

[Arne Schneider, CFO & Member of the Management Board]

We present as much as we can, but we wouldn't present more of that.

[Malte Schaumann, Equity Analyst]

And then third question is on SMI. You indicated that you see some progress with the new focus. Is there a certain point of time when you would expect more stronger sales impact somewhat in the future?

[Arne Schneider, CFO & Member of the Management Board]

Yes, we think that SMI was successful on the technical side to renew its product portfolio and we've seen, also publicly seen even, of part of that interesting announcements of new products that have not yet translated their full potential into revenue. And we expect that to happen over the foreseeable future now. So generally, we are positive SMI's development.

[Malte Schaumann, Equity Analyst]

So should we expect something to see already in 2018 or is that rather an item for the next year?

[Arne Schneider, CFO & Member of the Management Board]

SMI is a small entity, so it always fluctuates a lot. I wouldn't kind of overstress the Q1 that we are seeing now, particularly not what we are seeing in euro, because in euro you see that SMI shrinks a little bit while in U.S. dollar actually there is growth relative to the Q1 2017. So this is more the direction that we should expect.

[Malte Schaumann, Equity Analyst]

And then last question is regarding a little bit too early in the year, new design, new design activity, how you're -- the pipeline looks like, customer activity, any specific comments you are able to make.

[Arne Schneider, CFO & Member of the Management Board]

Well we see a healthy business climate in general. We think that design wins are on track, but it's, to be honest, really too early to tell what will be the end result. We always look at the growth chart where we see month-by-month how this develops, but now 4 months are filled and 8 months are open. So this would be really a big guess to already say it's good or a bad or whatever year. It's all on track, that is really what we know.

[Malte Schaumann, Equity Analyst]

Yes, I mean this the important thing.

[Operator]

The next question comes from Mr. Robin Brass, Hauck & Aufhäuser.

[Robin Brass, Equity Analyst]

One question also to the wafer price increase I will say overall. Looking at maybe the large German supplier here, I guess you look also for alternatives, so how is this development overall when you look forward continuing? Do you see enough alternatives maybe internationally and is there any issue here also with the Chinese and American tariff negotiations here that affects your supply here? And then maybe a second question also on FX headwind, that's on the margin, but I would assume the top line was affected maybe around EUR 2 million or so or how much would that be?

[Arne Schneider, CFO & Member of the Management Board]

So first on wafers, yes we see increasing wafer prices. Of course we have multiple sources for wafers and the most aggressive price increase parties are less well liked these days by us. So firstly, there are shifts in volume from the one to the other. Generally from the statistics that we get, we see that wafer demand is high but not increasing any more. So that makes us confident that we may, over the medium term, see a normalization here. We also hear that people are investing in 8-inch capacity. So we will have to see how this whole wafer increase story develops over the years. But since we multisource wafers, we think that the situation is very well under control. And yes we always love low prices and not so much like the high prices, but this is also compared to the general business and in fact we can compensate and we can live with. We have no specific information on tariff impacting us from as of now. It's no news that it's hard to predict what Mr. Trump does next. So we are awaiting any news which can come at the announced or non announced times. So this is very hard to do any forecasting there. On the FX, you know that we have some 20% to 25% of our sales in dollars. So the impact if you, for instance, compare the Q1 2017 to the Q1 2018 is EUR 1 million to EUR 2 million in revenue. So negative in revenue because the dollar in revenue terms moved against us, but of course in profitability terms it moved for us. So this is of course what happens if you show dollar revenue in Europe.

[Operator]

At the moment there seem to be no further questions. [Operator Instructions] And the next question comes from Mr. Charles Lepetitpas from Natixis.

[Charles Lepetitpas, Analyst]

So actually maybe a question on the sales growth, revenue growth was only 4.5% in Q1. So it seems light regarding in view of your annual guidance. How do you explain that? And I was a bit surprised you said it was as expected. So why was that as expected?

[Arne Schneider, CFO & Member of the Management Board]

Well, looking at sales, this was actually really as expected for us. We compare this to a very strong Q1 '17, also to -- consecutively to a strong -- extremely strong Q4 '17. So if we look at our planning, this was pretty much spot on. We also talked a little bit about an FX headwind if we do the Q1-Q1 comparison. So fundamentally we think everything is right.

[Charles Lepetitpas, Analyst]

And your guidance is still very wide. So -- and your -- yes we are 5 months in the year. So how do you explain that the guidance is still very wide. And in the past, if I remember well, it was not so wide.

[Arne Schneider, CFO & Member of the Management Board]

Well, if I remember correctly, we always had 4 points. Sometimes we opted for, say, in larger than or smaller than, but yes we will keep it that wide for a time since there is so much of the year that is yet to come. We -- generally if we look at sales, which is of course the driver of all things, we have to accept that there we face cut-off effects which when we come to the end of any given year, create a little bit of volatility around the sales development. So that is one effect where we say it is very hard to get a guidance smaller and smaller as the year progresses because that is something that is decided end of December and we can do nothing much about it. So we will probably not have a smaller and smaller and then even smaller guidance though our expectation of course get better because we also have effects that are just random at the end of the year and we have to include them as well.

[Operator]

Mr. Schneider, there are no further questions left.

[Arne Schneider, CFO & Member of the Management Board]

Okay. Thanks for your interest and your participation in the call. As a closing remark, I would like to remind you of our upcoming events. Our AGM takes place on May 16 in Dortmund and parts will be broadcasted via the Internet. Our half year result will be published on the 2nd of August and we would like to invite you already today to join us for the conference call at this occasion. Goodbye and have a nice day.

[Operator]

The conference is no longer being recorded.