Elmos Semiconductor SE

XETRA:ELG

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor AG conference call regarding the first quarter 2019 results. [Operator Instructions] Let me now turn the floor over to your host, Dr. Anton Mindl, CEO.

[Anton Mindl, Chairman of Management Board & CEO]

Ladies and gentlemen, also a warm welcome from my side. We are talking about the first quarter results of 2019. Obviously, Dr. Arne Schneider and myself, we will host the call together as usual. The start into the year 2019 was very much in line with our expectations. Elmos is developing reasonably well in the currently quite challenging market environment. Our products are very well received in the markets and more and more customers are convinced that it is a good idea to use Elmos chips and applications, like small motor drivers, mainly sensing technologies and also lighting, just to pick a few. Also, it's clear that Elmos could not do anything about the real downturn in the business cycle. We expect to grow this year and confirm our guidance from February once more. So despite a somewhat volatile market sentiment, we see positive development ahead for Elmos. Having said this, let me provide you with a short overview of the current figures. Sales increased by 8.8% year-over-year, coming to EUR 69.1 million. We benefited not only from a solid demand in running and ramping products but also had a few positive cutoff effects. We experienced some carryover topics from '18 but also some orders were collected earlier than originally thought. A little bit of support came also from the U.S. dollar to euro exchange rate if we compare the years, around 2%. Of course, also the weaker Chinese markets made its mark on the figures. The original sales development reflects general market trends and economic environment in individual markets. Europe has a more or less stable situation with EUR 33.1 million still counting for roughly 50% of our total sales volume. The U.S. stood at EUR 2.1 million, other countries at EUR 7.6 million and Asia at EUR 26.2 million or 38% of sales. Asian growth took a breather during the economic downturn of the last months, specifically in China. But we see already slight signs of recovery even in China. Last but not least, the government has taken tax measures to support market sentiment. In general, we have no doubt that individual mobility is the marketplace to be, not only in Asia but around the world. Our products in the developments we are working on will not only serve these market trends but with our continued stream of innovations, we will have structure influence on how applications in the world of individual mobility develop. Coming now to our segments, Semiconductor and Micromechanics. They both enjoyed positive momentum. The Semiconductor segment came to sales of EUR 62.2 million or a plus of 5.6% and an EBIT margin of 14.3%. The MEMS segment developed disproportionately strong in the first quarter, accounting to sales of EUR 6.9 million, a plus of almost 50% and an EBIT margin of 19.9%. We observed a continuously positive developments of our MEMS segment in the last quarters, but volatility will remain due to its smaller absolute size. Coming now to profitability. Gross profit was quite strong in the first quarter of 2019, amounting to EUR 31.4 million or gross margin of 45.5%, reflecting a good operating performance. Operating expenses are slightly higher in absolute terms in percentage of sales amounting to EUR 22 million or 30.1% -- 31.8% of sales. This is driven by rising R&D expenses as we strengthened our R&D capabilities at the beginning of the year as planned. Part of this is also our new R&D location in Düsseldorf. Thus, EBIT came to EUR 10.2 million corresponding to an EBIT margin of 14.8%. After taxes and minorities, the consolidated net income amounted to EUR 7 million or 10.1% of sales compared to 5.1 -- EUR 5.4 million or 8.6% in the first quarter of 2018. This equals basic earnings per share of EUR 0.36 in the quarter of reports today versus the EUR 0.28 in the respective prior year period. The operating cash flow for the first quarter of '19 reached EUR 7.9 million compared to EUR 4.5 million last year. Capital expenditures, excluding capitalized development expenses, amounted to EUR 16.1 million or 23.3% of sales, reflecting the expansion of our test capacity and higher spending in Q1. These are, of course, also cutoff net effects and full year guidance remains unchanged. CapEx spending and increase in working capital are reflected in the adjusted free cash flow as well, which came to minus EUR 10.4 million for the first 3 months in 2019. At the end of the quarter, we had a net debt position of EUR 11.7 million versus EUR 16.9 million net cash position on the 31st of December last year. The main driver for this rather big swing from a net cash to a net debt position is the first-time application of the IFRS 16 standard on leases. This led to an increase in PPE, property, plant and equipment, by roughly EUR 17 million and is reflected in the calculation of the net cash by higher financial liabilities. Leases are now more or less in that respect treated like real debt. Last but not least, let me come to our guidance, which we confirm for '19. We expect sales to grow by 6% to 10% compared to 2018. EBIT margin is expected to be between 13% and 17% of sales. Capital expenditures, excluding capitalized development costs, are expected to be below 15% of sales. The adjusted free cash flow will be positive. The guidance is based on an average exchange rate of USD 1.15 to the euro, and of course, the assumption that we have no major changes in the economic environment. Further informations and figures for the first quarter 2019 can be found in our quarterly statement available in our homepage. Now I would like to open the floor for questions.

[Operator]

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

[Malte Schaumann, Equity Analyst]

The first one is regarding any specific trends you see materializing, manifesting in your order situation, where you can elaborate a bit on what you see within your order books from different customers, different regions. Any specific things that give you confidence, give you less confidence? What are you seeing?

[Anton Mindl, Chairman of Management Board & CEO]

I mean I tried to express it a little bit that we think that we have quite good business sentiments in the areas we are operating. So we see growth trends in sensors. I mean we have quite a few ramping products. I mean we always ask ourselves, "Why are we, let's say, so special at the moment as compared to the other semiconductor companies?" If you look to their quarterly performances, most of them really report a negative Q1-on-Q1 comparison. There are only really very few that grow like we grow. And I would say the major reason for us to grow is that our part of ramping projects is maybe higher than with other competitors. And as we also expressed during other opportunities and calls, I think we didn't load our customer pipeline as much as other customers did. So these destocking effects are less severe for Elmos. And those two factors, I think, were true for completely Q1 and they are still true for the quarters to come. In general, I've also expressed in my presentation, we see also signs of slight recovery. I mean again the question would then be: Is it due to the attractiveness of the products that we are selling? Or is it a market sentiment? Well, that's not easy to answer. In some areas, we see more demand for products, which we think are very attractive to the market because they have a nice functionality and a very competitive price. In other areas, it's just the demand because a car model is better sold than another. So I think it's hard to say. In general, we are still in a somewhat corrective situation, I would say. But we see slight trends of improvements. But also maybe a few of the science might be attributed to the attractive products we have in our portfolio.

[Malte Schaumann, Equity Analyst]

Okay. Good. With respect to the product ramps, is that more or less evenly distributed over the year? Or is that kind of front end or back end-loaded?

[Anton Mindl, Chairman of Management Board & CEO]

That's again hard to say because yes, a lot of ramps all over the year. But what you never can predict results is how steep will they be because that depends very much not only on the ability of the Tier 1 to ramp but also it's even more so on the ability of the end customer, of the car company to sell its cars to the market. And I mean many of the reasons why these, let's say, sales channels have been somewhat blocked in the last months was not only a lack of attractiveness of these cars, but it was just simply the effect of these exhaust procedures that just caused the corporate users to remove cars from their Internet pages to be configured because they had to make sure that WLTP is finalized before they offer it again on to market. So I mean I don't like to talk about examples. But if you -- even big car companies, if you went to their Internet pages and look for a car that you thought you were familiar with half a year ago, you experience you couldn't configure it because it was just not WLTP-approved.

[Malte Schaumann, Equity Analyst]

Okay. Then with respect to your MEMS business, I mean, this certainly had a huge volatility from quarter-to-quarter. But is the growth seen in Q1 some kind of indication for growth you expect for that business in 2019? Or is that kind of pure volatility that's kind of usual?

[Anton Mindl, Chairman of Management Board & CEO]

The problem, Mr. Schaumann, and you know this, that I've never been neutral with my guys in California. I have been always in front of them. I think we see structural signs in that. I always -- in talking about this medical devices that we support by our pressure sensors, I think we created a unique product where we, first of all, made a world record, tiny, little, small pressure sensor that is capable of doing in vivo measurement, so being exposed to blood, which is a quite difficult chemical stuff, if you look just from the chemical purpose -- from the chemical properties, this fluid. And not only have we been successful in that, but we have now also been successful to contact this in a very specific technique that people take that and patent it. It's not easy to contact a semiconductor that's in the size of a hair or even smaller and then attach three wires to that and that reliable with 0 failure tolerance, which you can assume if this is involved in a medical treatment. And we are about to roll this out. So we have many interesting customers and interesting projects to follow on. But this will go to deepen. Of course, I mean, we are talking about still 10% of the business, don't forget this.

[Malte Schaumann, Equity Analyst]

Yes. Sure. Okay, then with respect to your gross margin, I think I have to go back to 2006 or something to see kind of a 45% gross margin in the first quarter. I mean usually Q1 is the weakest quarter of the year. So what that would tell us? I mean were there any specific kind of one-off effects included in there? Do you expect only a slower increase during the coming quarters in comparison to the normal trend? How should we treat that?

[Anton Mindl, Chairman of Management Board & CEO]

I won't give you guidance for the quarters to come. But what I can comment, what happened in Q1, it's quite simple. I mean compared to the, rather, I would say to be very polite, difficult situations we had in production in the last quarter of last year, we had a very controlled situation now in Q1, which was, of course, due to the many investments that we undertook and also the increased resources and met all the additional measures that were necessary to cope with the higher volume. And so we have been quite efficient in production. That's maybe a fair answer to give.

[Malte Schaumann, Equity Analyst]

And is there any reason why we should expect that you won't be as efficient in the next quarters or...

[Anton Mindl, Chairman of Management Board & CEO]

Not to my knowledge for the moment. Actually, production is a creative animal. You try to tame it, but if you can. But I mean, of course, we are always working on efficiency programs. Never forget, please, I mean, we are growing by 8.8%. Under that lies again, like every year, price negotiations. So in the end, you produce again much more parts than you produced in Q1 last year. So it looks -- maybe I sound relaxed and maybe it looks a little bit relaxed when you look at our figures. But I mean still, quarter-by-quarter, we increased production capacity rather significantly.

[Malte Schaumann, Equity Analyst]

Okay. And then with respect to pricing, if you could set up this year's pricing to be -- has been, what, pretty much in line what you see every year? Or was it kind of...

[Anton Mindl, Chairman of Management Board & CEO]

I mean we weren't Mount Everest, but we weren't also this never strong. So it was the same thing.

[Malte Schaumann, Equity Analyst]

Okay, good. And then on design wins, maybe you could comment on, I mean, just 1 quarter with maybe your view on current design wins since the start of the year?

[Anton Mindl, Chairman of Management Board & CEO]

Still very much in line with our ambition targets for this year.

[Malte Schaumann, Equity Analyst]

Okay, good. My last question would be then on CapEx.

[Anton Mindl, Chairman of Management Board & CEO]

Sorry, go ahead.

[Malte Schaumann, Equity Analyst]

My last question would be on CapEx. I mean you have strong growth. Pipeline seems to be okay. You're good for the rest of the year, so I don't assume that you kind of consider an adjustment of your CapEx targets, especially in your test area and capacity.

[Anton Mindl, Chairman of Management Board & CEO]

We don't adjust CapEx for this year, no.

[Operator]

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

[Robin Brass, Equity Analyst]

Just also one question on the joint venture with Fraunhofer. I mean you didn't change your guidance obviously after the announcement. But is there any detail you can give us? Like is there -- for example, was there maybe some improvements in pricing you negotiated or something like that? Or how do you see the joint venture here going forward to work?

[Anton Mindl, Chairman of Management Board & CEO]

I mean we never disclose any things of details of contracts that anyhow are under NDA. In general, I mean, if we sign a contract, we sign it because we think there are good reasons to do so. And to sign this contract, there was quite a few good reasons to do so. First of all, was the continuation of this successful cooperation with Fraunhofer Institute. And I mean all the other aspects you can assume have had since were compromises as well, not only from the side of Fraunhofer but from our side as well. And I mean we intentionally said that this contract signing does not have any influence on the guidance. So it's just the way I would like to answer the question.

[Operator]

At the moment, there seem to be no further questions. [Operator Instructions] Dr. Mindl, there are no further questions from the audience.

[Anton Mindl, Chairman of Management Board & CEO]

Okay. Thank you very much for bringing it right back to me. So thanks to you all for your interest and participation on the call. As a closing remark, like always, I would like to remind you of the upcoming events. Our Annual General Meeting takes place next week on May 15 in Dortmund and parts will be broadcasted via the Internet. Our half year results will be published on August 1, 2019. We would like to invite you already today to join us for the conference call and, of course, for the General Shareholder Meeting in this location. So for the moment, goodbye from our side. Have a nice day. Thanks.