Elmos Semiconductor SE

XETRA:ELG

Earnings Call Transcript 2018-Q2

[Operator]

Good morning and good afternoon, ladies and gentlemen, and welcome to the Elmos Semiconductor AG conference call regarding the Q2 results 2018. [Operator Instructions]Let me now turn the floor over to Dr. Anton Mindl, the CEO of Elmos.

[Anton Mindl, Chairman of Management Board & CEO]

Ladies and gentlemen, a warm welcome from my side as well. Together -- we host this [ telco ] together, our CFO, Arne Schneider, and myself.This time, I'd like to start off with a kind of a short general statement. Despite confusing global news; tariffs on all kinds of goods changing in figures more or less every day, this morning was just a testimony for this statement, threatening, of course, also automotive products, as a field we are in; and also new exhaust test procedures, abbreviated WLTP, which means Worldwide Light Truck Procedures (sic) [ Worldwide Harmonized Light Vehicle Test Procedure ]; and consecutive problems of the car manufacturers to release a car against these new tests; and despite a few profit warnings from some of the companies in the automotive field, we had a good quarter, and we look optimistic into the rest of the year.And the reason for this being quite simple. As long as we do not see a real slump in car sales, all the megatrends that promote electronics in cars will create solid tailwinds for all who have the right products. And Elmos has the right products. We are serving all the megatrends in the cars which make cars safer, cleaner, more comfortable and easier to drive. Our Ultrasonic ICs assist no longer only in cumbersome parking procedures but serve more and more in driver assistance functionality with very helpful, very easy to interpret and very cost-effective data, which is also very important.Our motor driver ICs make HVACs more comfortable and pumps and blowers more efficient and more silent. Our LED driver ICs lead the market for interior engine lighting. And soon, our devices for tail lamps will encounter a leading market position, too.Gesture functionality that's driven by our HALIOS, as we call the Elmos brand, make operating specific features less distractive during driving. And as we offer the most cost-efficient and most rugged solution, we are extending our market lead.On the safety side, we see solid demand for existing products, meaning that safety, in general, is an extending area in cars. More airbags and more safety sensors and systems are used in the latest models. I mean, in general, it's worthwhile to say more safety is kind of getting mandatory, and we are extending our portfolio for this application.So all in all, this is the background on which we develop and grow our business. Our preparations and, most important, our products continue to meet the right opportunities, and we continue to expand our portfolio, and we will deliver.Having said this, I turn to the figures. As our profits for the second quarter exceeded the analyst consensus by around 30%, EBIT came out at EUR 12.2 million or 17.7% of sales, so considerably above the analyst estimate of EUR 9.6 million or 14.5% of sales, we published our preliminary results ad hoc on July 18. Today, we confirm these preliminary figures, and I would like to comment on them in more detail. Sales increased by 16.2% year-over-year, leading to EUR 69.1 million, which made it a record quarter with respect to revenues. From a regional perspective, existing trends continue.Asia still grows disproportionately strong, plus 34% to EUR 28.4 million. This is driven -- self-generated Asian business but also by changes in shipping addresses from Europe into U.S. I mean, this is just reflecting the usual global trends that we see in supply chains. This also explains the more or less stable development in Europe because some of the business that we generated in Europe has been transferred to Asia then. And some of this applies to the U.S. as well.Coming to our 2 segments, Semiconductor and Micromechanics, we saw a positive sales and earnings development on both segments. The Semiconductor segment came to sales of EUR 62.8 million, plus 15.3%, and an EBIT margin of 17.4%. The MEMS segment accounted for sales of EUR 6.3 million, plus 26.4%, and an EBIT margin of 20%. Also, the MEMS segment had an encouraging and good second quarter. We still expect volatility in the future due to its much smaller absolute size.But still, it is valid here and worthwhile to state that we are on track with the strategy we pursue. As you know, we completely upgraded our product portfolio, and we have now a leading portfolio in the low and ultra-low pressure sensors. And particularly, we are proud of our unique IntraSense product line for the medical sector. This is a very promising field of activity of SMI.Coming to our profitability. Gross profit in the second quarter 2018 amounted to EUR 29.9 million or a gross margin of 43.3% and, thus, slightly increased in comparison to last year. Operating expenses are relatively low, with EUR 18.9 million or 27.2% of sales, which is mainly driven by relatively low R&D costs affected by the capitalization of the development expenses. We reported about that change in our way of doing this quite a few quarters ago and continue inform -- continuously inform you about how this is going forward.R&D costs, adjusted by these capitalized development costs and the respective depreciation on the capitalization, are increasing in absolute numbers, which reflects the plan and the general buildup of our R&D resources. So if you would compensate for all this, the adjusted R&D ratio would lie at around 16% of sales. And this is, if you remember, inside the range we typically have given for the R&D costs, being between 15% to 19% of sales.As a result of this, EBIT came to EUR 12.2 million, corresponding to an EBIT margin of 17.7%. After taxes and minorities, the consolidated net income amounted to EUR 8 million or 11.6% of sales comparing to EUR 4.3 million or 7.2% in the second quarter of 2017. This equals basic earnings per share of EUR 0.14 versus EUR 0.22 in the respective prior year period.Based on our good earnings development, the operating cash flow of the second quarter reached EUR 13.4 million compared to EUR 5.1 million in the prior year period. Capital expenditures, excluding capitalized development expenses, amounted to EUR 11.4 million or 16.4% of sales, reflecting the expansion of our test capacity. Please note that some of the investments into our back end were brought forward this year. This also influenced the adjusted free cash flow, which came to negative EUR 1.1 million in this quarter. And it is reflected in the net cash position, of course, as well, amounting to EUR 16.6 million as of June 30, 2018. If you compare it to the figure end of Q1, it was EUR 24.5 million at this point in time.Coming to the guidance for 2018, we are confirming our guidance for this year, which were issued in the middle of February, assuming no change to the economic conditions. So we expect sales growth between 8% and 12%. We expect EBIT margin between 13% and 17%. And as we are continuing to expand our test operations due to the growth we are expecting, we expect that the capital expenditures, excluding capitalized development costs, will be slightly below 15% of sales. And the adjusted free cash flow is expected to be negative. All the forecast is based on an average exchange rate of USD 1.20 to the euro.Further information on figures, like always, for the second quarter and the first half of 2018 can be found in our interim report available at our home page.With that, I'm done with my presentation and hoping for your questions. Thank you for listening for the moment.

[Operator]

[Operator Instructions] And the first questioner is Malte Schaumann from Warburg Research.

[Malte Schaumann, Equity Analyst]

A couple of questions from my side. The first one is regarding capacities -- capacity situation in your company and competitors. You mentioned that you brought forward investments. Do you think that brings you into a position to capture additional market share? Or is everyone constrained, and that potentially, market share gains are not really possible in the situation as you suffer from 2 less capacities and the competitor price ramped up as quickly for -- as well and is able to do so?

[Anton Mindl, Chairman of Management Board & CEO]

Okay, first of all, thank you for the question. I mean, we are gaining market share, but I would not only, let's say, build up the logic against our capacity buildup, we are -- but we are gaining market share because we are having products that, obviously, are better than that of the competition. A good example is maybe that of the LED drivers. I mean, Elmos has been literally not existent in that field 3 years ago. And now we are leading the market in the interior lighting. So obviously, some products went from our competitor to us. When we look on the taillight story that I touched in short during on my presentation, we anticipate that a similar thing will happen, because we have been only with very low volumes in the taillight driving business, and we will gain market share there. And when it comes to gesture recognition, the question is are we gaining market share or are we just expanding the potential that is in the market, because we are very much the leader in this segment. So yes, we are gaining market share because of our leading products in the product portfolio. And with that, in parallel, we have to extend the capacities, otherwise we wouldn't be able to produce it. Are we restricted? I wouldn't say we are restricted, but when you read my quote that we put in the press release, we say that we are growing with existing products, and we have very dynamic ramp-ups, and we are very engaged in doing this. This means that this is not, let's say, an equilibrium situation where you can tune every process to its optimal. So we are not in a phase where we tune everything to its optimum, but we are rather working as hard as we can to fulfill all the needs that we get from the market.

[Malte Schaumann, Equity Analyst]

Okay. So at a later point in time, maybe one could expect some positive impact in gross margin as you are then able to optimize your production?

[Anton Mindl, Chairman of Management Board & CEO]

Well, we keep on growing like this.

[Malte Schaumann, Equity Analyst]

Okay, that's equally nice. Okay. And then on -- qualitative comments on design wins. How satisfied are you so far? You have seen the first 7 months of the year, so maybe your first impression how 2019 develops according -- compared to the prior years.

[Anton Mindl, Chairman of Management Board & CEO]

We are on a good road. We are, let's say, according to plan. Not above plans, and not below plans. So up to now, everything runs through the respective design wins, as expected. I mean, of course, we always have more ambitions, but it's -- we have already ambition plans in place. So we are going ahead -- we are going along these ambition plans.

[Malte Schaumann, Equity Analyst]

Yes. Okay, good. And then a question regarding gesture recognition. How do you see the competitive environment? We saw -- we see other players making some inroads in car gesture recognition. Do you see an increased competition? And how do you think your product is positioned in the markets? Would you still say that from a technology and price point perspective, one of the most attractive products to your customers?

[Anton Mindl, Chairman of Management Board & CEO]

Yes, this is what we think. We think that this combination, ruggedness, reliability, because if you -- I don't know who of you in the audience has a car with a gesture recognition. The things you hate most is if you have an intention, and you show it to your car, and the car doesn't reflect what your intention is. So people are extremely sensitive if you claim you have a gesture recognition and then machine doesn't do what it should do. And in that respect, HALIOS is just fantastic. Simple gestures are, without any latencies, recognized, and the error rate is minimal. And all comparing systems are just much more complicated, much less reliable and, in addition, many of them are most -- more expensive as well. So we think we still have a very competitive edge. I mean, we are already now with a second generation in the market. The third is in preparation, and we are working already on fourth and fifth. So we think we are -- have a very good position there.

[Malte Schaumann, Equity Analyst]

Okay. Good. The MEMS business had quite a strong quarter. Was that exceptional? Should we expect, maybe not similar, but also strong sustainable development in the second half and going forward?

[Anton Mindl, Chairman of Management Board & CEO]

As you know, we don't guide the segments for themselves. At least what I would say is that SMI, that has lagged behind the last quarters, is now catching up with the mother company, and we have good reasons to believe that the product portfolio they have is much more successful now in the market. But it tends to be a more seasonal, a more spontaneous market than our automotive market. Most of the things that SMI is, in the meantime, selling is no longer going into the automotive. Automotive is below 50% now at SMI. And so it's difficult to say how this develops. But what we can say is if you -- because we do benchmarks, of course, in this low and ultra-low pressure segment, we have really outstanding products. Stability is always a criterion there, and we have ultra-stable products. We have -- we can easily go for tailor-made pressure ranges. So we have many advantages, we think, in the market. How consistent this will be, we will see. But what I'm most excited about in SMI is this medical IntraSense product line, which helps for minimal invasive operations to do a lot more monitoring than has been done up to now. And there is a variety of operations that could make fantastic use of precise, temperature-compensated, zero-drift pressure measurements in these operations. I mean, I don't want to confuse it with all the medical abbreviations, but we have been amazed when we looked into that subject a few years ago how many applications are around that are measuring pressure in the body. It's more or less, in all organs, it's important for heart operations, for bladder, for kidneys, all kinds of stuff. And we have interesting customers for this product. But of course, this -- and there maybe our patience has to be asked also, because when you look to this medical market, of course, before you get it really into, let's say, considerable volumes, you have to do all this FDA stuff. And, of course, our customers do this. So this is also not a thing that jumps from 0 to 100 in a quarter, but it will be a development that we see in the medium time scale, I would say. But we have a fantastic product. It's the smallest pressure sensor system to automatically contact this, so that's -- in that niche of the market, it's a small revolution, I would say.

[Malte Schaumann, Equity Analyst]

Okay. So it might some -- take some time before we really see maybe stronger growth rates due to market share gains with new clients on new applications, okay. Okay. Then on the financial side, there were some losses with associated companies. We had a slight loss in Q4, and in the full year for 2017, there were larger losses in the second quarter. Maybe, can you give us some guidance what we should expect in the full year and then going forward in the next years that improving in a short period of time or sustainable -- somehow sustainable losses to be expected for the near future?

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

Well, while you're referring to the company Omniradar, we invested in some time ago. There will not be any further losses and exposure because we actually wrote that down now in the half year such that's -- that the half year will be more or less what you see in the full year. Nothing more of bad things to expect there.

[Operator]

The next questioner is Robin Brass from Hauck & Aufhäuser.

[Robin Brass, Equity Analyst]

One regarding the recent developments in the U.S. where the government was looking into having all new cars -- having some mandatory backward-looking cameras. But this was postponed, I think, the last time I heard about it. Is there any development here? Or is for you, at least, additional benefits quite limited given that all new cars are already spec'd with these backward-looking cameras? And secondly, how do you see currently development in your ASSP products? Is this continuing to grow as planned? Or how do you see it currently?

[Anton Mindl, Chairman of Management Board & CEO]

Coming to the back-looking cameras, indeed it was postponed. In general, it would help because the Act is about where the driver has to be more alert when he is in danger to run over somebody, especially a child. That has been the triggering event. Of course, ultrasonic helps there, and in general, what see in the U.S., and that will help us also in the midterm. The U.S. market up to now has been a market where ultrasonic parking was not very famous. The equipment rate was very low, and this is going to change in the future. It will not be a rapid development, but we see it better for the years to come, maybe the next 2 to 3 years that will change in the U.S. market. But what we can say, in general, and this is what I tried to highlight in my introduction, when we talk about our ultrasonic devices, then the reach of this sensing functionality is getting broader and wider, as we speak, so to say. Because in the past, our ultrasonic sensors were only used for parking procedure. Nowadays that we have these automated emergency braking systems or all kinds of additional data requests from safety systems to understand what is in the next neighborhood of the car, we see that our ultrasonic devices are used for all these purposes as well. So this sensing principle goes more and more into these driver-assisted systems and to these autonomous systems, and this is good news for our company. I must say, I did not understand your second question. You said about ASSP product...ASSP?

[Robin Brass, Equity Analyst]

ASSP, yes, sorry.

[Anton Mindl, Chairman of Management Board & CEO]

I mean, we are making progress there. I mean, I think the last reporting we made was the end of '17. And there, it was something like 45% ASSPs. So 45% of the revenue we made was in ASSPs. And I think this number will gradually increase in the years to come, as we always said. It's not a paradigm. We decide the projects by the profitability and strategic value for the company. So we look on the business cases. We look on how good does it fix strategically to the company, and then decide on them. So -- but we -- I think it will still grow, the ASSP, but we also have quite a few ASICs, which are also high volume. And whenever there's a good business case, we will do it. So there is no target for ASSP percentages, so to say.

[Operator]

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

[Anton Mindl, Chairman of Management Board & CEO]

Okay. Thank you, Ms. Pollo. So ladies and gentlemen, thanks for your interest and your participation on the call.As a closing remark, like always, I would like to remind you on the upcoming events. We have our 9-month results on November 7. There will be a conference call, of course, as well for this occasion. And of course, we would be happy if you could join in. Afterwards, we will be, again, at the German Eigenkapitalforum end of November in Frankfurt. And of course, we would be happy to see you in person there.So thanks again for listening and looking forward to meeting you next time.