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Elmos Semiconductor SE
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Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor AG Conference Call regarding the Second Quarter Results for 2019. [Operator Instructions] Let me now turn the floor over to your host, Dr. Anton Mindl, CEO.
Hello, ladies and gentlemen, also a warm welcome from my side. We will have a meeting on our results of the second quarter. Dr. Arne Schneider, as you are used to, and I, we will host the call together. We are reporting quite decent results today, and that is especially true considering the markets' environment that we have currently. Having said this, let me directly jump into the financial facts. Sales increased by 8.6% year-over-year, coming to EUR 75 million with a solid development across the entire portfolio. I will tell you a little bit more about that later on. Truth be told, they're almost 2% of this year-on-year comparison, and the growth came from the U.S. dollar to euro exchange rate. But truth also be told, from Q1 to Q2, only 0.3% of that came from the U.S. dollar. And so I think still a good development. And we, of course, when you look on the exchange rates that we had anticipated last year and this year, we kind of anticipated this development and the support by the dollar when we did our budgeting process. Coming now to the regional distribution of our revenue. Europe increased directly proportional to sales to EUR 35.5 million, accounting for roughly 47% of our total sales volume. And that was almost precisely the same number in percentage like 2018. The U.S. stood at EUR 2.9 million; other countries at EUR 7.4 million; and Asia came out at EUR 29.3 million or 39% of sales. As always, we recommend not to over-interpret the individual developments in the region since this is still more a point of delivery logic and a market logic. Nevertheless, the weakness in Asia can be seen. We see, when we go to specific projects in China, minus 15 to even minus 20 and sometimes even more, percent development. So going down -- revenue going down for specific purely car volume-related products with some Chinese customers. But obviously, when we do the averaging for Asia, more ramp-ups and new projects help to overcompensate this effect. In the end, Asia still grew on a quarterly as well as on a half-year basis, but not the big numbers we have been used to in the past but only by around 3%. Well, but still not too bad in the situation given. Coming to our 2 segments, Semiconductor and Micromechanics, they both enjoyed positive momentum. The Semiconductor segment came to sales of EUR 67.7 million, 8%-plus, and an EBIT margin of 73%, equals EUR 11.7 million. The MEMS segment had a very strong first half year, and Q2 was no exception with sales amounting to EUR 7.3 million, 16.6% up, and an EBIT margin of 18.3% in the quarter under report. The latest development has been really positive for our MEMS segment, especially driven by the success in the medical area. I'll also come to that a little bit more in detail later on. Coming now to profitability. Gross profit is developing well, amounting to EUR 34.6 million or a gross margin of 46.2% in the second quarter 2019, reflecting our good operating performance. Operating expenses are more or less stable compared to the previous quarter, but compared to last year's Q2, we notice an increase of around 14%. This increase is mainly driven by the expansion of our R&D capabilities at the beginning of the year. We have been reporting that during our Q1 conference call. And this is a very important step for us to prepare the company for even more growth in the future. Thus, EBIT came to EUR 13 million, corresponding to an EBIT margin of 17.4%. After taxes and minorities, the consolidated net income amounted to EUR 9.1 million or 12.1% of sales compared to EUR 8 million or 11.6% in the second quarter of 2018. This equals basic earnings per share of EUR 0.46 versus EUR 0.40 in the respective prior-year period, nominally, an increase of 15%. If you go to the figures, very much behind the corner, and it's only 14.2%, but it's still very good. The operating cash flow for the second quarter of 2019 reached EUR 9.7 million. Capital expenditures, excluding capitalized development expenses, amounted to EUR 9.1 million or 12.2% of sales. The expansion of our test capacity made good progress and is slowing down now. Nevertheless, driven by both the CapEx spending and an increase in working capital, the adjusted free cash flow is still slightly negative with minus EUR 1.7 million compared to the minus EUR 1.1 million in Q2 of 2018. But it shows a significant improvement compared to the previous quarter, where we were at minus EUR 10.4 million. At the end of the quarter, we had a net debt position of EUR 24.4 million. And let me remind you here, I mean we already commented that last time, but again, I'll remind you here. This main driver for the change from a net cash to net debt position is the application of the new IFRS 16 standard that was -- that, more or less, leases have turned to debt, and this affected roughly EUR 17 million in our case. Furthermore, the CapEx spending, the dividend payment of more than EUR 10 million and our current share buyback program accounting also to around EUR 3 million from December 2018 to the end of the second quarter. They are all, of course, reflected in the balance of the net debt/net cash. Further information and figures for the second quarter 2019 can be found in our quarterly statement available at our homepage. Let me now come to our guidance, which we confirm for 2019. 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. I think you can conclude from our figures of the unchanged confidence of our outlook that Elmos continues to develop reasonably well in the unfriendly market environment of 2019. Even under these circumstances, we are able to grow and improve earnings. Our products are well received on the market, and we gained market share across a remarkable broad product portfolio with products such as HALIOS for gesture control, LED drivers for interior and rear lights, motor controls for a variety of applications, and ultrasonic parking, just to name the most important ones. We recognize that the growth of integrated circuit contents per car is fully intact for us and for our attractive and innovative products. So many program starts and ramp-ups are compensating for disappointing market volume developments. And this is not only true for China, but across our worldwide customer base. The structural trend was more autonomous driving, more electric vehicles. More safety and comfort is obviously the change we are serving and shaping with our innovations. We have no doubt that individual mobility is the right place to be. Furthermore, we made very good progress in the medical field with our MEMS segment, the SMI in the U.S. With our innovation in IntraSense, the world's smallest pressure sensor with globally unique micrometer scale, automated by our edge technology, is already now a very remarkable success. Sample orders alone account already for a high 6-digit dollar number of revenue since product launch end of 2018. And additionally, SMI was awarded the Innovative Product of the Year prize from IntraSense during the Best of Sensors Expo Awards in San Jose, California in June this year. This Sensors Expo and Conference, where this happened, is North America' premium event for sensors connectivity and IoT. So we obviously enjoy more and more visibility for our company and for this product by this event, you can imagine. All in all, we can state that our innovative products do not only fit to the market trends, but in certain areas, even to structure them. We will continue to work on translating products and innovations, which lay the ground for a superior market performance. Okay. Ladies and gentlemen, with this and through my presentation, I would like to open the floor for questions now.
[Operator Instructions] The first question is from Johannes Ries of Apus Capital.
We can really say congratulations this time because you definitely outperformed as a sector in the semi space. Therefore, you can explain a little bit more. I just came out of the Infineon call. They see the same trends, China weakened, the commodity, traditional business coming out on new products, asset drivers, of course, in the automotive space. It's -- you said maybe you have a stronger impact and you'll also benefit from effects that you have maybe fully loaded up. Maybe you can confirm this, as Infineon definitely in the automobile space has reduced this utilization of ASIC. And also maybe you can give us some ideas, what are the products which have been the biggest drivers in the quarter and in the first half? Was it again LED business? Was it again the...
Ultrasonic.
Ultrasonic, sorry about it. Ultrasonic in auto. Was it the radar business with HALIOS? The big drivers, next to the sensors, is in Micromechanics.
Mr. Ries, thank you for the question and for compliments. We still don't do radar, just to mention it. Because when you say it -- when you formulated the question about HALIOS, you said radar. HALIOS is not based on radar, it's based on optical...
Not based on radar, okay. Because Infineon has a radar solution in -- for smartphones, rather, which is...
Let me first answer the simple one. Yes. Our head is completely loaded. And I think the people who know us know this, and I think you know it as well, because since we I think we have kind of elaborated on our fab light strategy, and they're using for a high percentage. There's a material that is not coming from our side. We are able -- that even if prospects do not develop like we anticipate, we can keep our fab completely full because we modulate the needs via our foundry partners and network so -- very well. Still, they get enough material. So don't worry, they are used to modulate the fab. On the product side, I just can repeat what I said before because we never have been more specific on this. We sell in -- every year, we sell more. We sell more HALIOS. We sell more Ultrasonic Parking Assist ICs. We sell more LEDs. But also motor drivers are taking up a lot because the applications for motor drives seem to really broaden as we speak. And as all of them nowadays are electronically commutated, so brushless motors, they need quite complex-driving ICs, which helps, I think, all IC companies. So all those things we're contributing. I mean strongly growing, of course, the areas where we have never been present. I mean if you would have listened to conference calls of us 2 years ago, then maybe we had the first mentioning that we do development in the rear light area, but we definitely had no revenue in those days. And now revenue is climbing up strongly. But this is one of many. So the -- in all business lines we have, sensor business line, motor drive business line, comfort and safety, we have more needs for our products. That's nice. Hope it answers one of your questions.
No, no, it's nearly fully answered. Maybe I thought the other question more to Mr. Schneider. Free cash flow will be definitely positive in the second half. And how much, maybe, is the chance that we can come back to maybe a positive net liquidity because the dividend effect is definitely maybe -- and in fact, which hits more the first half, and they're not -- it comes again in the second. And maybe also the IFRS 16 effect is only a onetime effect. So is there a chance to come back into profitability this year or maybe soon next year?
Mr. Ries, yes, we estimate that we will be free cash flow positive this year on the net debt. We believe we will still have net debt at the end of the year.
Okay. Will -- to a lower amount, I think, yes?
Be careful. This is a lot. We are at EUR 24 million, as we just reported. So we -- I mean we have -- we know why we do not guide free cash flow more precisely than we do. So if you are not -- and even if you will try to force us, we will not give you a more detailed number there. I mean it will be positive, the free cash flow, but it will not be sufficient to lift us to the other players or to sign again. And in my mind, I mean it's -- for me, this is the kind of a balanced methods. I mean we have been, long years, we have been free -- we have cash positive. And just by changing the balance sheet, I think nothing changed. Now on liquidity. Of course, we have a lot of cash. I mean very liquid.
Maybe another topic as the inventory topic is probably the topic in the semi space which is discussed most at the moment. Going also back to the Infineon call, again, as I said, it seems the automotive space, maybe 5 to 6 weeks in the commodity business and the traditional, maybe more volume-related semi space for 5 to 6 weeks more than what is normal and they expect another 2, 3 quarters to work it down. Is it also maybe something you would confirm? And could it mean if this is done, maybe even your growth rate could be higher because ASSP is more -- is something which is maybe working against the growth you get from the new products at the moment. Because like you mentioned also the additional ones are under pressure because they are volume-related, also on top, maybe you have inventory impacts here.
I mean if you have plans for a high-volume product that is, let's say, coming out at a rate which is not 100%, but 80%, I mean you prepared in your production line and we have -- I mean we have a production cycle that's almost half a year long so you cannot react immediately. But on the other hand, remember that's the thing we also have been reporting constantly. As we are entering more and more the ASSP regime of the business, we have been aware of and we had to increase our inventories in order to capture, especially in the Asia markets, business changes, which you only can grab if you're able to react faster than we usually have been able to do. So yes, we have also more inventory. There's quite a lot of inventory, but we don't feel bad at all about this because we -- first of all, we think we know that we can get it sold, and second, this is a part of the strategic preparation of being more flexible in the ASSP arena. So when the market picks up, we are ready to supply it. So it's not a drastic change. No, I mean in general, we, of course, went a little bit on the break because when the revenue doesn't run in a way that you kind of expect it to be, then it's nicer to go a little bit stronger from the gas pedal. But in general, to have a decent amount of inventory was the kind of strategic plan. And the ASSPs that customers tend to order on a time schedule that, if you start and producing, you won't need to change to sell them.
But the question was more on the inventory at the customer side in the channel -- the direct customers and distributors side.
I mean definitely, they have inventories. Yes. I mean those -- I was reporting about specific -- these customers, very experienced, minus 20% or sometimes even -- or a decrease of the specific market. Definitely, they have the inventories full. But you know, I mean sooner or later, this will have an end as well. So generally, when we look into what is making us grow, then it is not these volume-related products. That's clear. It's the boosts that have been ramping, that are ramping. I mean most of them is really the ones that we had ramps maybe already a few months ago and they are now spreading out. So just to name an example, and I don't say that this is the example, but just to make it clear. If, let's say, a BMW starts with a new electronic feature, let's say, in a 5 Series or a 7 Series, and then this goes to the 5 and to the 3 and to the X models, then this is really giving the boost to the ramp. And these are the things that help us overcompensate the volume-related effects.
The next question is from Stephane Houri from ODDO BHF.
So my question is about your remark that, basically, the underlying market is not good at the moment. As Mr. Ries just said during the call of Infineon, Infineon confirmed that, yes, the legacy business, I will say, is not good. It's not doing good, and the visibility around an improvement is really weak. So -- and you said that you were compensating with new contracts, new design wins, new products in the market. So my question is, how long can you compensate this weakness? If the weakness continues going forward, what is your visibility on the products that are ramping, as we speak, but maybe also in the second half? And second question is about the margin guidance for the year. You are clearly more in the high end of the guidance. You're targeting 13% to 17% now for the first half. You're at 16%, so clearly in the high end of the guidance. So what prevents you from upgraded -- upgrading, sorry, or shrinking the weights of this guidance on the upward, of course?
Okay. Thanks for the question. I think this is a good question. I mean in general, I won't give you a guidance for 2020. We have a guidance there for '19, and this is positive. And -- so I don't see any related problems with the item you just raised for this year also. As just discussed numerous times now, we agree that, let's say, volume-dependent things are still running as been anticipated by many of our peers or competitors. How this develops in 2020 is ought to be seen. But in general, we have a very full design pipeline. So without giving any guidance for 2020 in the moment, we think that business develops nicely, and we have many reasons to believe, why these innovative products you can maybe grab a better edge of the whole situation. When it comes to profitability, why don't we increase guidance? I mean we -- first of all, last year's fourth quarter was a very strong one. So we have to get up against this also in this year. And always, we have been guised that -- we've also always been a little bit blamed for a conservative guidance. But the benefit that I would say with us is that usually if we do guide, we don't have to correct it as, i.e., the market completely collapses. So we think that now is no situation where we should change anything in the guidance there or anything. We did, don't forget this in February. So I think it was not unbrave to do this. But on the other hand, we don't want to be overoptimistic now and make a funnel more narrow that is necessary. So we think, yes, we are on a good way, but there is no need to set anything tighter now.
The next question is from [ Lukas Spang ] of [ ViewNorth ].
Yes. Two of my questions were already asked so I have only one left. Consolidating the order intake or order backlog into revenue resulted by the ratio of 1. Do you see here maybe a downturn in the development? Or what's your opinion on this ratio?
I mean during the whole year, we saw, of course, again, numerous -- repeat it now. In volume-related products, we saw that, let's say, order intakes were not on the speed and on the pace we have been used to. But of course, you see in this book-to-bill also the ramps or everything contributed. It's building the average that we are, in general, at 1, is for us, let's say, not a bad sign, especially in the market environment we have. But on the other hand, we also learn now over many, many quarters and many, many years that book-to-bill ratios also they seem to be fantastically logic. They shouldn't be overinterpreted because customers usually do what they want. And even if they book something, if they wake up the next morning and say, "Okay, I don't drive. I don't pull this order then." And they -- first of all, they don't do it. So you have to have time to persuade them to still do it. On the other hand, we experience the other cases as well. They say, "No, we don't need any more parts." And then they wake up the next day and they say, oh, what, I don't know what I wanted to say.
You forgot something.
So you have to deliver 30% more. So I mean it's, at least, not a bad business indication. It's a fair business indication for the area we are in.
The next question is from Malte Schaumann of Warburg Research.
A couple of questions from my side. The first one, I wanted to come back to the inventory discussion. You had a pretty strong ramp-up of inventories in the first half of the year. Did you think -- do you expect kind of a similar trend for the remainder of the year? Or do you think that the inventory addition to the slowdown?
Addition to the slowdown.
Okay. And from the inventories, you have added how much? Maybe a rough number, how much came from your own production? And did you also take inventory from third-party suppliers?
We don't disclose this. I mean I even wouldn't know. I mean of course, when we go on to break that, that will show it's going to break that from the foundry side. So -- but -- and I think it's not necessary to disclose this. I wouldn't know why we should understand anything on this. Sorry. No, I can't tell it.
Okay. But you -- yes, okay, I'll leave it there. That's fine. Then on the MEMS business, usually in the past years, it had been a bit back-end loaded. Do you expect a similar development this year? What's the difference in the quarter in patent? So it's towards -- often not stronger than H1.
Yes. But I don't know whether we really had a patent. If you look for more years, I head out, I mean identifying patents, I must say. I mean in general, you -- in general, we say that they are quite volatile. And this is just the case because, let's say, overall revenue in the quarter is only EUR 7 million. And their products and projects in it, that alone can decide about EUR 1 million or EUR 2 million. Then volatility is a kind of a decent subject in itself. What we see this time, and this is the reason why I even listed it up to the presentation, we have a decent development of the baseline, which is coming from the IntraSense because IntraSense is really a small revolution, I would call it, in the medical arena because you can do in vitro measurements for all kinds of purposes. In the end, mainly astonished most about all the different applications that we seem to serve. There are even applications in the oncology area where you can precisely determine where the high pressure is, a tumor. You can be much more precise in the dosage of your pharmaceuticals. So the efficiency of fighting cancer seems to be dependent on how clever are you in localizing the tumor. And our vision seems to really contribute to that. So we have exciting times in this area, and this is one of the reasons why we have so many sample ordering. And believe me, we don't make the samples cheap. So getting alone sample ordering for almost EUR 1 million in much less than a year is amazing. So we are far away from any serious production up to now, but still IntraSense is contributing, and we foresee that this should really be an interesting product to develop. It's too early to really say how far this goes, but it's a very nice product.
Okay. So -- and it might take some time, but yes, maybe in a couple of years this could really be a very large revenue contributor...
No. Maybe we see already in -- maybe not in a couple of years, maybe we will start a little bit next year. How much influence this has on the revenue of SMI? I can't still tell you because in all these projects, also the physicians tend to be not as precise as the physicists like to be or the electro engineer like to be. But the changes are exciting. Definitely.
Okay. Good. And then for the ramp-ups. Generally, are these broadly, very broadly evenly split over the years? Or are they kind of screwed to the H1 or H2?
I mean it comes back to how fantastic is the visibility, even for our customers. We just had a few days ago exactly where we shipped it. Somebody woke up in the morning and realized that they forgot to order parts. So I -- we -- I don't see any loading. The only thing I see is that we have across really a quite broad product portfolio. We have new business chances, and we don't get how a ramp goes into the various models of a car customer. We don't get this disclosed. So I mean when I look to the periodicity of the car producers, I would say, typically, ramps should happen in the beginning of the year and in the end of the year. But then they, of course, need the pre-loading times also. We can't tell. I mean we only know that we are in quite a few ramp-ups.
Okay. But you have no indication that it's kind of a strange patent or something?
I mean no patent is strange for us, you know. If you're renting the patent of interior lighting, then no patent is strange for us.
Okay. Then a question for Arne. So let me -- the D&A number got up by EUR 1 million in the second quarter. What's behind that? And is that kind of a lasting effect? Or should we expect a similar level during the next [ indiscernible ] quarters?
So I would say these are pretty normal fluctuations. I would -- if you look for a run rate, I would average out some quarters because we always have fluctuations with onetime effects, one and the other direction. So run rates are better averaged over the coming quarters.
Okay. I mean kind of one-off effects, like extraordinary write-downs or something.
No. I mean if so many small ones. So there's nothing worth commenting. Yes. But still, things fluctuate. There are trade sales now and then. These are costly, then it goes up a little bit. And we analyze that actually month-by-month and have a very detailed look, such that we do not miss anything. But with all the single items, if they are small and they just fall into different quarters and they accumulate a little bit more under one quarter, and then in the next quarter, for whatever reason, the trades there, maybe in April instead of March. Then there are effects that, for us, need no further explanation because they are just normal volatility.
Yes. Okay. Good. The last question is on the design wins. Maybe quick comment on how satisfied you are with these -- the design win developments so far this year.
We have decent developments up to now. So no doubts that are targets will be met by the end of the year.
[Operator Instructions] The next question is from Johannes Ries of Apus Capital.
It's only one short follow-on question. So ASSPs which are north, stays around percentage of 50%. But remember, in prior presentations, in the order intake, it was maybe into 70s or 80s. Is that still the case? So far ASSPs will grow further going forward?
I mean frankly speaking, I don't have a more precise number right now. What we see is that in our design wins, we have many, many, many ASSPs. So if you would just count the number of projects, they are maybe at 97% or so. But then NASIC appears, and boom, this is such big that you can collect $100 ASSPs. And as always told, we don't have a paradigm. So whenever the business is good and we can fulfill the needs of the customer, we do it. So there is no traction against the ASICs. If the business case is good for us and the customers obviously willing to buy from us and develop it with us. But I don't have a more precise number in the moment. If I look through the list, maybe we can really get them from a pure count basis. ASSPs, by far, are dominant. But now and then the ASICs come in and they correct again, then for the ratio when it comes to the revenue piece. So ASIC is still in the same range. 70% for the ASSP revenue, 30% ASIC. But we will make the new statistics by the end of the year.
Maybe 2 quick -- maybe follow-ons. On MEMS, would you say, if the growth going on, especially in health care, there's a good chance that the profitability stays above the semiconductor space even in the future. And secondly, what is going on in the U.S., maybe when we could see stronger growth? And you mentioned this new team, which had maybe a great start. I know from design wins to revenue, it's a long way. But at the design win side, I see your first further progress in U.S. business, if that could be a close driver going forward?
And the short answer to second question, I mean the team has already contributed through a lot of design-ins, but the problem will stay the same. In very rare cases only, we will see the revenue in the U.S. because this Mr. Trump is not more successful than he is now. Still, U.S.A. is not the area where ICs are assembled in ECUs. So our team is already performing really good. And we have quite a few design wins that have been originating from our North American team and have been supported by them. But again, it will not appear in the U.S. So major -- I'm sorry to say it, but we are forced to do this retail distribution, but it's a point of delivery. It has nothing to do with the business. I mean the reason I -- we don't give selective guidances for the 2 segments. The only thing, I think, you can take with you from the comments I made on SMI, I think with this new IntraSense products, we are really entering in a new phase with SMI. How far this takes us? We will see. I mean still, you have to take into account that if you look to the revenue, then SMI is only still 10% of what the old company is. So even if they would now add another 10% of growth to the already impressive growth, I would say, they have been showing, then this will, again, on the basis of our complete company being only 1%. So I mean they have to do a lot in order to be remarkable on the group level. But nevertheless, profitability in medical areas is definitely a chance for the good.
The next question is from Christian Sandherr of Hauck & Aufhäuser.
I would have 2, please. So first of all, what can we expect from the gross margins for the second half? I mean it's really improved quite nicely compared to last year. Is that something you can take as a run rate for the second half and also for 2020 or whether some special effects that helps you in the second quarter? And then the second one would be on the wafer prices. What kind of development have you really been seeing? And what would you be expecting to see in the near future?
On the question for our guidance for gross margins for individual quarters or half or next year, we do not give that. And we gave a guidance on our key parameters -- on our 4 key parameters. And this, unfortunately, have to suffice. The wafer pricing. We see that the aggressive behavior of our wafer suppliers is turning towards the more customer-focused behavior. People are interested in loading again. So given where we are now, we certainly have seen the peak in wafer prices in the back mirror. So that concern slowly goes away. We, of course, have also some commitments over longer-term agreements. We have some shorter-term arrangements. So I would say we will not take further headwind in that area, which is good for us.
And just to get back on the gross margin. Were there any special effects that positively impacted the gross margin in Q2?
No, but there's a range of operational things that fluctuate. So in one quarter, you try to explain a little fluctuation up and the other little fluctuation down. The truth is, there are a lot of things that overlay, and that just leads to a little bit of fluctuation. It's not good to read too much into it.
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Okay. Okay, ladies and gentlemen, thanks a lot for your big interest and the many questions. As a closing remark, like always, I would like to remind you on the upcoming events, results of the first quarter will be published on the 6th of November 2019. We would like to invite you already today to join us for the conference call at this occasion. So for now, thanks a lot, again, for your participation. Goodbye, and have a nice day.