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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 third quarter results of 2019. [Operator Instructions] Let me now turn the floor over to your host, Mr. -- Dr. Anton Mindl, CEO.
Good morning, ladies and gentlemen, also from my side. Welcome to our conference call on the results of the third quarter of 2019. As always, I host the call together with our CFO, Dr. Arne Schneider. Before coming to a more detailed discussion of the figures, a few general remarks on the highlights of the last quarter as well as our position in the current market environment. As you all know, we have sold our subsidiary, SMI, to TE Connectivity Ltd. on the 30th of September 2019 for a quite attractive valuation of a net debt-free enterprise value of USD 95 million, corresponding to a multiple of 3.4 on external revenue or around 21x of -- on the EBIT, based on the 2018 SMI numbers. With the sale of SMI, the subsidiary is no longer included in the consolidated group of companies after September 30, 2019. The assets and the liabilities of SMI are therefore no longer accounted for in the consolidated balance sheet. The Micromechanics segment will be discontinued as of the fourth quarter as it fully represents SMI and will only be presented in the context of past observations for comparative periods.We adjusted our guidance on the 30th of September 2019 only to reflect those aforementioned transactional effects, but our operational numbers remain unchanged. Today, we confirm the guidance given on this 30th of September 2019. For the full year, we are expecting 4% to 8% sales growth. The operational EBIT margin will be between 13% and 17%. Regarding our capital expenditures, we are expecting a rate of less than 15% of sales. Due to the cash inflow from the SMI transaction, we will have a significantly positive adjusted free cash flow for 2019. The assumptions for the underlying exchange rate of USD 1.15 to the euro has not changed.Moving on to the market environment. We still see low level of auto sales globally with quite a difference between the 3 big markets: China, U.S. and Europe. All markets are challenged by trade conflicts, special effects like the Brexit and many more crises around the globe that affect trust in global trade and economic performance in general, but particularly also car sales.Summing up the picture for the first 9 months overall. Europe and U.S. car sales are still negative but much less than China, which was and is especially hurt by the downturn. Despite all these disturbances, we can be quite pleased with our performance in the third quarter and the first 9 months of the year. We were able to surpass these spiraling negative trends and outperform our peers' operational performance. This is due to our strong product portfolio with quite a few worldwide #1 products and many ramp-ups in all 3 business lines. Having said this, let me now comment on the current figures. In Q3 2019, sales was increased by 8.1% to EUR 75 million compared to the EUR 69.4 million in Q3 2018. Over the course of 9 months, we have even grown by 8.5% from EUR 202 million in 2018 to EUR 219.1 million in this year, which means we have outperformed the general market trends and we're able to increase market share. Obviously, our customers consider us as the innovative partner of choice due to the fact that our ICs are often the differentiating factor for their systems. This is even more important in difficult market environments.Comparing revenues of the 9 months 2019 to 9 months 2018 from a regional perspective, revenue in Europe increased by 7.5% from EUR 94.9 million to around EUR 102 million. The revenue shares stayed roughly stable at around 47% of sales. The revenue in the U.S. grew by around 28% to EUR 8.8 million, corresponding to around 4% of total sales. Other countries have increased by around 27% to around EUR 23 million, which equals around 10% of sales. And finally, Asia rose slightly by 3.9% to EUR 85.5 million, which equals around 39% of sales. As more or less always, there is not much to read from these fluctuations in regional distributions, especially on a quarterly basis. They usually correspond to changes in delivery addresses and somewhat arbitrary changes in delivery volumes. But for the 9-month period of 2019 and the report now, it is worthwhile to mention that we were still able to grow by almost 4% in Asia while car sales still were strongly depressed, especially in China, which is around at minus 12% for the moment. All in all, we delivered a strong quarter in the given environment.Coming to the top line developments of our 2 segments, Semiconductor and Micromechanics. We can say both contributed positively in Q3 2019 as well as in the first 9 months of this year. The Semiconductor segment grew by 8.8% from EUR 62.3 million Q3 2018 to EUR 67.8 million in Q3 2019. The MEMS segment increased by 2.2% from EUR 7 million to EUR 7.2 million. On a 9 months' basis, revenue in the Semiconductor segment increased from EUR 184 million to EUR 197.7 million, which corresponds to a plus of 7.4%. The MEMS segment achieved EUR 21.4 million in the first 9 months of 2019 compared to around EUR 18 million in the same period of 2018, corresponding to an increase of 19.3%. The ongoing positive development of our Semiconductor segment also in Q3 2019 is due, as we think, to our innovative products matching the automotive mega trends and serving our customers well. The MEMS segment contributed on a lower level in Q3 but even outperformed the Semiconductor segment on a 9-month basis. Please note as an effect, as I've already said, the deconsolidation, that this was the last time to report current figures of the MEMS segment.Coming now to profitability. Gross profit came out quite strong in the third quarter 2019, amounting to EUR 36.2 million or a gross margin of 48.3% compared to the EUR 32.6 million or 47% in Q3 2018. This positive development is mainly due to our strong underlying operational performance, our favorable product mix as well as a few seasonal effects. Other operating income is significantly higher compared to last year, especially because of the effect from the disposal of SMI, which contributed EUR 61.9 million and therefore led to a total other operating income of EUR 62.7 million in the quarter.The total reported EBIT includes, of course, this effect and comes to EUR 72.9 million for the group in Q3 2019, which is around 97% in relation to sales. Our operational EBIT related to the normal course of the business decreased by 21.7% or EUR 3 million from EUR 40 million in Q3 2018 to EUR 11 million in Q3 2019, corresponding to an operational EBIT margin of 14.7% versus 20.2% in Q3 2018. The decrease in our operational EBIT margin is due mainly to the planned increase in R&D spendings, a somewhat lower capitalization in this quarter and the onetime external administrative expenses related to the sale of SMI.As it is difficult and in the end not very sensible to differentiate tax effects related to the income channels, operative versus transactional, we report our net income only on a consolidated basis. After taxes and minorities, the consolidated net income amounted to EUR 67.4 million for Q3 2019. This equals basic earnings per share of EUR 3.43 versus EUR 0.50 in the respective prior year period. Capital expenditures, excluding capitalized development expenses, amounted to EUR 7.4 million or 9.9% of sales in Q3 and EUR 32.7 million or 14.9% in the first 9 months of the year. Considering all of the above, our adjusted free cash flow, including now also the proceeds from the disposal of SMI, came to EUR 88.3 million for Q3 2019. Thus, net cash increased to EUR 70.3 million as of September 30, 2019, compared to a net debt position of EUR 24.4 million 3 months ago. Overall, we can be quite satisfied -- or very satisfied with the course of the year-to-date. Obviously, we cannot fully evade the market trend. But beyond short-term and mid-term fluctuations, we are working on the right topics to address the further improvement of our top line development as well as our operational efficiency. So we will continuously invest in R&D and customer relationships to target the right products and we will continue to extend our reach in Asia. Regarding operational efficiency, our Fablite strategy for the front-end wafer fabrication is a wonderful and working role model to be extended to our back-end activities in the coming periods.Okay. With that, gentlemen, I'm done with my presentation. Further information, as always, can be found in our quarterly statements and on our website. And with that, I would like to open the floor for your questions.
[Operator Instructions] The first question comes from Johannes Ries.
A good tradition, yes? Some short questions, starting with one of the [ prominent every time ]. In this piece in the new presentation, you have a figure of 50%. I think that's related to sales, not to order intake, right?
It's always -- if we give this number, that's always related to sales.
Yes. But I have something in my head, in design wins, it's much higher. It was a figure in the 80s. Is that right?
It is -- this is correct. But we do not necessarily report that every quarter. And please keep in mind, my comment that I have given several times here remains. We don't have a paradigm. I mean it was very important for the company to learn how to create ASSP and deliver those that really go to the market and to the customers. But now I mean we really differentiate by the business case. So if an ASIC has a fantastic business case, there is nothing bad about an ASIC. In a tendency, ASICs are much fewer in number, but they tend to be bigger in volume. So we are quite satisfied in getting a lot of ASSP designs done, but there is no paradigm in reaching specific ratios between ASSPs and ASICs anymore. We have now really reached a very good skill set developing ASSPs that the market needs.
Okay. Second question, during the call in September, you said without maybe a correction, the inventory correction at your customer side, you have even showed higher growth and maybe inventory correction could come to an end maybe for some foreseeable future. You said even in some -- at some products you see it already, you said it came to an end, in other you expected. How much maybe is -- the gross figures have been negatively impacted and how much maybe the inventory correction is finalized at your customer side?
I would say we are still in phases where the future is quite unsecure. We can see this from the behavior of our customers. So many things tend to be short-term-orientated. I would say yes, at least the rate at which the deceleration happened, that's definitely not increased. And I think in some areas, we have found the kind of a floor. But I really can't predict when this, let's say, quite pessimistic or maybe passive behavior will be ending. But what is definitely clear if, let's say, the whole economy would not have had this setback, our growth figures would have been much better. That's clear. But I think still, as I said, we are quite happy with how we performed in a market that's -- if you look at the peers, at best at 0; at worst, showing minus 15% in the growth figures, delivering 8%-plus is not too bad. So I would not like to fantasize about what would have been the case if the market would have been great.
Don't get me wrong. I don't criticize you to growing too slow. We are very happy. Maybe a question on auto, surprising good figures from the U.S. You mentioned in the past you have the new teams there, but partly you couldn't see because maybe the orders are booked in Europe or so, but now are you reporting strong growth there...
I hate to disappoint you, Mr. Ries. Unfortunately, this is kind of an accumulated effect from a transaction in the delivery address that has been more or less undertaken after the first half year of last year and now it's showing more and more the full year effect. So if you would account for that in the right region, we should rather show it in Asia.
Okay, okay. It's difficult.
The thing that you said before are okay. There is no criticism on our sales activities in the U.S. on that. I mean we just have to live with the fact that usually the things are not produced where they are sold.
But so far, the team does a very good job after you had a disappointing [indiscernible] before, yes?
We are definitely satisfied with them. I mean if any comment on the regions is justified, then it was the one I made in the presentation on China or on Asia, because still, of course, a big part of the footprint is in Asia. And as the market is really still a little bit depressed there, which is more than just minus 1% or minus 2% and still growing at almost 4% for us, that is an achievement, definitely.
Okay. Definitely, you give no guidance for 2020. But I think you have an idea maybe about new ramps of product or design wins you had some years ago. So how is your general feeling a little bit if you look at your own maybe situation? Are you also optimistic for 2020 to maybe make a general statement?
Okay. And to support me in giving mine or -- how should I [ understand ] this? Well, I'd like to start with what I said before, that we see still a very cautious behavior at our customers, right? So I mean in fact, if we would compare behavior, let's say, 12 months ago and now, it's really changed quite a lot. Well, maybe even a little bit more than 12 months ago, where in those days, it was more about the [ integration ], what do we have to do in ordering to get the parts and therefore increasing then the volumes that have been put into the order sequences. We see now the opposite. I mean I think the belief at the customer side is anyhow as capacities are not used in the market, I can be very aggressive with my assumptions in lead times. Because even if I come out with my needs after 8 weeks or with a lead time of 8 weeks, I have a fair chance that the semiconductor guys support me. I mean definitely, for a company like us, this is a very, very difficult challenge. We've talked about that in the quarters before that, due to the ASSP strategy, we tend to go more into stocks in order to be prepared, in some cases, for this kind of short-term order behavior. But in general, we need definitely more time to produce our products. Now coming back to the original question, it was rare in the times I've been now under the helm that visibility has been, let's say, this burdened by economic threats and I believe that it's still not over. So I won't give you any heads-up for 2020. However, I still think that due to our product portfolio, we have a chance to be better out than the rest. Because we always talked also about the acquisition success that we had in the years. And we can tell you that '19 is also one of the years that is going very well with respect to the orders we are taking in. And you always remember that this takes 2 to 3 years to come into effect on the revenues. But when I look back to the other years, '16, '17, '18, all of them have been strong on the order intake on the acquisitions we have been successful on. So I think we should have a better prerequisite when it comes to the normal economic circumstances for 2020 than others might have.
Very good questions. That's more than enough. On HALIOS also, a question I repeat every time, when I look to the presentation, it sounds quite positive. BMW is starting, other OEMs are following. So it's still a high-growth business, yes?
Well, the thing is very simple. If you want something that works, it's from a system cost perspective, really low cost and as far as the customers, it's a good choice to take HALIOS and not other product.
Okay. A long time before it start to fly, but now it's...
Definitely. I mean when we look back, I'm always astonished about how long we invested it. But it was good to do it. And it feels better, much more. I mean we will see many more launches. It's still in the application, it takes a little bit of time and advice and help, but now that the Golf 8 is launched and we see that again, VW is very convinced about our systems, so it will come on the broad line of the Golf 11 -- Golf 8 and all the other derivatives. So this is a, let's say, a kind of a second stage of HALIOS market introduction. And it will give us definitely also more momentum to talk to other customers.
Sounds good. Finally, you now you have a lot of cash on your balance sheet. It was already a discussion in September. Any add-ons to your comments you have given there, what you do with the money?
No, no add-ons. Money doesn't hurt. So I don't feel any pain. I don't know whether, Arne, if you feel any pain, but I don't think so. We have all the options. And all the options are considered, discussed with the Board, discussed with the Supervisory Board. And let's say if anything is more substantiated, we will let you know.
The next question comes from Malte Schaumann.
My first question is on your recent comment that you expect to perform better than the rest probably next year due to the strong product portfolio you have. So does that compare then to the overall automotive IC market, so you would expect broadly that Elmos achieves higher growth if we see growth next year than the automotive IC business overall? Would that be then the right conclusion?
It would be a quite good conclusion. The problem still being [indiscernible] that it depends very much on which analyst you go for when you look on the overall market and how they, let's say, tend to be correct on the market then. Because when we will give our prognosis, which will be most likely in the first quarter of next year, then we maybe see a little bit more what the market really does, because anything that is forecast is a thought about the future. And as we all know, the future is the thing to be the hardest to predict. So let's see how predictions in the short term change.
Yes. That's right. But I mean broadly, I mean flat automotive production, some content growth, then we are at plus 3%, 4%, 5%, something for the overall market and then...
Yes. Content growth. I mean how can you explain in a market, China, minus 12%. Asia in all, 2 digits down. We grow by 4%. Overall, we grow by 8%, where the complete market has only 1 sign and that's minus. So you have to have products that get a broader footprint in the less car sales that are done. Otherwise, you wouldn't grow.
Yes, sure. Okay. And then on the gross margin, you had a pretty strong, actually, gross margin in the third quarter with 48% despite the fact that you had a reduction in inventories. I mean this is typically diluting the margin a bit to a certain extent. Coming from these margin levels, I mean is there kind of any one-off component in that, that makes this level not sustainable then going forward? I mean we always know we have the price thing then coming in the first quarter [indiscernible]. This margin level seems to be quite better than -- structurally better than what you had in the past quarters, where you probably benefited from a rise of inventory levels. So what might be different or what might be considered then going forward?
We have one-offs in this quarter, as I told you, because -- and that's typically for Q3. I mean if you look to 2018, that's also a question of being operatively strong and having typically the people going on [ vacancies ] and then releasing the provisions, the associated ones. And that is one of the reason why Q3 in tendency is always quite strong. In general, I would say what we see is that our operations here, and that is, of course, due to the Fablite model, is always fully loaded. And as time goes by, we more and more learn how to operate this even better as time goes by. Also, I would say the fact that we have 2 foundry partners that serve us helps us also in kind of getting a decent cost control. So there are a quite a few contributions that support this high gross margin. But on the other hand, we shouldn't forget that every quarter is a new, let's say, a new game when it comes to raw wafer pricing, when it comes to the pricings with the customers. So everything is a new game. And maybe one additional comment on the stock level. The stock went therefore down because in the balanced numbers, the sale is already present. So the stock is already reduced by the deconsolidation of SMI. That is the major reason that the WIP went down. If you take this into account and look just on the inventory levels in the IC business, then inventory slightly went up even in this quarter. And we do this intentionally because, as I mentioned before, to support ASSP growth opportunities, we have to work on our lead times. And the only way you can do this is to put a little bit more into the WIP.
Yes. That makes then fully sense. So I got that potentially wrong. Do you expect inventory levels to further increase then over the coming quarters, especially owing to the short lead times your customers are expecting? Or do you feel quite comfortable with the level you have then achieved right now?
Let's say that the biggest increase is definitely for the moment behind us. Of course, it always has to relate a little bit to the revenue level we are at. And as we've increased revenue, WIP also increased. So we will see still a little bit of marginal increases. But next steps, we are only looking forward to if we see substantial additional growth opportunities as well. Forecast on that is also difficult to say because what we definitely will do is we optimize our production efficiency. And that means that a thing that has lessened the optimization focus and perspective of the management is WIP. That's also clear. Because I mean money is very cheap in the moment. Anyhow, as we've just been hinted to, we have a little bit on the war chest. So WIP is not the first focus of optimization.
Yes. Sure. And on the M&A side, anything in the pipeline that might materialize somewhere in the future? So are there opportunities? Or is everything too pricey to really make sense to discuss?
No. I wouldn't say everything is too pricey. But it's the same answer like always. We have a long, long list and a short, short list. But we only let you know if there's anything that really substantiates it. And actually, as we speak now, there is nothing to report about.
Okay. Then have the market conditions changed over the past few quarters?
We don't know. I mean there have been a few sales on the market in the last weeks that were still extraordinary high in the multiples. But I don't know, maybe the tendency that's only room to change. Let's see, we don't know. I mean it depends very much in the individual opportunities. Sometimes unicorns are in 1 week a unicorn, in the next, they are dead or bankrupt or whatever. Looking for chances and with more intensity than ever.
There are no further questions so far. [Operator Instructions] One question comes from [ Günther Icke ].
Yes. I have 2 questions. One is about the share buyback. I see it on Page 17. Are you using these shares for, say, for M&A? Or are they out of the balance sheet? And second question, is Mr. Luckner still on your Board?
Thank you for the questions. I'll start with the first one first. I started my presentation here saying that our CFO is in the line as well and his name is Dr. Arne Schneider. So Nicolaus has supported the company for a long time and very successfully, so we are grateful to him, but he's no longer on the Board and has no official function, no adviser, nothing. But we still appreciate him a lot. So we will see him next time for the Christmas celebration. The shares that we have bought are there for all purposes, that we have been, let's say, included in this decision that we made on the General Shareholder Meeting. And one of them could also be to be included in M&A transaction. But there is no specific plan to do so for the moment. I would say that considering the amount of shares that we have, that might anyhow be only a very small part of contribution to any M&A one could think of.
The next question comes from Stephane Houri.
I have one question about the guidance, the sales guidance that you gave. Basically, you kept the 4% to 8% guidance while you were at 8% for the first 9 months. So why aren't you a bit more precise for the full year guidance? And is there any reason to expect that the growth could slow down suddenly in Q4 and go to the low end of your full year guidance?
Yes. Thanks for the question. We are frequently asked why we don't reduce the position. I mean let me give 2 answers on that. First of all, we never change the midpoint of the guidance. And we all have in mind at the 30th of September, new guidance just was accounting for the sale of SMI. So when, let's say, we look on to Q4 and try to anticipate what the guidance figures will look like in a percentage basis, then you, of course, have to take into account that the whole Q4 will be the first quarter where we don't have any revenue from SMI. So if that quarter is compared to the Q4 2018, then of course, the growth to be expected is smaller than the ones being given on the forefront, between 6% and 10% or between 4% and 8%. Because when we give the guidance, we give it for the full year and not for the quarter. And we are just missing out in the range of something like between EUR 5 million and EUR 7 million of SMI revenue. So this will miss when we compare Q4 2018 to Q4 2019.On the precision one, one more comment. What we typically see by the end of the year, and no year has been an exception, and this can go both ways, we always have cutoff date effects. And the question, when a big customer decides on the 30th of September not to take the goods on the ramp or to take them, can easily be EUR 2 million to EUR 3 million of revenue, which means that the revenue level for the year we are at, this is easily 1% in or 1% out. So that is one of the reasons why we tend not to be more precisely, even when we go to the end of the year. But I mean we keep the midpoint. Maybe one additional comment on that, as you all know, we had 6% to 10% at the beginning of the year and then it was 4% to 8%. Again, you can look on to that both ways. If we would have no SMI business in 2018 and no business in 2019, there wouldn't have been any reason to change the 6% to 10%. So have that in mind, the 4% to 8% was only the consequence that in Q4, no SMI revenue will be present in 2019.
Okay. I understand that. And just if you could help us then giving us the figure of what would have been Q3 organic growth without SMI, just to have a sense of the rest of the business?
I think I read the figure in my presentation. I think it was something like -- let me see -- I'll give it precisely to you. It was 8.8%.
8.8%.
Yes. Due to the fact also that SMI was quite weak on a quarter-to-quarter basis. On a quarter-to-quarter basis, SMI delivered only 2.2%. On a 9-month basis, SMI delivered almost 20%. So they even, let's say, outgrew on a 9-month basis the IC segment. And the IC segment, if I remember, it was for the 9 months at 7-point-something, 7.4%.
One more question comes from Johannes Ries.
Yes. Only 2 very brief follow-up questions. So first, the administrative one-off costs, how high they have been? Only to have -- maybe because it's a one-off, to have a clear idea, a clean margin for the quarter.
A small 1-digit million number. I mean look at...
1-digit, it was EUR 2 million or EUR 3 million? Or what it was?
Maybe it's on the high end -- in that range.
Okay, okay, to have a feeling. And finally, after the sale now, is there anything left outside the automotive space? Or are you now a pure play?
What do you mean is -- pure-play automotive?
Yes.
No, we have also ICs in...
How much is left, yes?
I can't give you a precise number right now. We have to do that by the end of the year. But one thing is true, SMI had less automotive percentage than our Semiconductor IC business. So the ratio for automotive content will increase. Maybe it will be at 90% or something like that.
But there's still businesses outside and they are growing, yes?
Sorry?
And the businesses outside automotive are also growing, yes?
We don't guide the different markets, very sorry for that. I mean we -- our, let's say, ambition and empathy goes with the automotive market. I still think that it's a fantastic market. Also, with the turmoil that we have in the moment, this is, again, much more changes than anything else. And when we do something that is nonautomotive, and this is very much in the range where we kind of opportunistically step into contracts that, let's say, either we have a long relationship to or it comes across and where a product of ours fits very good. So in general, I think we will continue to do so. So again, percentage-wise, there is no paradigm, no religion. So when it's again at 85 to 15, it's 85 to 15, we don't care. We decide businesses according to is it a reasonable or a good business case for the company or not.
There are no more questions in the queue.
Okay. So obviously, it's now the end of our presentation. Thanks a lot for your interest and the engaged discussion. Like always, let me remind you on the upcoming events that we have in the next weeks to come. The next one is the German Equity Forum, Eigenkapitalforum, that's on the 25th and 26th of November, which is really 3 weeks only. So hope to see you there again. We will issue the preliminary full year results in combination with the analysts -- we have an analyst conference call on February 18, 2020. That's quite far away. So we hope to see you at both opportunities again. And for now, we say goodbye, and have a nice day. Thank you for your participation.
The conference is no longer being recorded.