First Sensor AG

XETRA:SIS

Earnings Call Transcript 2018-Q1

[Mathias Gollwitzer, CFO & Member of Executive Board]

Yes. Hello to the audience. I come to present our first Q presentation so Q1 2018. On my side, there's also Dirk. So you can also say something, Dirk, to the audience here.

[Dirk Michael Rothweiler, CEO & Member of Executive Board]

Yes. Hello on my behalf also. Dirk Rothweiler speaking, CEO of First Sensor.

[Mathias Gollwitzer, CFO & Member of Executive Board]

We would like to present the facts and figures based on the first 3 months of 2018. The structure is the same as last year and the quarters before, and refer to also the information that we have already announced and distributed this morning at 8:00 so far. So we start with the overview concerning our sales in 2018 first quarter, that blue on the right side of this chart, in comparison to the other revenues that we had the quarter before. As you can see, we achieved EUR 34.5 million in sales in the first quarter in 2018. This is on the same level as in the quarters before, meaning Q4 in 2016, Q1 '17 and Q2 '17. And this shows that we have more or less achieved a level, as reported in the past. In comparison to the Q3 and Q4, it's almost EUR 5 million below that level. The figure in Q1 2018 does not show any growth, as promised for the year 2018, and is not in the expectation of the company. The question is why this is the case. Looking at the order entries and looking at the backlog that we will see later on, the reason is not that we would have a lower order income or a lower backlog. We have customers, and the customers are confident in our product. And we have a wonderful, I would say, ramp-up in terms of getting orders from the markets. We have more or less a challenge in getting out our products, meaning to produce it in the first quarter. And that's the main reason why we did not achieve a level as expected of roundabout EUR 36 million for the first quarter. So we could have shipped more, but we had troubles in our facilities. And this is explained by our systems that we have installed in the first quarter at First Sensor. This one ERP took us more effort in terms of getting all the information in the system and ramping up our production. So this is the only reason why we have this revenue in the first quarter in 2018. Referring to the next slide. We see the comparison between all of our target markets, Industrial, Medical and Mobility. And when we compare the first quarter in 2017 with the first quarter in 2018, we do see a positive increase in Medical and Mobility and a decline in the Industrial target market. This is due to the fact that we have, in this first 3 months, a lot of discussions with our main customers in order to ship sensors, as ordered. And in the automotive area and medical area, we reprioritize our production volume, so that we can deliver the sensors and the product, as demand, with a negative impact on our Industrial target market. So this is the next slide, which shows us the reason why we did not achieve what we have internally expected for the first quarter. The good news is, and this is the reason why we'd like to underline the situation that we can improve, and we will improve the output in our production area to achieve what we have internally budgeted and expected in our business. When we look at our regions, we have the same situation as in the quarters before. Our main market is the area in Germany, Austria and Switzerland. So we do see an increase by some 100,000 of oils used in this area. There's a slight decrease in the rest of Europe, and we do have also a situation like last year in North America and Asia. Our phase team has the task to focus on those customers, which promised us a higher volume. And this leads to a certain readjustment of our work in the sales area, with a certain impact on these areas with the rest of Europe. So this is also one explanation why we have a slight decrease in sales in Q1 2018 in comparison to the Q1 in 2017. The EBIT situation shown in this slide here, we have an EBIT in the first quarter of EUR 1.1 million or a margin of about 3%. This is a decrease in comparison to the quarters before. And I would like to explain the situation in comparison between Q1 '18 and Q1 '17, and also would like to give some information about the situation and the development between the fourth quarter in '17 and the first quarter in '18. So from quarter-to-quarter, year-over-year, we have a decrease by almost EUR 700,000 between the EBIT in Q1 '17 of EUR 1.8 million and the EBIT in Q1 '18 of EUR 1.1 million. This is simply explained by a deviation in other -- in our other operating income. This -- we had some income in Q1 '17 referring to payment of our insurers, which are not, of course, part in our Q1 report 2018. And the deviation between Q4 '17 and Q1 '18 of roundabout EUR 2 million, that refer only to our decrease in the sales stream by almost EUR 5 million. When we go a little bit deeper in the month-by-month like for the first quarter '18, we do see that we had in February and in March EBIT results, which were completely in the range of our guidance, a little bit more than 8%. The big change was in January 2018, where we had a lack in sales, and therefore, also, our challenges in creating enough results. So again, we are now in a better situation in April and March in comparison to the beginning of the year, so that we are confident to come back in our expected business in terms of sales and also in terms of EBIT. Concerning the cash that we have generated, there are, of course, some good news. We had an improvement in terms of the operating cash flow for minus EUR 200,000 into a positive range of cash flows for the first quarter. This confirms our measures that we have undertaken in order to improve our efficiencies because the operating cash flow covers 2 parts of the business, the normal development of sales on the one hand side and the change in the working capital on the other side. The free cash flow is therefore also improved from EUR 2.5 million minus EUR 1.9 million. And in addition to that, we have also some positive developments in the financial activities, so that we can state that we overall have achieved a better cash flow in total in Q1 in comparison to the same quarter in 2017. So these are, in my point of view also, a good indication of how we have changed our business in comparison to the last year. When we look at our balance sheet from the starting point in 1st of January 2018 until the last days in March of 2018, there is no big change in the total assets. However, we do have an increase in our inventories by EUR 2.8 million. This explanation is that we want to improve our accuracy in terms of delivering products, so that we have increased outside the product volume, and increase also the part of our product shippable to our customers. And we have paid this with our cash flow. You'll see also in terms of cash and cash equivalents, and also in terms of current EBIT decline in almost the same amount. The rest is more or less unchanged. When we look at the personnel expenses in Q1 '17 and Q1 '18, we see an increase by EUR 400,000. And this is the reason why we have -- when we look at the ratios and decrease in terms of sales for employees. The increase in personnel expenses is related to 2 factors. First of all, we have increased our FTEs, our full-time equivalents, from 822 to 869 because we have more business to do in the production side because we want to achieve a better sales stream in the rest of the year. And therefore, we need more workers in the factories. And we do have also added some new colleagues in the sales department in order to push the business also in this area. And the second point is that we have also, in comparison towards the Q1 2017, an increase in payments in the sales in the later area, so that we can, I would say, safeguard our people in the production side, and also in the area of our development department. So the last chart in terms of giving new information about our key performance indicators, UBC and the development in terms of order intake and our KPI book-to-bill ratio, the order intake amounts to EUR 39.3 million in the Q1 2018. This is good news because this is year-over-year a strong increase in order intakes when you compare this figure to Q1 2017, for example, and gives us also certainly a comfortable view for the rest of the year. The book-to-bill ratio indicates the same good news. We have more order income than we can -- or we could deliver in the first quarter. This is, I would say, to all, which will continue as long as we do have the latest information from our sales department. So overall, the remarks that we get from the markets are positive, and we have the strong intention also to deliver what we have promised. So this gives me now a good possibility to hand over to Dirk.

[Dirk Michael Rothweiler, CEO & Member of Executive Board]

Yes. Again, good afternoon, ladies and gentlemen. So the short quarter was highly marked by the introduction of our SAP-based one ERP system. It was due and overdue for years, but it's a strategic and important investment because it forms the basis for our improving the operator for excellence step-by-step, in line with our vision to reaching EBIT rate of 10% midterm. However, as you know, the introduction of such an ERP system is a major effort. It has consumed a lot of manpower, which was partly in conflict with day-to-day business, but revenues have come up consecutively from January to February and March. We are on a favorable level. At the same time, we have a good order entry and order backlog, so that we are confirming our guidance for the year 2018, which is to achieve revenue of EUR 150 million to EUR 160 million, along with an EBIT that is expected to exceed 7%, and might go up until 9%. Yes. And this is basically the information we had for you for this Q1 call. The opportunities and risks for this year are shown here on this slide. We have this good order backlog, and we had a book-to-bill of about 1 in the first quarter. This goes back to some customers continuing ramp plans, which is resulting in good demand on our inside. This is mainly for tailor-made solution products that we generate and develop and produce in volume for key customers. But also on the side of the standard product, our key products, there is an increased demand. So that's on our way towards increased economies of scale. We are making further progress. In terms of forward integration, we see more inquiries for higher level and higher value add. And again, based on our operational excellence efforts, we also have confidence to see continued impact. On the risk side, obviously, late order placements within this year may result in shipments, which will occur in 2019. If customers delay product launches, then obviously, we would also not be able to realize revenues to the extent we have planned for this year. We have introduced products in 2017. The launch is supported by marketing activities. And depending on the progress, this cost may be higher, as initially expected. We obviously also have other influences, which are out of our immediate control, such as purchasing prices in our supply chain, but also the lead times within our supply chain, which has a trend of becoming longer. We have seen first indications in the second half of last year at one of our manufacturing sites, best indications from Q1 this year that suppliers have a trend towards longer lead times also for other manufacturing sites. And the opportunities may help us to overachieve, while the risks may slow us at some time. But all in all, we feel very confident with the guidance we are giving. So finally, for your information, we would like to highlight a few dates on our financial calendar. Coming up tomorrow is the German Spring Conference in Frankfurt, where Carina and Mathias will be available. Later in the month, there is our Annual Shareholder Meeting, which is on the 23rd of May. On the 1st of June, we will be participating in the Oddo BHF Roadshow in Paris, France. Later in June 21, 22, there's the Berenberg Pan-European Discovery Conference also in France. Mid of August, we will be reporting our midyear results and our Q3 interim report with you in November, and we will have the German Equity Forum at the Sheraton in Frankfurt in November. So now the call is open for your questions.

[Operator]

The first question is from [ Sebastian Laraugnie ], [ Inno Capital ].

[Unknown Analyst]

Just a quick question. Given the book-to-bill, the increase in the development of the business, can you provide a bit more color on the mix exposure? Is it mostly Industrial, Medical, Mobility? And what's the driver and type of margin? And the second question, you provide 7% to 9% EBIT margin guidance. The range is quite high, in fact. So does that mean that 7% will relate to the EUR 150 million sales and the 9% EUR 160 million? Or if not, what would be the key driver to be closer to 9% as opposed to 7%? Last question will relate to your long-term guidance because if we step back to Q3 last year, you already achieved the margin that was above the 9%. When shall we expect progress in the business to be able maybe to upgrade your long-term margin guidance?

[Dirk Michael Rothweiler, CEO & Member of Executive Board]

You're welcome. So first of all, the trend in order entry that we see is good for all the markets. And as I've said, it's also across the solution versus standard products. So there is not a major differentiator. So the second question was referring to the EBIT guidance versus revenue guidance. Your expectation is correct. But because of digression effect, of course, the higher EBIT margin will also be expected to come along with the higher revenue. But then, of course, there may be changes in product mix from quarter-to-quarter, which will also have an impact if such effects should kick in. The last question was referring to Q3. Last year, we were operating on a level of close to EUR 40 million revenue per quarter, so we were seeing a favorable digression effects. The capacity was loaded to a good extent, but then also a couple of key customers and volume customers were calling off from their framework agreements and contracts in large quantities. So we have a nice scaling effect, and also a favorable product mix, as we have stated in our Q3 report and call.

[Unknown Analyst]

Just going back on the book -- order book today. How is the mix compared to last year? And shall we expect like a maybe better mix compared to '17? Or is it more of the same?

[Dirk Michael Rothweiler, CEO & Member of Executive Board]

So the year is quite long, and there may be changes. For example, last year, we had 2 Medical customers that were showing lower demand than expected, but these guys are back in the game. Basically, as I mentioned, the market share is about half in Industry, it's about 20% in Medical and 30% Mobility. There is no indication that there would be a very strong change that would come shortly.

[Operator]

The next question is from [ Richard Becker ], [ Equinat ].

[Unknown Analyst]

One thing maybe for clarification. You outlined that there is a little bit of shift-- I heard some noises in the background, sorry. Can you hear me?

[Dirk Michael Rothweiler, CEO & Member of Executive Board]

Yes, we hear you.

[Unknown Analyst]

Okay. Yes, you outlined that there are some delays in production due to the ERP introduction and various points in sales and other things. I think we will see more positive numbers in the second and third quarter maybe. And the question in terms of clarification is, if that is also the case for the inventories and for the working capital ratio you have planned in the current fiscal year. That's the first question. And the second, in the appendix of the interim statement, you mentioned or you talk about the start of the Blue Next cameras that you have started production. And maybe you can outline a little bit how the ramp-up over the next quarters will take place and when you will arrive at a, let's say, material sales volume.

[Dirk Michael Rothweiler, CEO & Member of Executive Board]

Okay. So I'm going to take your question regarding revenue development and the Blue Next camera, and Mathias will respond to your question regarding working capital development. Yes, as I've said, the introduction of our one ERP system was a big effort, and it was slowing us, particularly in January. Revenue has come up in January -- sorry, after January and February and March nicely, and we have entered Q2 with a favorable April revenue, supported by the order backlog we have. We expect obviously a better Q2 than we had Q1, and this is also expected for Q3. This was what you have expected and what you have asked, and also Q4. The Blue Next camera is a new camera design, which basically is a digital camera. So at this meeting, the recent most requirements in the market, and we have started to win orders already last year that should come to shipment soon in this year. But obviously, the first thing that customers do is to qualify our products and their products with their customers. And this will mean there is a time delay until which our customers will take their products to a volume. So we may see some initial effects for this year, but there should be more effects as of 2019.

[Mathias Gollwitzer, CFO & Member of Executive Board]

So I would like to come back to your first question concerning the net working capital ratio. Yes, we do have this KPI in our books. We have a long-term target of 22% net working capital ratio in comparison to our sales. This year is a special one. As often mentioned, we do have a -- now a challenge in order to ramp up our production. Dirk has mentioned that some suppliers have also indicated a longer lead time. So our objective is now to get our material as soon as possible in the volume that we can get. So the first target now is preparing all material that we need to push production, and to take every possibility to prepare that we can deliver our products. So this is for the next 2 to 3 quarters our main objective. So this might be in the end that we will have quarter-by-quarter a little bit higher working capital, but we want to deliver.

[Operator]

At the moment, there are no further questions. [Operator Instructions] There are no further questions. I would like to hand back to you, gentlemen.

[Dirk Michael Rothweiler, CEO & Member of Executive Board]

Yes. Thank you, everybody, for attending our call. We appreciate your interest and you accompanying our further business development. Have a good day.