First Sensor AG

XETRA:SIS

Earnings Call Transcript 2018-Q3

[Operator]

Dear, ladies and gentlemen, welcome to the Q3 Results 2018 of First Sensor AG Conference Call. [Operator Instructions] May I now hand you over to Dr. Dirk Rothweiler, CEO, who will lead you through this conference.Please go ahead, sir.

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

Thank you, Mrs. Sander. Ladies and gentlemen, a warm welcome to this conference call of First Sensor. We thank you for joining us, and we certainly appreciate your interest in the company. Mathias and I will discuss results for the third quarter and for the first 9 months of the year, which were also released this morning. We will walk you through the presentation, which can be also found on our website. And at the end, as Mrs. Sander has indicated, there will be the opportunity for asking questions. All in all, we are very pleased with the Q3 results, as both revenues and EBIT represent historical quarterly highs, there. So we were reporting a strong order backlog in our half year conference and this is also a result of our strategy for profitable growth, which is driving a continued generation of economies of scale.We have used the time to further decrease relative direct cost. We have pushed yield increases. We continued with value stream improvements and logistics. Plus we could leverage purchasing scale as a result. And last but not least, following the desirable order backlog, we continued with investments in machines and also direct health.Mathias will now run you through the details.

[Mathias Gollwitzer, CFO & Member of Executive Board]

Well, thanks, Dirk. Ladies and gentlemen, I would also like to welcome you to our call today. Following on this chart, all of you, I would like to delve deeper into the figures. So let's begin with sales.For third quarter 2018, we delivered sensors and sensor solutions amounting to almost EUR 41 million. Sales total exactly EUR 40.8 million. This underlines the continuous demand for chip know-how and for our expertise in microelectronic packaging. With these competences, we are able to offer differentiated optical, pressure and also flow sensor technology.To meet this high demand, we continuously build up our production capacity. Over the course of the year, we have expanded our shift models for our chip production and microelectronic packaging. We further optimized batch sizes, installed new equipment and built up additional calibration capacity, all to generate a higher production capacity and a better flexibility in the production network. One example, we have already increased output for one of our product families in the field of pressure sensor technologies by 50% compared to last year. This product family is our H series. It is a standard product. By the end of this year, we want to have achieved an increase of 70%, and so further investments in the coming year are underway.We have EUR 115.1 million sales after 9 months. We are in the expected range for the full year. This corresponds to growth of 6.4% year-over-year. The compound average growth rate since 2013 is at 6.9%, and this without any effect of M&A activity.Let's now have a look at our sales by target market. The industrial target market remains our largest sales market with the share of roughly 50%. Sales increased by 4.1%, reaching EUR 57.8 million. This growth is attributable to new pressure and optical sensor projects in Asia. In the field of pressure sensor, it is mainly our H series which pushes the business. The optical project wins refer to our photonic product families. Furthermore, we have a sound base for our flow sensors, mainly in Europe. The increase of demand in the medical target market refer to our standard pressure sensor, the H series, and to customer-specific packaging solutions in the field of the optical sensor technology. This leads to an increase in sales by more than EUR 5 million compared to the last year.Sales in the mobility market amounts to EUR 31.5 million after 9 months. We have some delays in ramping up our new camera generation, which is based on seamless semiconductors, but it will be making its debut tomorrow at the electronica trade fair in Munich. At this fair, we will also present our embedded electronic control unit or the ECU for the very first time. This control unit represents our engagements in expanding our expertise in the applications field for partly and for fully autonomous driving of commercial and special vehicles. This platform enables the user to combine certain cameras and other sensors like LiDAR, even radar and ultrasonic sensors. And in addition to that, embedded software applications has already been implemented such as area view, rearview mirror replacement and also object detection so that our customers can enhance our know-how with their own applications.In the field of optical sensor solutions for automotive applications, we also have delivered our photonic products to customers for their final system test. As it is today a feature in the sensor released for one of our premium tester cars, the demand is still on the low volume, but it has already been doubled compared to the expected figures. And even autonomous driving is not yet a volume market, we strongly believe in its potential. So we prepare ourselves for a sustainable growing market.A view of our sales shares by region tells you that our internationalization is moving forward. North America and Asia now has a share of about 12% each. The growth in these markets is generated also by contracts with new customers. Our core region DACH, which means Germany, Austria and Switzerland, is still on a high level at around 50%.So let's now come to our earnings. An EBIT margin of 11.3% puts us above Q1 and Q2 2018 as well as above the last year's peak level. This increase is based on an improved gross profit. With EUR 23.3 million, we have an improvement of EUR 1.7 million or almost 8% compared to the same quarter in 2017. The EUR 12.3 million personnel expenses slightly increased, and other operating expenses level out at EUR 4 million.Looking at the earnings after 9 months. We see significant improvement in profitability over the last years. Measures such as optimizing value chain, meaning forward integration, the portfolio streamlining, improvement in yields and the bundling of purchasing volumes helped as well. Of course, we still have our homework to do in relation to yield management, the handling of small-scale orders or a better supply chain management. However, with our standardized SAP system across all our major factories, we now have a better transparency, and we see new approaches to optimize the way we do our business and even we see new possibilities on how we do our business. To sum up, we are sure that we can further strengthen our profitability.The operating cash flow after 9 months amounts to EUR 4.1 million compared to EUR 5.6 million in 2017. While we could improve our profit before tax from EUR 5.1 million to EUR 7.4 million, the cash flow has been reduced, caused by an increase in inventories and receivables. The free cash flow after 9 months amount at minus EUR 2 million, and this is on par with the previous year.The total volume of the balance sheet now amounts at EUR 162.1 million. The balance sheet reflects the increase in inventories and trade account receivables, as mentioned earlier. The reduction in cash and cash equivalents is related to the increase in working capital, the payment of new equipment in cash and also the dividend of EUR 1.6 million that we transferred to our shareholders in May 2018. The increase in raw material reflect our intention to continuously fill the supply chain to avoid shortfalls and to respond more flexible on customers' requirements.On the equity and liability side of the balance sheet, growth in retained earnings over the reporting period drove equity up by EUR 4.4 million. The equity ratio reached 53.3%, so 2 percentage points higher than the figure as of December 31, 2017. Our net debt amounts to EUR 26.9 million as of September 30. This figure is EUR 4.1 million higher than it was on December 31, 2017, which is in line with the mentioned increase of inventories as well as receivables.Now some information on the number of employees at First Sensor. The increase in our permanent staff to the previous year took place in production and development. We now have additional 41 FTEs working in our factories in Berlin. And this includes both semiconductor production and microelectronic packaging. 11 more FTEs have also joined the development department in order to expand business for customer-specific solutions, along with sensors optical, a better software and subsystems expertise.The order intake in the third quarter 2018 amounts to EUR 39.5 million, which indicates a book-to-bill ratio for the 3-month period of about 0.97. However, the order backlog end of September remained at a high level of EUR 100.6 million. 1/3 of these orders are still scheduled for 2018 and the rest is mainly to be shipped in 2019. After 9 months of the year 2018, the rolling 12-month forecast -- no, the rolling 9 months book-to-bill ratio is at 1.07 and which is an indicator for our further growth.Now I would like to hand over to Dirk. Dirk will now spend some words on the guidance for this year and the medium-term opportunities and risk situation.

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

Thank you, Mathias. So after going through the figures, it's no surprise that we are staying our guidance for fiscal year 2018. We continue to anticipate sales in the region of EUR 150 million to EUR 160 million and an EBIT margin between 7% and 9% for the entire year.The opportunities and risks are shown on the next slide. Let me start with the risks. Yes, there is some minor corrections of the expected performance of the world economies, but this is mainly down from 4% to 3.8% in one example, which would be the Institute for World Economy here in Kiel, Germany. So mainly, we see the markets remaining intact.Another point that we've looked at when presenting our first half numbers for 2018 back in August is the new emission standards here in Europe. So there is a risk that this may hit sales in August. I mentioned to you that we've seen some limited impact, but we can compensate or more than compensate by the business that we enjoy in medical and industry applications. The trade conflicts, especially between the U.S.A. and China, is a conflict that we also pay attention to. So far, we don't see any direct impact for our business.A question that has brought up ever more recently is potential supply shortages. It was correct that we are working at a more proximate situation with all our supply chain partners as there may be some hiccups, but typically, in our high-volume business, we are pretty much in good shape because, as a result of the larger business volumes and the forecast we received from customers, we are in an excellent position to coordinate with suppliers early on. And then, obviously, also in the situation of the economies, which is still good, salaries may increase in the employment market.If we look at the opportunities, then I think the nice thing about the sensor market is that this technology remains important and it gets ever more important as a key technology. So that industry automation advances in medical technology and also the transition of mobility application into a new era of mobility will continue to give us positive market developments. With our analog chip know-how and the simultaneous microelectronics packaging expertise, and please remember this is a very unique application in the market, we are very well positioned to benefit from the general trends in the market.As Mathias has indicated, we have invested in our production capacity, and we have improved operational excellence in terms of value streams and logistics so that we have an increased output capability. We will continue to benefit from these in the next couple of quarters but also midterm, and our plans are to continue to make investments. Particularly, we have a revised make-or-buy strategy. We are determined to increase the buy contributions and work closer with supply chain partners.So that's all in all with our strategy information -- implementation continuing to drive economies of scale. We remain prepared for increased quarterly sales revenues and also positive effects on the margins, which will continue to become more visible.So having said so, I would like to begin our Q&A session. Can the operator please open the line for questions.

[Operator]

[Operator Instructions] The first question is from Winfried Becker, equinet.

[Winfried Becker, Research Analyst]

The first question is returning to Slide 11, where you have commented the order situation. As we can see for several months, the first time Q3 came out with a book-to-bill ratio below 1, and you touched briefly on some things, lowering economy or so. So maybe you can clarify a little bit more. Is that a, how should I say, normal seasonal impact here in the 3 segments you are operating in? Or, yes, is the background more coming from the economy?

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

Yes, I understand. So first of all, the quarter was covering the month of July, August and September. So there is obviously a peak season for vacation, and this may also, in other years, as we've seen it, impact the order entry behavior. This is certainly one part. Second, we have seen some impact of the emission standards and reduced order income from the automotive industry. The way we see it is not that this would reflect a general decrease of demand but a temporary effect. And again, we are having the option to compensate it for medical and also for industry applications with their order books. So from one quarter to another, I would not see and think that this is a significant signal. But you're right, we are focusing the order entry on the market behavior. I think the rate of newly registered cars was behaving very well in the first 8 months. There was a negative hit though in September when in Germany, the rate for newly registered cars was 30% below September the year before. So that's a good enough reason to stay focused and pay attention, but I wouldn't say there is any regular behavior as of now.

[Winfried Becker, Research Analyst]

Okay. May I ask another that is more related to the working capital performance you mentioned, Dr. Gollwitzer. And in a different context, we've talked a little bit about supply chain, I say, problems in brackets, I don't know. So my question is -- the increase in working capital, I can imagine, it is a mix of better volumes you have in Q3. Or is there -- that's the question. Is there an additional part, so to say, that you have made strategic bias in order to secure your production simply that you have enough volumes for your regular production? Maybe you can clarify that again a little bit more.

[Mathias Gollwitzer, CFO & Member of Executive Board]

Yes. Of course, Becker, it is indeed mainly the decision that our purchase department has done to secure the supply of raw materials to our production facilities. They see certain allocation problems in the future mainly caused by electronic components and certain parts, so we decided to open the channel in order to order volumes of electronic components, which covers normally up to 2 years.

[Winfried Becker, Research Analyst]

Okay. Could we expect that this might continue during the next quarter? Or looking to your suppliers, will you expect more the situation to ease a little bit?

[Mathias Gollwitzer, CFO & Member of Executive Board]

Well, it depends, so to say. We do currently observe the situation on the supplier side. Once we see that the lead time is going to [Audio Gap] level, then we will come back to a more reduced volume of raw material on stock. But for a moment -- for the moment, we decide as explained to you, and we monitor the situation very carefully.

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

Yes. So those indications were visible for us in Q3, Q4 last year so that we could immediately implement proper locks and control to work with our suppliers. And trends as well, the last couple of quarters, it has intensified a little bit, and therefore, I think it was the right thing to go this direction and have the critical part on stock, yes. So I wouldn't expect that the situation goes away from this to the next quarter, but obviously, as it will soften up and become less of a risk, we will also correct inventories down again. This is a very visible effect as we have both forecast from our customers, and at the same time, we work closely with our suppliers so we can probe and sense changes in the situation early on and make respective decisions with respect to inventories early on as well.

[Operator]

And there are no further questions at the moment. [Operator Instructions] We have a follow-up question from Winfried Becker.

[Winfried Becker, Research Analyst]

Question on the sales performance. Due to some weakness in Mobility, I would say, the sales share of the 3 divisions have changed a little bit in the first 9 months. And with regard to your profitability, is there any effect included with regard to a change of the product mix, which might go in line with this sales change, whether it is positive or negative, I don't know?

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

Yes. So good question. I think that is the trend that we see in the markets, and our sales follows proportionally. In recent meetings, when the questions came up with respect to gross margins broken down by the market segments or divisions, I think our standard response was always there is variation of margins in all these markets, and that's still correct for now. So there is no leading impact on the gross margin. I think Mathias and I myself, together with the team, are very confident that we could demonstrate an EBIT rate above 11% this third quarter because we have engaged the team in real hard work to improve the processes, whether this is the process on the machines and potential reduction of yield losses, whether it's the touch time that we need to bring sensors through our manufacturing or whether it's working with supply chain partners on respective pricing or whether it's on developing the organization with a focus on direct versus indirect labor as we start seeing economy of scale effects, which allow us to take out relatively indirect costs. And this is what we did in the past 12, 18 months, along with a continued review of the product portfolio addressing the gross margins of individual selected products by specific -- by defining specific means in terms of yield targets, of material cost targets, of process cost targets. So the team has really been working hard on this, and I think it's fair to say that the change in gross profits that you see is not going back on relative market contributions but rather on the operative excellence of the organization, of the value-creation change. And this is really something that will remain a priority for us going forward. So the plans that we put in place are not just covering individual quarters, but they have a range all the way through to the next 12 to 24 months.

[Winfried Becker, Research Analyst]

Okay. May I ask again, maybe last one? Yes, last question from my side, completely different. A few days ago, an announcement came out concerning your biggest individual shareholder, Deutsche Private Equity, saying they are considering to sell their stake maybe. And if I kind of have it right in my mind, the statement from your side was you will take and support this role in this context. And maybe you could elaborate a little bit more on what that means. And yes, maybe in general, you could give some more information as far as the management of First Sensor is concerned, would be very helpful.

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

Yes, I think it's correct. We have announced that DPE has informed us about the intention to review the option of selling their shares in First Sensor. And obviously, they are holding a stake of more than 30%. So if they set it as a complete package, there might be the possibility of a public takeover offer. So -- and obviously, in that context, we want to play an active role and actively take care of the future of the company. So if a process should involve, then we would be an active partner in this process. Specifically, this means that we're having discussion with an investment bank as a financial adviser.

[Winfried Becker, Research Analyst]

Is it fair to assume that the overall process is more or less in an early stage than being close to finalization?

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

Yes. So we are in the process of mandating Goldman Sachs. And besides that fact, you are right, it's in an early phase, and a lot of things that you might be interested to ask would rather be very speculative at this time, and we are really not interested in having impacts from speculation that become visible in our share price.

[Operator]

At the moment, there are no further questions. [Operator Instructions] As 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, Mrs. Sander. So as there's no question, Mathias and I would like to thank everybody for taking the time to dial in into this conference call. We wish you all the best, and goodbye for now.