Elmos Semiconductor SE (ELG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor AG Analyst Conference Call regarding the financial year 2019. [Operator Instructions] Let me now turn the floor over to your host, Dr. Anton Mindl, CEO; and Dr. Arne Schneider, CFO.

Ladies and gentlemen, welcome also from my side to our conference call, Arne Schneider speaking. Particularly for those who know us less, well, I have some overview slides at the beginning. Then as usual, financial. And also, as always, we are happy to take your questions in the end. Elmos is about making all of our cars more intelligent with 5 Elmos ICs per global average car. Within this group, I would expect the 5 ICs per car can easily go to 50 and beyond. The car is clearly becoming the next smart device. For Elmos, that journey started around 35 years ago. The good thing is, I think, we may be almost halfway there. The other good thing is to become a really, really smart device, we have at least halfway still to go. And Elmos is prepared for the next part of the journey. We are present where our customers are and count 16 sites globally. We focus on what we can do best, multiple #1 product in our 6 business segments, our Fablite strategy now being extended to the back end operations and also the sale of SMI, our testimony to that. We are a small player, but with a global reach, and we feel we are exactly in the right spot. 2019 was a busy year. Here are some of the highlights. We opened a design center in Dusseldorf and also added R&D resources elsewhere. The successful Fablite strategy now in the front end, very well established. We started to extend that to the back end, so do our test operations and more and more testing over time will move towards Southeast Asia. We have 1 billion ultrasonic ICs sold. That sounds a lot, but if we ever want to have autonomous cars move through a crowd of people that we feel will only be the start. And we got very positive feedback from investors and others on our transformation to a European share cooperation. The SE helps us to keep the right governance for Elmos and to move on as a company. So thank you all for your positive feedback, but please also register your shares and vote for the SE at the AGM because this is what we still have to do to get that into effect. Last year, we also gave SMI into the hands of a better owner and also money changed hands, and we are quite happy with the valuation. We announced a role change concerning Dr. Mindl and myself. And the beautiful Audi marks our advances in rear lights, and it's is a good example of a highly innovative IC developed in close collaboration with the global car industry. Lastly, despite all our efforts, the cooperation with the Fraunhofer Institute IMS will end mid of the year. This means 2020 will also be a year of restructuring. After that, we'll be trending towards a 50-50 share in-house versus foundry in the mix of wafers that we use. Taking a longer term perspective, we see that Elmos is present in high growth areas. So we are not at all afraid of the future. We got some projects for the EV and hybrid space. We are already #1 for ultrasonic ICs, #1 for Gesture Control, #1 for HVAC flaps, #1 for ambient lighting, and soon, we will be #1 in rear light. So all of these areas -- so substantial growth potential. So we feel and see that we are on the right track. Looking back at 2019, not only Elmos had an excellent year, but the share price as well. We noted that the share price was up 47% at the year-end. On the plus side, we also gained 2 more investors with larger stakes. So thank you for putting in the research and diligence, and adding the Elmos' share to the portfolio. Coming to the financials. We had an organic growth of 7.7%. If you look at reported numbers it's -- we, of course, reported 7.7% as well as the 6.2%. The 6.2% does not include SMI in the fourth quarter. That's why it's a little bit lower. The Semiconductor segment grew 7.7%. We also had very good design wins, which again highlights that our products are well received in the market. As most of you would have expected, the book-to-bill was below 1 at the end of the period, meaning at the end of 2019. Since the Q4 was an all-time high in sales, and this is somehow to be expected that in Q1, with the price downs happening, is a little bit below than Q4. So the book-to-bill is, of course, a little bit below 1. So all of our successful 2019 happened in rather cold and rainy weather. We had minus 5% in global car registration, minus 10% in China and most peers had a sales development that was also in such a negative range. Elmos had a very good ramps, and a lot of good things happened at once. Growing from that new level is, of course, a lot harder than rebounding after a contraction as you see in our guidance. And I mean if you would start at 100% and then grow 8% and say another 2%, then the next year, you will be at 110%. But if the competitor also starts at 100%, and shrinks 7% in the first year and then rebounds 5% in the next year, he's somewhere around 98%. So far away from the 110%. So that is a little bit also what we see happening in the market as far as we can see. In 2019, we also had a good earnings development with an EBIT margin at our midterm target level. We show you the operational EBIT here, reported EBIT comes out at EUR 97 million, so more than double of what we show you as operational. The reason, of course, being that the sale of SMI resulted in extraordinary income of EUR 63 million on the plus side and the termination of the Fraunhofer cooperation resulted in restructuring charges of EUR 11 million on the negative side. Overall, we show as operational half or less than half of EBIT, we actually report EUR 45 million, 15.4%. On CapEx and operating cash flow, there are actually little surprises. The SMI sale brought in a lot of cash. We've not decided on the use of these funds. There might be selectively M&A, but nothing is off the table here. And we will let you know as soon as there is any news on the question of the cash use. Our net cash position of EUR 74 million certainly gives us some flexibility there. We think we gave you a good guidance a year ago, as indicated also by the green tick mark. We only changed our guidance due to the SMI transaction in September, and we think that was good news. So we reached 6.2% sales growth in the mid of the range, 15.4% operational EBIT in the mid of the range, we kept the smaller than 15% CapEx guidance. Of course, cash flow was significantly positive with the transaction. So we are happy with the guidance achievement. Coming to 2020, the business cycle does not look too friendly. We see predictions of minus 2% car sales from December last year, and that was before the coronavirus. So while we are very optimistic in the long term, the year 2020 will not be a super easy one. But you all read the papers, so that is no news for you. We guide coming from a very high baseline for sales growth in 2020 of low single-digit percentage range. We expect the EBIT margin to be between 11% and 16%. And please keep in mind there are price downs in our industry every year and also the R&D hiring of 2019 has full year effects this year. In addition to that, the restructuring charges we put back should be sufficient, but we still have to deal with the Duisburg situation and that is not completely finished. CapEx will be less than 15% of sales. The adjusted free cash flow, despite the Duisburg cash out, we think, will be positive. So we do not have much coronavirus forecasting or estimates in that guidance. You've seen the minus 2% in China on the previous page as our baseline assumption. We are not sure what comes out of that. So we'll basically have to see what comes out. Overall, you see that the weather is a little bit rainy and cold, but the fundamentals are all very good. And with that, I would open the floor for questions.

[Operator Instructions] The first question comes from Malte Schaumann from Warburg Research.

The first question is regarding on your gross margin. I mean the drop from 49% to 45% -- from 48% to 45% in the fourth quarter. I think I have to go back to 2008 to see a similar decline in gross margin, which was then accompanied by quarterly sales drop due to the situation. So maybe you can add some more flavor on the margin development, especially gross margin level throughout the year. And why the margin was at least perceived relatively low in the last quarter?

Arne has worked a lot in the presentation, maybe I'll try to answer now. I mean the fourth quarter that is, I think, fair to say, stretched us in respect of revenues. So production couldn't quite keep up with the pace that was necessary from a sales perspective. So that is one of the reasons. So we definitely had to deliver something out of the stock for that peak revenue, and we have productions up and down. So I don't see any trend there. See, there is a kind of a one-off. I also don't see the 48% as a trend. I mean 48% has been very good for the fact that -- you have to understand that we have a lot of ramp-ups in the moment. I mean Arne pointed it out when he mentioned somebody that loses 7% in the last year in the report in 2019 and grows now by 5% is still far away from the 110% that we are reaching in this 2-year perspective when we grow by almost 8%. And then, let's say, you give another 2% as a mid-range of the single percentage digits, just for the sake of this calculation now. And we are at 110%, and the other one is at 98%. So that's a really -- a different perspective. And this comes from ramps because in the volume side of the story, we see exactly what the market tells us. If we have a product, there is no more fantasy that it's just running in all the models. I mean what do we see? We see the dip in China, we see the dip in Europe. We see the dip everywhere. So you have to compensate with ramps. And this is not easy for production. I mean testing is a hustle. Many things are a hustle if you have so many ramps like we have.

Okay. Okay. Then regarding 2020, referring to your guidance and SMI. Is this kind of a bit of caution factored into guidance with respect to the shift of the production from SMI to your foundry partners? I mean there might be some hiccups in the production process?

The IMS -- sorry...

The IMS, you mean?

SMI -- yes, the IMS, what I meant.

No, there is not much caution factored in there. We plan for a very structured and orderly ramp down of the production in Duisburg. We also plan for a high volume not until the last day, but pretty much until the last days of that facility. We try to support that with various measures. And so far, everything looks good. So far, we are happy, but this is a major change in our production setup that goes on. We are very happy with the robustness of our production setup with the foundry partners and Dortmund. This is no question of delivery, this is just a question of managing within our value chain.

Yes. Okay. And then with respect to your CapEx, you mentioned the second wave outsourcing now affecting the back end. What's the implication for CapEx then? I mean you had pretty high cover investment ratios over the past years. What's the implication then going into the future? Should that then also lead to lower CapEx for the back end over time? How do you see that evolving?

If this is a question for the further future, then maybe Arne might want to answer. Just joking. I mean this is what we do it for. I mean we definitely know that this criticism is justified that we are producing too little free cash flow out of a company that's running at good -- very good speed, I would say, especially when it comes to product definition. I think we did, again, a great year, last year with respect to the acquisition of the projects that we had in plan, and it was really a very good year. We never give numbers, but we give a kind of assignment to it. So it was a very good year. But what I think is justified, we -- yes, we should make more cash out of this model. And we definitely invest too much in testing, and there will be multiple approaches to reduce that. But please understand that we don't give any cash guidance for free because now, we let you know when we are sure about the evolvement of our -- of the effect of the measures that we are planning. But I mean it's fair to say also that if you look in the missed tables that we have, let's say, set up and executed the last years, you'll have a hard time in finding anything that looks like a front end equipment. So there is only a few reasons why the back end would not be so extremely successful. But definitely, we can do much better than we do it actually.

And the next question comes from Mr. Johannes Ries from Apus Capital.

Maybe some follow-on question to Mr. Schaumann. You mentioned the ramps, given the lower growth rate in this year, is it also depends that you have less ramps compared to the last year where maybe is this more outbalanced weak market?

No. But what we see is, and please try to follow me again in the calculation that Arne started and maybe I might reiterate. I put it now for a customer, and I take a little bit more extreme numbers that we have seen from competitors as well. Let's assume just for the sake of the calculation that our revenue would be EUR 200 million and one of our customers will be just a lame duck being passive in the market. And let's go 2 years back then, and this customer is 50% of our revenue. So he contributes EUR 100 million. So for those being tested in the market, the market came down by 15%. So this customer would have presented as last year, for '19, with a revenue of EUR 85 million when we start from the EUR 100 million. So now he says, I will recover this year, and I make 10% plus. 10% plus on the basis of EUR 85 million is around 8%. So add 8% to the 85%, you are at 93%. We on the other side of our customers' perspective, increased the EUR 100 million, and again, I'll take -- for the sake of the calculation, I take 2% for this year. We are at 110%. So we are the side that went down and then recovered by 10% is at 93%. The other side is to be at 110%. So in 2 years' perspective, that means you have to compensate for 17%. I tell you Mr. Ries that requires a lot of ramp ups. Otherwise, you cannot compensate for this missing volumes. And even if you look on the 1 year's perspective, the calculation stays the same. You have, let's say, 7% less than the 100%. And then you have to add 2% on top, so that's 9%. If a big part of your products are just doing this kind of slumping, you have to have ramps that compensate for this and that's the story. So we still have in rear lighting, in Ambient Lighting, we see dramatic increases. I mean things that -- this is more like a jump in volumes than a normal growth perspective. And you have to because otherwise, you end up nowhere.

But anyways, there is less dynamics this year? Or maybe some product gaps you mentioned -- product areas, you mentioned lighting is very strong. It's jumping in sales. Others may be getting slower. As in ultrasonic speaker, same the year before? Or it's other things maybe on your space?

If ultrasonic -- is also developing nicely. If ultrasonic, as an example, I mean, this is maybe the candidate that this -- at this point to be discussed. If you are in ultrasonic with one type of project out in the volume market, and let's say, the take rate is at a firm percentage and you would expect that this project and this volume follows exactly the market dynamics. So these projects, well, they are already at a lower basis. They have been last year, and they will not fully recover from the basis they found last year. So they will not contribute to something that is above this 100, if I stay in my example from before.

On the other side...

Am I confusing you or do you understand what I mean?

Partly confusing, partly understand. The question is, why you have been last year so much better, losing so much teams this year. So it's not -- I'm not the only one maybe. Is it that the customers get cautious? There is maybe a destocking? Although, is it maybe that a reason?

That is not the reason. I mean it's a question of percentages. We regained where the others lost. So if you assume market sizes then the percentages, to gain further on top of this, are more difficult to get it. That's simple. I mean our level, if you compare us to somebody that lost 10% last year and we grew by 8%, our level is 18% higher. On top of this is much more complicated than to grow on a basis that has been demolished more or less.

That's very simple mathematics, but I understand so far that you are growing faster because you have winning products, products which are new, which for the others who are losing have the old products where there is no structural growth that are...

No, no, this is not correct, Mr. Ries. I told also in the last conferences that we had products that follow the market dynamics. I mean it was you maybe had the price degradation. So does it mean if you wouldn't have this effect, you grew by much more? And we said, yes, we would have grown much more. If you had, let's say, the sluggish market dynamics and the products that just follow the volume.

But that would mean that it's other things which are maybe help you to grow better are weaker this year. So that's the only conclusion. All others who are following the market is even more severe than last year. There must be something different to last year without the base effect.

Yes, there is something different to last year, that's definitely true. And one is the base effect and the other one is the economics around it and the market around it, definitely, yes.

But maybe from a regional view, what is your basis? Asia, you mentioned China was weak. As you also been a little bit more cautious on Asia, especially because without corona, even you mentioned that especially the Chinese car market was very weak because the subsidies on EV, for example, have been partly cut. Therefore, is it also that you have a strong position in Asia that also we have seen a little bit [ CCS ] development at the background of Asia -- maybe stays weakened this year?

Asia is definitely contributing to that. I mean if you look on the last numbers that has been issued by the VDA. They said, January was down minus 20%. We all knew that from July last year, they kind of canceled more or less all the BEV, the battery electric vehicle subsidy because they made no conclusions about the environmental concepts. So yes, we see this. I mean as we are in some of the AC/DC converters, we can tell that our, let's say, market problems with BEV vehicles in China right now. I mean Asia is definitely not adding any steam to the market dynamics. That's clear.

That's clear. And pricing, in the end, do you see a stronger pressure on prices, given that the whole value chain automotive is under pressure? Or is it the same in your calculation, in your guidance the same as every year in the price?