Elmos Semiconductor SE (ELG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE Conference Call regarding the results of Q2 2020. [Operator Instructions] Let me now turn the floor over to your host, Dr. Anton Mindl, CEO; and Dr. Arne Schneider, CFO.

Good morning, ladies and gentlemen. I would like to welcome you to our conference call on the results of the second quarter 2020. Our CEO, Dr. Anton Mindl, is here as well. And of course, we are both available to answer your questions. And give comments following the presentation. Before I go into details, let me briefly give you an overview on the current business sentiment. The second quarter basically turned out as expected, with our -- in our given guidance range. It shows, as we said, first effects of the corona pandemic. The third quarter will show very significant corona effects, but we will also see the turning point in the current third quarter. The development of incoming orders is positive, and we perceive a revival of business in the different regions, especially in Asia. While by the end of the year, we will still be far away from pre corona sales levels. We are looking optimistically into the future. As we see it today, Q3 will be the trough of the current downturn. Because of the high volatility in the market, we are still not in a position to provide you with a guidance for the full year. Instead of a full year guidance, I would like to guide you through a scenario calculation similar to what we did when we reported the first quarter results. This type of calculation helped last year at Elmos to see beyond short-term logistical deviations and link our sales to the underlying markets. We assume for a moment that car registrations would be down 20% in the year 2020. Market research institutes still vary quite a bit. So you might also find minus 17% or minus 24%. There are lots of research numbers offered. There is no reason to believe that such a downturn would not reach Elmos more or less proportionally as a truly automotive chip supplier sooner or later. You can say ramp-ups help, yes, but many are delayed and less steep. So don't forget, these are projects at the start, so in comparison, they run in lower volume as compared to those that have already been in the market for some time and made their way to more customers or more platforms of the same customers. So if Elmos would mirror the general market development of, say, minus 20% sales. In the fiscal year 2020 would then reach EUR 219 million and with sales of roughly EUR 123 million in the first half, that was just down 5% versus the prior year's first half. I calculate that this would leave us about EUR 96 million for the second half. Now you can take different market assumptions and read different numbers. But our general assessment of the situation is always the same. Most of the corona effect will be processed in Q3, and we are convinced that the last quarter of this year will show a decent recovery. And beyond the year 2020, we are positive for the medium and long-term development of Elmos. Our development projects are running at full speed, and customer acquisition is successful. We maintain market-leading positions. As you know, for example, as the global leader in ultrasonic distance measurement or as a key player for LED rear lights. This leads us to new customer relationships in various markets. Also in other areas, we are experiencing high interest. This holds true for our semiconductors for ambient light in vehicles. The market-leading gesture control for intuitive operation and are highly sensitive, yet very robust sensor signal evaluation ICs. One application of these ICs is a recently developed solution that specifically addresses the pressure and temperature monitoring needs of high-performance batteries in electric vehicles. That has generated important design wins and market-leading customers. Overall, we are therefore convinced that in the medium and long term, we will participate disproportionately in the dynamic growth of semiconductors in vehicles. After this more general remarks, I would like to go into the details of the second quarter 2020. Overall, the quarter under report turned out as expected. The second quarter was the first 1 to show revenue effects from the corona pandemic. We recorded a sales decline of 13.2% versus the prior year quarter, resulting in sales of EUR 58.8 million. Just for the sake of clarity, we compare our results against the continuing operations in order to account for the sale of our subsidiary, SMI, which took place at the end of Q3 2019. Since we do have rather long lead times within which the orders are more or less fixed, a good part of the second quarter still benefited from orders that didn't take into account the corona effect. The EBIT margin of 5.4% in the quarter annual report is the result of 2 effects. On the 1 hand, the sales decline, coupled with a rather fixed nature of operating expenses, operating expenses caused pressure on the margin. And on the other hand, the EBIT margin reflects the planned and executed expansion of development expenses. As we reported, we built up a new design center in Dusseldorf in 2019 and invested in general in our research and development capabilities. CapEx amounted to EUR 3.3 million or only 5.6% of sales. This is, of course, due to the fact that we are currently, because of the weak demand, are very restrictive with respect to new investments in hardware. The adjusted free cash flow amounted to minus EUR 10.3 million in the quarter under report. This is caused by rather high tax payments that took place in Q2. But also by other effects like an increase in inventory. Now I'm switching to the outlook on the current quarter. The running third quarter will see the worst effect from the corona pandemic. What automotive manufacturers and Tier 1s experienced earlier this year, lockdown of car dealers and plant closures is what hits our results in the third quarter with delays. We have Tier 1s that had to close down, but their electronic manufacturing services kept ordering for months without adjustments. And the result is seen in the second and third quarter. In Q3 2020, we are expecting sales of between EUR 37 million and EUR 41 million. For the EBIT, we are expecting a loss of between EUR 13 million and EUR 10 million. This will be the result of the fact that at this level of sales, most of the proportional costs have already been reduced to the maximum, so that the residual costs have predominantly a fixed nature. The third quarter guidance is based on an exchange rate of EUR 1.15 to the dollar. As I said, we see the turning point in this current third quarter. Finally, I would like to give you an update on the measures we are currently taking to weather the crisis and how we will continue. As reported already, we have taken numerous preventive measures very early on, both to protect our employees and their families and to avoid being directly affected by corona infections in our business operations. And we are still very deliberate and selective on business travel. Lots of employees still work at least partially from home. We continue with social distancing measures. Temperature screenings, meeting provisions and limitations, limited canteen openings and firm rules to wear masks on site. We have seen infections at Elmos employees, but due to our measures, none of them infected other employees. So that, we believe, proves that they are effective, and we need to keep up with them. At the same time, we have implemented operational measures to cope with the economic impact of the corona crisis. Our cost-cutting measures include short time work, which is meanwhile introduced in all production areas and most of the administration departments. This will be adjusted as appropriate and needed in the future. It is worthwhile pointing out that in light of the low level of demand, we have temporarily extended short time work even to our wafer production in Dortmund because the reduction of orders at foundries reached their limits. The additional production notes stemming from the termination of the IMS Corporation resulted also in additional wafer material, thus contributing additionally to the situation that wafers out of Dortmund for the time being are less needed. Associated with the short time work, the management Board and executives as well as those employees not affected by short term work, voluntarily waived part of their salary. In the future, depending on the development of the crisis, we might also consider more personnel-related measures. Now no 1 knows how long this crisis will last, how many ways we will have to live through or when the appropriate vaccination will be available to end the pandemic. But 1 thing is for us clear, with gross cash of about EUR 87 million, our prices proven managerial skills and our better than ever product portfolio, we are sure not only to weather even a very long crisis, but to come out in a stronger shape. Already 2019, we have proven to be stronger than our peers. And with this, I would like to open the floor for your questions.

[Operator Instructions] And the first question comes from Mr. Malte Schaumann from Warburg Research.

The first question I have is that maybe you can provide some more color on customer behavior in different regions. What other than you see in Asia, Europe, U.S., et cetera? That would be appreciated.

Well, generally, we see our customers somehow correlated with local market developments in China, the numbers are not that bad today. We had relatively good China sales numbers. And we generally see that car sales in confidence, particularly in China is kind of on a good way back, and this is then reflected in orders. People asking how much 1 can produce. People asking that the supply chain is secure. And we have very kind of good signs, especially from this Asian region.

Maybe I can from the European side, there are -- I mean, it depends very much on where the Tier 1s are focused on. So you also see European Tier 1 s that are, let's say, going back to a more optimistic assessment of the situation than has been the case a few weeks or a few months ago. So in general, it's just like we said in the presentation, we think that the sentiment of the market is pointing upward. The only region that's obviously lagging a little bit behind is North America. But I think this is due to the special situation they have over there in corona.

Yes. Yes, makes sense. Okay. And then secondly, on your loading in your fab in Dortmund, could you provide some, I don't know, if other indications that you will end short time work soon because of the uptake you expect for the fourth quarter? So what's -- maybe you can provide a number? What's the average amount of short time work you have in your front end fab? And what kind of a time frame you expect when this might end? Or would you require significantly higher sales level to really reach full utilization?

We -- what you have to do is when you do short term work, you have to make sure that you don't do it 3 days and then you go back to normal operation and then you make it a week and then you go back to normal operations. So you -- once you decide upon short term work, you should keep that modest for at least a month. And that's also what we are planning to do that we do it for a longer period of time. Let's not fix it to a month what I mentioned right now, but we want to deliberately stay at a fixed amount of time in the short time work. If you want to go back to full speed, again we can do this immediately. But you also can see in our numbers, over the course of the last month, we also deliberately built up stock and inventory and majorly for 2 reasons. First of all, we have been successful with this strategy in the crisis 2008, 2009, where business took up much stronger, much faster than everybody anticipated. And we were 1 of the few semiconductor companies that could supply to the levels required in end of 2009 and 2010. This is 1 experience we tried to pick turn. And the other thing is that we don't forget we closed in Duisburg. And this means, first, you, of course, in the ending period, do as much as you can to keep the operations as efficient as you can. So we kind of produce the max of wafers till the end of Duisburg and then also we had to synchronize this with all the qualification procedures that we have to have in place when production starts to change. So we think that we have a good stock and a good inventory in order to also be able to make efficient use of the short-term work schedule even in the wafer fab.

Would you say that inventory levels have broadly reached kind of a plateau peak whenever? Or do you expect, given the sales decline ahead in the third quarter that inventories keep rising?

I would say it's from -- again, as a kind of a sentiment feedback, I would say that in China, we are getting slowly to the trough of the inventories built in different stages. And I think if somebody watches us for a longer period of time, we anyhow have the problem or the feature, whatever you may call it, that we sell much less over distributors than other semiconductor companies do. So when we talk about inventories with our customer, we talk about inventories of the EMAs, or the Tier 1 s and maybe even though it's -- we have the feeling that in China is really going to a level where we are much closer linked to the real order needs they have. Varies maybe in other areas, it depends very much on the assess of the Tier 1. I mean we have 1 specific Tier 1 that is increasing orders drastically as we speak, but that has clear reasons. And we have other Tier 1s that are still very hesitant to go back to the old -- well, not to the old, but to, let's say, kind of levels that have been the general level when it started to be not as good. I mean, don't forget, we are in the year 2020, where for most of our peers, 2019 was dead wasn't it. So in general, I think we see more dynamics from China, improved dynamics from the rest of the world aside North America.

Okay. Then in regards to your CapEx. Investments have been understandably low in the first half of the year, I think, about EUR 9 million for tangible assets. Is that kind of runway you would also expect for the second half? Or is there any requirement to step up investments later in the year?

Well, we don' precisely plan that, and we don't precisely forecast that. I mean you know that if you buy machinery in our business, then kind of the lowest number that you can get something senseful for is -- seems to be EUR 1 million. So it depends very much on whether we think that we have favorable conditions. Of course, we tried to use the time we are having at the moment also with our suppliers in a sense that we said, listen, gentlemen, you can have a bigger contract if the individual machine is cheaper because we know we will need more sooner. So that may depend on closing of these kind of negotiations or not closing on these kinds of negotiations. But we don't give a guidance here. I mean, in general, as long as I don't see a clear signal that it goes steep up again, we will be restrictive. I mean that's hardware. I don't say that we -- if there are soft skills required to improve our business, we will do this. I mean if you look in our R&D investment, we not step back 1 small inch or a centimeter, depending on the medium-term.

Okay. Then a question regarding the medium-term perspective, when I read into your, Anton, remarks and reading the quarterly part, then I wasn't too sure to in the past, when you talked about outgrowing the dynamic growth of the semiconductor IC market in automotive. So has anything changed for you to become kind of more upbeat regarding the term perspective that kind of even top the automotive IC market growth in the medium-term based on your product portfolio?

Well, I think when you look -- we also usually load up a presentation with a quarterly reports. When you look just to the number of #1 product niches or product areas that we have. And you compare this with maybe 5 years ago, you definitely can see that we added to the ones we had before we added a few. And when we mentioned also deliberately in this presentation that we have a new fleet of so-called sensor signal processors that on the 1 hand side are very sensitive, on the other side are very robust and that they enter applications that are good for e-vehicles, then we obviously put a lot of hope into these extensions of our portfolio. And so my answer would be, I think, like Arne said before, our product portfolio has never been in a better shape. So -- and we are still having a lot of additional ideas.

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

Like always, also some follow-on questions to Malte Schaumann who some I also would have asked. But maybe please help me a little bit. I understand it maybe from the statements you made in the last minutes a little bit more. If I listen to all the other automobile related semi companies, say and exceeds the trough in Q2 and to see already an improvement in Q3. Yesterday, for example, it was also a feedback from the Infineon call. Therefore, it's the reason that you see maybe the trough in Q3, is that you have followed another inventory strategy like you mentioned, that's a special case in Duisburg?

I don't think that links to the inventory strategy. I think it's linked to the way we are linked to our customers. I have the impression that in some areas, our customers are used to our, let's say, yes, maybe more specific tailored IC solutions then they might be with others. So if you take a standard ASSP from a standard stock. When you say, okay, today, I want to have one. And then you get it out of the stock of a distributor, maybe with 1 or 2 weeks lead time. And then you say, okay, now I don't want to have a new IC and you just cling your order. This is not the case with us. Usually, we have the long lead times. So we have 12, 14, 16 weeks, depending. And usually, our contract partners, our customers, our partners, they try to, when they can, they try to cling to the contracts as we do. So I mean, I can also -- I can only just look from the outside in and maybe Infineon has a specific dynamics because they are outstandingly strong, I think, in the power semiconductor area, which definitely will go up a lot because the e-vehicle dynamics goes -- go so well in the weeks and months to come. I mean, the ID3 is for them, definitely a very important car because they have many semiconductors in there due to these electric cars. For other companies, I think it's maybe due to the fact that we always have been traditionally not good in distributors. Maybe that's 1 of the reasons. But I can make only guesses around this. But when we talk about our revenue, we don't talk about our inventory strategy. We talk about the orders that we are processing.

Okay. So for -- also, maybe the inventory topic that your customers are, because you have these long lead times and different behavior, I got it now, okay. But you are the only 1 who sees a trough in because we all the others have seen in Q2 [indiscernible] Texas is really a special case then?

Yes, it is. We know this, certainly, Mr. Ries. Don't get me wrong, but -- and we also asked ourselves, but this was 1 of the answers we got. I mean, on the other hand, what you also have to see -- I mean I don't name names now, but if you go down in '19 by a significant 2-digit number, maybe things get anyhow a little bit distorted because we grew by 8% in last year.

That's clear. That's a fair point. And another point is there's a book-to-bill you don't publish it, but only from a direction. Also, sorry to mention Infineon again, they had a book-to-bill in Q2 in automobile of 0.2 and expected to go over 1 during the quarter -- the third quarter, do you see also such a strong recovery in the book-to-bill?

Well, our book-to-bill is significantly below 1, but it's not 0.2. But either way, I mean, it's far away from 0.2. So that also hints at much more volatile development of orders which we discussed in the earlier trough discussion. If orders are more short term, if they are cancelable, potentially some of our competitors may even have contracts with distributors where they can return material, which is something we, for instance, do not allow. Then you have a totally different revenue development in terms of timing, maybe not in terms of overall.

Maybe another questions a little bit in looking to the next quarters. Any feedback or maybe it's different from OEM, auto OEM, like you mentioned before. How are we acting the OEMs to the crisis are, say, bringing new features and new -- maybe new products faster to the market? Or are we reluctant because maybe the market is not ready because of the crisis? How you see it? Is it -- in that regard, like speed up of new things of innovations which could good for you? Or is it the other way around?

They are throwing the hybrid vehicles meaning that vehicles would have electronic drive and a kind of a range insurance onboard. I saw it on the market like crazy. And I think in general, the overall trend and that has nothing to with the corona crisis, but the overall trend that car producers are forced to obey to the CO2 image that the European Union is accepted in the end, this drives innovation like crazy because you really have to look on every milliwatt of power consumption. You have to have a very complicated system thinking and coding solutions to that. So that helps us a lot. I mean, we reported about this ASSPs that serve for the purpose of having kind of an early warning system if something in the battery goes wrong, if temperature is too high, if pressure is too high. And this is a thing that is, let's say, putting much more insurance to the safety of a battery. And is the status in current e-vehicles. And the good news is that it's not 1 piece per battery pack for the full battery, but it's rather 1 piece per pack. Or this can be any part, so it can be 10, it can be 20. It can even be more depending on the size of the battery. So in general, innovation is -- I wouldn't say is driven by corona, but it's driven by the fact that the powertrain has to change a lot. And of course, by all this autonomous driving. I mean the ultrasonic things are also expanding more and more because sooner or later, it will be expected that even cheap cars break if they have somebody behind them. And they break, if you exchange the braking pedal by the accelerator pedal, but you're standing in the traffic jam, which is often the case in Japan, and with an ultrasonic device that's linked to your automatic emergency braking system, you can prevent this from happening. So you go in the throttle, but the car doesn't accelerate because it knows, hey, we are in a jam. If we get it.

Okay. Maybe to this battery project, which is also a little bit new. Is it 1 design win? And you are -- could others follow? Because...

[indiscernible] of the customer and when goes into serious production and to how big is volume. It's what we use. I can't answer you. It's more than 1 customer, and it's, of course, a Tier 1 and other OEs. So we will -- we are looking forward that we will be able to spread this.

Okay. You said a lot of -- Mr. Schneider mentioned a lot of projects where you are very optimistic. It was a little bit fast. Maybe you can repeat a little bit what are the major drivers or major projects we need as ultrasonic and some battery things that you see as the strongest growth over in the next 2, 3, 4 years?

The longest growth drivers are always our high-volume things, and that is ultrasonic, there is HVAC and that is LED. LED in the interior and LED in the outside. And then the sugar -- how do you say that? Sugar pies or come. And this is just an extra cream on top end. Don't forget, I mean, if you talk about such a design, and this, again, will take at least 1 to 2 years till it starts. And it starts careful because these are new plants that have to be treated carefully. So we don't have EUR 10 million of revenues in 2 years from now, but it will start. And once you prove and that you can do this application, you will set a kind of a benchmark. And this is the reason why it's worthwhile to mention that here.

Okay. Is it a new customer? Is it a customer you had before?

This is a customer we had before, but we had this customer only for other applications until now.

Okay. And finally, sorry, coming back to the figures, but only the calculation figures. You will hit -- saw a strong -- a high loss in Q3 because of the idle cost now because you mentioned in Dortmund. Now you have reached a low point of the foundry, the reduction of the foundry orders. And there’s obviously underutilization in Dortmund, if I take your scenario playing, you're moving back in Q4, nearly if it -- scenario is right, closer around the figures we saw in Q3 and you have been profitable. Therefore, is that the right assumption that maybe the idle cost will -- if the scenario is right, will rightly go away in Q4?

Well, if they completely go away, we don't know. And there's a lot about Q4 that we don't know. That's why we do a scenario and not a guidance, and we deliberately said it might not even be minus 20%, it might be minus 15% or minus 25%. But anyhow, we think what is clear about it is that it goes up. And we don't know to what level. But we are very confident that it should go up from what we know today. This is a little bit linked to the question when will short time work in the fab and when we'll have you running at full speed again. And this is something we cannot tell you today. Of course, we have all an interest that it goes up as quickly as possible, but then in the end, we are demand linked.

Maybe 1 more comment from outside. When we said this statement in our presentation and also in the news, then of course, we don't talk about, will it go up or not. It will definitely go up, and it will not be 500,000 or 1 million. But it will be definitely much more, but we came precisely tell you the number.

But you will likely -- maybe if the orders come back, most will go first to Dortmund if possible, if qualified to bring up the loading again?

Yes. This is, of course, the intention. I mean you -- don't forget that we, of course, use our foundries not only with our technology. I mean we transferred the 350 nanometer technology to nanochip and TSMC and there, we still keep a minimum low because we want to make sure that they don't kind of forget how to process the wafers. But also, we get wafers in their own processes like 250 nanometer, 118 nanometer. And that is, of course, anyhow, always at the foundries.

And next question comes from Mr. [ Gunther Ika] from [ Ika Trade International tours ].

I have 2 questions. The first 1 is about Tesla as a business in Brandenburg's new factory. Have you connections with them? And the second question is about the Fraunhofer Institute. I mean the Fraunhofer Institute has a very good reputation worldwide. Why did you stop the contract with them?

Thank you for the question. The answer to the first question is yes. But not to Brandenburg, but to the Santa because they are the area where, let's say, projects are getting developed and put together. Yes, we have contacts in Tesla. We can't deliver more on this. Unfortunately, we will do this at a later stage in time. We also regretted that, let's say, the cooperation with the Duisburg foundry could kind of upbring cling ends together. But in the end, you know the Fraunhofer have maybe a more advanced development focus, and we have maybe a more economic focus. And in the course of the years, we tried the best to keep this together, but it was just not possible in the end. I mean, our economic projections didn't fit with the possibilities, and their centers of activities in a sense, what do they want to focus on in the advanced areas, did not also -- it did also not exactly fit with what we wanted. So in the end, I think it was just a sheer consequence that the contract ended. In general, we have to say that it makes, of course, our operations leaner and much easier to manage. That is fair to say as well. So in the end, I think putting all that into mind, what I just mentioned, it is positive for Elmos that, let's say, this was ended as it was ended.

And we have 1 more question coming from Mr. Hamish Edsell from Otus Capital.

Just a final question for me was on the treasury shares. It looks like it was a very sort of value-creating move to buy back those shares in Q1. Is the intention here to cancel those shares? Or will you hold them for potential acquisitions? Or to sell back to the market at a higher price later on?

Well, generally, we have no plans to cancel them because we think that cancellation is such a fixed thing. And they might end up being canceled. It's not impossible, but they might end up being used in M&A. And once we cancel them, we ruled out the other options. So we want to keep all options open, which means, for the time, we'll stick to them and keep our options open.

We thought it ourselves when we bought them.

Yes. Well, hindsight is proving you correct at the moment.

There are no further questions at the moment. [Operator Instructions] And we have Mr. Johannes Ries from Apus Capital.

Sorry to coming back with the question was not planned party cover my head regarding the owned shares. Are you at the moment actively looking around for possible acquisition targets? Or are you out focusing more on the daily business and you have so many projects in the pipe that you don't need it because you have still an interesting cash pile and all the shares, and you mentioned it you're looking for all options. Therefore, what is the strategy on the M&A side at the moment?

We are actively looking what could add to our competencies. And we do that next to doing all the other things, of course. We wouldn't have ourselves restricted by a lack of time or so. No, we are looking -- we are talking as soon as something comes out that's more noticeable, we'll let you know. Yes. That is -- we are always looking.

Okay. There are things around, which would fit, yes.

Yes. But you still have to do a deal. I mean this is this the thing that in the past, we have to agree on valuation and agree on lots of other things. So M&A is not a predictable process.

And we have 1 more questioner, Mr. [ Gerhard Chan ] from [ Chan Investment ].

Just a little add on concerning the supply chain. Are there any shortages? Do you have the visibility here? And finally, the prices of raw materials, the -- depending on the U.S. dollar fluctuation against the euro, maybe you can give a little bit of insight here.

Well, generally, we had, over the last half year, some situations where there was sales looming, but it never reached the critical stages. We had people that produce a little tighter in Italy and Italy was at some point, a critical country. But today, I believe we are out of the woods there. It's -- most countries keep producing and keep running. So I wouldn't see a big additional risk there. It's pretty controlled right now. On the dollar, of course, both on the sales and on the cost side, we have dollar exposure. But it's coming down, and we are getting a little bit closer to a natural hedge now and then. So this will not be a determining factor for this year's profitability.

Mr. Mindl, Mr. Schneider. At the moment, there seem to be no questions.

Okay. In that case, thanks for your interest and your participation in the call. I would like to remind you that we will report our third quarter results on November 4, and we would be happy if you would join us for that conference call again. And finally, I would like to wish you personally and professionally all the best in these turbulent times. Goodbye. Take care, stay healthy and safe.