Elmos Semiconductor SE (ELG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE analyst conference regarding the fiscal year 2020. [Operator Instructions] Let me now turn the floor over to your host, Dr. Arne Schneider, CEO.

Good morning, ladies and gentlemen. I would like to welcome you to our Fiscal Year 2020 Analyst Conference and Earnings Call. I'm very happy to present to you the highlights and preliminary financial results of a very special and challenging year. As usual, you'll have the opportunity to ask questions at the end of my presentation. At the beginning, I would like to present a short overview of the Elmos group, especially for those participants who are new to our company, shown on Page 2 of the presentation available on our website. Elmos is one of the world's very experienced semiconductor companies for the automotive industries, and on average 6 Elmos ICs are installed in every new car. We develop, manufacture and distribute mixed-signal ICs for more than 35 years. Our roots and headquarters are located in Dortmund, but we have continuously expanded our international presence. With 16 locations around the globe, we serve all regions and are always close to our customers. Seven R&D centers worldwide, and more than 350 experienced engineers turn our deep understanding of our customers' needs and future trends into beautiful microelectronics. We have implemented a successful and flexible Fablite manufacturing strategy, processing wafers in-house in our own fab in Dortmund, and externally at our foundry partners. We organized ourselves in 6 main product segments, which all support the global mega trends and offer very attractive growth potential. Our sales are mainly attributed to Europe and Asia, where the majority of our customers' factories are located because we show you a distribution by shipping locations. But our automotive ICs are used in cars all over the world and are present in all the well-known brands. In 2020, we have been impacted by corona as everybody else, resulting in lower sales and profit. But despite the global pandemic, we have further intensified our R&D activities with a record spending of almost EUR 48 million last year. Elmos is crisis-resistant company, thanks to our strong balance sheet and a very solid financial position. With an attractive dividend and major share buyback -- a major share buyback offer, we could further increase shareholder value in 2020 when many other automotive suppliers were heavily structuring to finance their business. Elmos products provides innovative solutions for automotive megatrends with cutting-edge ICs for ADAS up to autonomous driving safety, comfort, user experience like gesture control and powertrain electrification, and Page 3 gives an illustration. Elmos has a leading role and #1 positioned in important automotive application field. Of course, I will not read the entire product catalog now, but let me just give 3 examples. We are global leaders in semiconductors for ultrasonic distance measurement. Our new generation of ultrasonic semiconductors processes signals considerably faster and at higher resolution than previously possible, delivering an additional gain in traffic safety. Our new LED rear light applications are also promising high potential for growth. We offer OEMs a large extent of design freedom as well as cost advantages over conventional solutions because we save an ECU, and thus system costs. Elmos applications for the optimized configuration of front grill and air flaps are convincing solutions, especially for electric vehicles, providing a smart and efficient power and battery management. As I mentioned before, despite the significant effects of the corona pandemic, we have not reduced the R&D activities last year, so many more and exciting products are to come. These efforts combined with the IC market growth, expectations and increasing IC content per vehicle provide a very reasonable basis for future growth of our company. Let me now move to some of the highlights of the last year on Page 4 and 5 of our investor presentation. The past financial year was a special year for our company. We had to manage a global crisis. But at the same time, we were able to successfully continue with our strategic course and consistently exploit new opportunities. At Elmos, we have recognized the seriousness of the COVID-19 pandemic early on. For the protection of our employees and to safeguard our business operations, we have implemented the first corona measures at the end of January 2020 already. As the COVID-19 pandemic worsened, we also intensified protective and cost-saving measures, including short-term work in our Dortmund fab, voluntary salary concessions of the management Board, senior executives and employees, personnel reductions and further cost cuts. Finally, we could suspend the short-term work program from November 2020 onwards in the light of increasing orders from our customers. We also achieved important strategic milestones during the last year. With Samsung, we found a prominent new partner and signed a foundry cooperation agreement for the manufacturing of ICs on wafer-level for automotive application in Samsung state-of-the-art facilities. This is a consequent next step in our Fablite manufacturing strategy and gives us access to advanced process technologies. During the crisis, we used our strong financial position and successfully completed a public share buyback offer for around 8% of own shares, now holding roughly 10% in total. With the conversion into a European Stock Corporation, as of July 1, 2020, we have successfully completed a step towards the international and future-proof positioning of Elmos. And towards the end of the year, we acquired the Dortmund-based software engineering provider, Online Engineering, which will help us to offer our customers even more comprehensive system solutions in the future. We also had, as we had planned a long time ago, the CEO handover between Tony Mindl and myself. During his 15-year term as the CEO of Elmos, Dr. Mindl played a major role in shaping the successful development and the strategic realignment of the company. We at Elmos are all very thankful for his outstanding commitment and his great achievement for our company. The global automotive market has been hit very hardly by the corona crisis last year, which is shown on Page 6 of the presentation. Overall car sales dropped 16% year-on-year and with a decline of minus 22%, Europe has been impacted the most of all regions. In China, the market could recover very quickly, posting strong increases, especially in Q4 of last year, and also other regions could recover from the low point of the crisis, however, somewhat later and less positive than the Chinese market. You all know that this V-shape recovery is currently leading to a very dynamic growth, and all sorts of challenges, but more of that later. Let us now have a look at our financial results, starting with the sales and gross margin development on Slide 7. Just as a clarification, the previous year figures are based on our continued semiconductor business only as we sold SMI in Q3 2019. In fiscal year 2020, sales decreased by 14.9% to EUR 232.6 million due to the COVID-19 pandemic. However, our 2020 sales finished at the upper end of the guidance range, which was between EUR 227 million and EUR 233 million. And please also note that after our turning point in Q3 last year, Q4 showed 68% sequential growth. The decrease in gross margin is the result of lower fixed cost absorption rates from the underutilization in production. Especially in Q3, demand was significantly lower than what is needed for an efficient and profitable production. As expected, we benefited from the recovery of the automotive market and stronger IC demand in the last quarter of the year. Accordingly, the Q4 2020 sales increased to EUR 68.7 million, which was the highest quarterly sales level in 2020. Turning to Page 8. At EUR 8.7 million, the EBIT in fiscal year 2020 ended also at the upper end of the guidance range. It was heavily impacted by the sales decrease and lower fixed cost absorption. The implemented countermeasures such as short-term work, layoffs, voluntary salary cuts and other cost savings could not fully recover the negative impact of the lower top line, but prevented a further deterioration of our profitability. As volumes increased at the end of Q3, we were able to achieve a very fast turnaround in Q4 with an EBIT margin approaching pre crisis performance levels already, despite the fact, by the way, that October was still impacted by short-term work. Let us now have a look at some of the other KPIs on Pages 9, 10 and 11. In the last year, we were very restrictive with investments in new equipment as we did not need additional capacity due to the lower demand. Therefore, CapEx was significantly lower than in the previous year, totaling to only EUR 18.8 million or 8.1% of sales. As I mentioned, we invested a record amount of almost EUR 48 million in new products in 2020, which underlines our long-term perspective and our long-term ambitions. Our cash flow from operations declined year-over-year, mainly due to the lower income. But despite the overall challenging business development with declining sales and lower income levels, we still could achieve a positive adjusted free cash flow in 2020. At the first look, this looks, by the way, significantly less than last year, but please keep in mind that the free cash flow in 2019 shows the cash inflow from the SMI transaction. So this is not really comparable. We have clearly shown Elmos is a crisis-proof company, supported by a very solid financial foundation, as you can see on Page 11. the further increase of the equity ratio to 78% at the end of the year 2020 underlines the financial solidity of Elmos. Total equity at year-end was EUR 310 million. The dividend of EUR 9 million and the 2020 share buyback, about EUR 27 million is, of course, reflected. And these 2 topics are also reflected on the cash side. Ladies and gentlemen, despite the massive impact of the global pandemic, Elmos equity and financial base is stronger than ever. We have successfully managed the 2020 crisis year and are now in a very good shape. At the end of my presentation on Page 12, I would like to give you an outlook for the current quarter. The beginning of the new year is characterized by a very high demand for semiconductors, not only for automotive applications. Therefore, our main focus is to manage the available capacities and to secure our deliveries to our customers. The automotive market is expected to grow by 14% based on the low level of 2020. However, the further course of the pandemic, ongoing lockdowns and the impact on the global economic development and on the automotive demand cannot be precisely predicted at the moment. Our forecast ability is also significantly affected by the current allocation within the IC market. Some cars may not be built, some components may not be available. Currently, things are well, but we do not know what the future holds. Therefore -- and we provide a comparative forecast for the full year 2020, and we do that for regulatory reasons. So our -- and maybe also your focus should be on the Q1 guidance. We have started the new year very positively with a substantial growth momentum. In the first quarter, we expected sales -- we expect sales to reach EUR 76 million, plus or minus EUR 3 million. The Q1 EBIT margin is expected at 14.5%, midpoint, plus or minus 1.5 percentage points. Ladies and gentlemen, as I said at the beginning of my presentation, 2020 was a very special year. And the coming months will also be challenging, but also very exciting. Elmos is well prepared and perfectly positioned to benefit from the market recovery and the long-term trends within our industry. We have the perfect set of composed of innovative products, a very strong financial position and highly motivated and very skilled and experienced employees. This is a great recipe for long-term success. That is why the management Board has decided to raise our midterm EBIT margin goal from 15% to 17%. Please let me repeat. This is our midterm target. So not immediately for 2021. But we strive to reach it in the midterm, and we are pretty confident that we will. Before the crisis, we have already managed to achieve an EBIT margin of 15%. So we are confident that we will be able to further increase our profitability in the coming years. We have the right setup, a good product pipeline, combined with strong financial structure to finance our future growth. And we are all very determined and highly motivated to continue our successful path. Thank you very much. I'm opening the floor for questions now.

[Operator Instructions] And the first question comes from Johannes Ries from Apus Capital.

I think you can hear me now. Hello?

Yes. Yes. Yes. I can hear you.

And what the difference a quarter makes. If you look to Q3 back, maybe a couple of questions. First, design wins. Because you have this very, very long, long design, in-phase, only a feeling maybe a direction for the mid- to longer term, how had design wins developed over the year compared to the years for -- how much had been influenced even by pandemic. That's the first question.

Well, we had -- and this was a little bit against my expectations, a very good design win year 2020. I thought that with the travel restrictions and everything, it's going to be hard. But in the end, I believe our strong product portfolio prevailed, and we ended with a very good number. So this is something we are actually very happy about because it proves that it's not just traveling and being at our customers that helps, but it's also products and virtually meeting that somehow also does the job to very, very good now. We also started well into the new year, but a month is too early.

It's clear. Next question. That's a big, big elephant everywhere in the room at semiconductor conference calls at the moment, especially also in the auto sector. You're also, in some regard, discussed it a little bit before, what is -- maybe is the right view on in the sector. What is maybe overbooking in this boom because of the shortage we have in the sector on semis? How much -- how you see the, say, inventories at your customers and in the channel? And do your share the opinion of Melexis that the second year will be weaker or you're more in the camp of Infineon, who is more optimistic. So what's your feeling, despite you have although not 100% view, but only from the hard fact you see out of maybe -- for how much the inventories look? And how much is structural even that maybe some of the growth is and the shortage in areas, which are now really booming because of change in the market like EV, electric vehicles, and new lightings and things like this, maybe new features, which are now in much more cars. And therefore, the demand is much higher, and so market is not prepared for this.

Well, fundamentally, I think we have a good momentum with our products. So even if we would not grow as a number of cars this year, and of course, this won't happen. We would still grow at Elmos, and also in a nice way. Of course, we will grow much more because the number of cars will rebound. To what number exactly, we cannot tell. If we turn to IHS, this will be some 84 million or 85 million light vehicles. You can deduct something for the chip shortage. You can add something for coming out of the corona crisis. We cannot be sure about that. The competitor said, their orders are more in line with 95 million cars as compared to the IHS' 85 million, which suggests overstocking. On the other hand, I think we went into the year with a relatively low stock level at some of our customers through the value chain. So maybe it's just restocking and not overstocking. Who can tell. We would be overly optimistic in our forecasting skills, if I could tell you exactly where Q4 or even Q3 will come out. This is, with so much moving pieces, really hard to tell. Today, we are very optimistic because our order situation is super bright. We try to smooth out orders over the year to kind of put the butter evenly on the bread, and not only have a very much front-loaded year. This is our aim. And let's hope that we are pretty successful with that.

And that's the reason why you don't gave an exact number of book-to-bill. Maybe you can only give us the direction. I think the book-to-bill at Infineon was 1.6 in the automotive space. Is that a number which is maybe would say it's not unusual in this time.

Yes. This is -- I mean we would consider that number, probably be a little above 1. I believe we said we are substantially above 1. So our book-to-bill reflects our good mood.

Yes it's really high in other words not only 1.1 or 1.2, it's higher.

Yes. More, I wouldn't comment because then we're kind of ending up as a statistic of our book-to-bill. But significantly above 1. And I mean, you would, of course, guess that if you see our guidance for Q1. You know the numbers for Q4 last year. Yes, so...

So the next question, how much you are limited in growth by capacity? How much the growth can supported by Dortmund? How much you really get capacity at your foundry partners? Because I think maybe you are more in the nodes, which are really tight. I hear that tightest nodes are the nodes between 28, 40 and above. So nodes are high end. And also, you signed a new foundry partner with Samsung. Did you get enough capacity to really fulfill all your needs?

Well, the whole industry is struggling and discussing because we all go to the same facilities in -- mostly in Southeast Asia. And as Elmos, we, of course, load our own fab to the maximum extent. And if we can below the maximum, if that is possible. But then it is, of course, also suppliers in assembly for wafers, where we have to rely on. I believe currently, the auto industry as a whole, finds itself in a situation where there is a lot of demand from the home offers and lockdown-based electronics. That somehow partially tries to crowd out the automotive chips. And then there are counter reactions. You have read in the newspapers that the German Minister Altmaier wrote to the Taiwanese, that also has to get a priority. And so there are a lot of moving things right now and a lot of struggle to get capacity. We are, of course, also part of that struggle. So to claim that things are easy right now would be wrong. But I believe we are holding up. We're serving our customers well. We are not the reason that there are line downs at the OEM. And let's knock on wood that, that stays so forever. But we are -- yes, we are, of course, struggling like everyone else. But I believe we're holding up reasonably well.

Last question from my side to give the line free. How much the growth in this year is driven by maybe the ramp-up of really new growth products, maybe there's a ramp-up of products, which has maybe started last year and now get really volume. So for some structural internal Elmos growth in some regard.

Well, we are looking at pretty nice structural internal Elmos growth, but of course, the rebound in the number of cars also helps. I mean it would be wrong to say, coming from 70-something to maybe 85 or so, that, that doesn't help. Of course, it helps. But we have very nice products and very nice momentum. We have new ultrasonic generation ramping. I mean it's pretty broad actually. We have a list of ramp-up project. I believe it goes to 15 or 20 that we monitor just to ensure the ramp-ups are smooth. So we also -- you learn from that. We also actively monitor our ramp-ups. Because ramp-ups are special situations for products, and you need to take extra care that things are happening in the way it is planned.

Okay. Super. Sounds good, and good luck for the year. And you have a very, very, very good -- maybe a last comment, with 10% of your shares, indirectly, you have now -- I think if I'm not wrong EUR 110 million in liquid assets. That's not bad.

Thank you. Our financial situation is okay.

The next question comes from Stephane Houri from ODDO.

I still have a few questions even after Johannes. So the first one would be about your manufacturing strategy. You've been talking about the Samsung deal that you've made. What is in your view, the target in terms of in-sourcing, outsourcing for manufacturing in light of your new 17% EBIT margin, long-term target. So that's the first question. Second question is about the R&D. Where should we think about at the right level for R&D for the next years? Because it has come up pretty significantly as a percentage of sales. So I know sales were down, but still the level was still pretty high. And so what should we expect going forward? And some of your competitors, and maybe sometimes bigger, like to present themselves and say -- explain how much of their sales is for green, how much for their sales is for ADAS. And so they give a kind of rough image of what they are doing. So can you play that game and maybe tell us what is the size of your ADAS/green sales as a turnover -- in the turnover.

So on your first question, our Fablite strategy, we move to new technologies with the Samsung agreement. That is good, though there will be no serious production, kind of in the very short term in very high numbers. So this will ramp, of course, over the years. We have a set of product that is in development now. And that is coming out all according to plan and very nicely. So it's a big strategic advancement for us. I wouldn't say this is the only driver of our 17% margin go there. There are a lot of more drivers behind it. This is not kind of linked to that single event that we tell you about the things now at the same time. We will continue to load Dortmund to 100%. We believe this is the best and the most clever strategy to keep our own fab fully loaded, thereby very cost-efficient, and to have the rest on the outside. Of course, as we grow the share of internal production where -- which we do not substantially increase in terms of an absolute number, will, over the years, a little bit decrease. Because with growth, we need more wafers. And it's more or less fixed amount that we get out of Dortmund, and we squeeze out a little bit more, maybe each year. But it's getting harder and harder. On your second question, the R&D, yes, we had quite a high -- it was a record last year. We built up the Düsseldorf R&D team. We built up other resources in R&D in the previous years. I think we will probably have a year or 2 or 3, let's see how it develops, where R&D is a little bit more flattish. So we do not plan to offer a news -- to open a new site in the kind of immediate future. So I would not expect that the R&D line is a straight line that can be extrapolated in the future. It will be a little flatter.

In absolute value, right?

Yes, yes, in absolute value. I mean it may decrease a little, it may increase a little. That is also, of course, an effect of capitalization, which is very hard to predict. But we do not plan really significant adding of resources this year. So you it's going to be a flatter line, overall. Looking to the green and ADAS, we are not going to do the same as others do and have revenue shares by product. But I believe we have a very substantial exposure to the trends. The ultrasonic portfolio is a key part of the more and more autonomous driving, and it's a good share of our business. Our sensors help in many ways. But also in waste, I believe some 2, 3 or 4 quarters ago, we had a little discussion around it, that we use our pressure sensors for some run rate detection in electric batteries, which I believe would be in the green category, if you want to. Also, many other products that we do for the EV would probably be in the green category. In general, I believe the microelectronics help a lot for the car to become greener. We had a kind of back-on-the-envelope calculation, what CO2 do we actually use to produce our semiconductors. And how much CO2 is saved by semiconductors. And the CO2 that is saved by semiconductors, and also our semiconductors is a multiple of the CO2 that we need to produce our products. So overall, we consider ourselves a very sustainable, and if you want to, yes, green company.

The next question comes from Malte Schaumann, Warburg Research.

With respect to the CapEx, required investments. I mean, obviously, you had lower investments last year during this environment. But should we think about the return to kind of similar investment levels, which are pretty high seen in 2018, 2019, owing to the expected future growth?

Well, CapEx is very much correlated to our general mood, which is then very much correlated to growth. And I would see that your statement similar levels that we've seen in the past are possible this year is not wrong.

Yes. Okay. And in that respect, maybe some more color on the outsourcing in the back end, which was historically more or less not outsourced. So where are you in the process? And when will the next milestones be reached?

Yes. We are -- it is one of the key strategic initiatives going forward to also achieve the equivalent of a Fablite concept in the back end. We are -- I mean we were a little bit slower in pushing for it during the last year. Due to corona, travel was a little bit restricted. And also, we had less need. This year will be a bigger push. And I believe next year, we will have a markedly increasing share. So it's in a way as planned. We prepare, we execute. And then with all the qualifications, with all the customer agreements that we need, this will start to run.

No. Okay. And then on the sales split. In your presentation, I think there was a number like 85% automotive, 15% industrial, whatever nonautomotive industrial. I would have assumed slightly less favorable ratio, so more automotive after the sale of SMI. So did that ratio increase more substantially last year? Or whether that's just kind of a coincidence or just my perception forming earlier?

Yes. I mean SMI also had, had an auto part. And it was small. So if you look very, very closely, you will actually find an SMI effect. But it's not that huge, actually.

Yes. Sure. Okay. So more or less the same as in all the other years, basically?

Yes. We also see some -- I mean this is just minor effects. But we also had some of the non-auto sales to be a little bit more stable last year than the auto sales. So it also contributed then again a little bit. So yes, that's the results overall.