LEM Holding SA (LEHN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the full year Results 2020/'21 conference call and live webcast. I'm Andre, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Frank Rehfeld, LEM's CEO. Please go ahead.

Thank you very much. Good morning, ladies and gentlemen, and thank you for joining us in this webcast where we would like to review with you LEM's full year results of our financial year '20/'21. My name is Frank Rehfeld. I'm the CEO of LEM. And I'm together here with Andreas Hürlimann, the Chairman of our Board of Directors; and Andrea Borla, our CFO. For those who are not yet familiar with LEM, LEM is providing sensors for measuring electrical parameters, namely current, voltage and energy. And with those, help our customers and society through transition to a sustainable future. The -- today's agenda. After my opening remarks, I will give you more detail on the business performance of our 2 segments. Andrea Borla, our CFO, will then introduce our financial results, and I am going to outline how we see the future. Our Chairman, Andreas Hürlimann, will then introduce the dividend proposal to our shareholders before we open the line for a Q&A. We are in month 15 of sanitary measures in Europe and are still not back in the position to hold this meeting with personal attendance, unfortunately. By the way, in the meantime, life in Beijing is back to normal, people are strolling through the streets and airports are busy. We are, however, optimistic that with the increasing vaccination rate in the western world, we can restart having non-virtual meetings with you in the new business year '21/'22. LEM has proven to be rather resilient in those turbulent times. We've delivered robust results with even a slight top line growth of 0.4% in constant currencies and an EBIT improvement of more than 4% under challenging economic conditions. After a strong fourth quarter, we are pleased to report that we finished the financial year 2021 with sales down only 2.3% in Swiss francs and an even improved EBIT level, a result that shows that LEM is in better shape than we could have foreseen throughout the year. We continue to have a strong balance sheet. The main reason for that can be found in the diversity of our business across sectors and regions and LEM's exposure to both mature industries and novel technologies. We go on to substantially invest in R&D, launched 10 new products and are very happy with the market resonance on those. Despite all the negative implications of the coronavirus to our private and professional lives, the death toll that has and is still being paid -- I also understand the pandemic as a wake-up call to rethink our way of behaving and working. We already see the trend towards digitalization, but also towards a more sustainable way of living get accelerated. And LEM commits to contribute to those developments with all means that we have in our head. And I would like to share with you one example of our new way of working. You see here Song Xiaoyang, her Western name is Chloe, our Supply Chain Manager in Beijing. After harsh lockdown in January and February last year, the Chinese economy was restarting rather quickly at the beginning of our financial year. Against last year, LEM's China business was growing by an impressive 15% in 2021. It worked for the LEM Group, the only region that was growing in this financial year. In particular, our supply chain team in China had, therefore, to manage in a rather short timeframe considering lead times for subcomponents, both the closing as well as the opening of the supply chain wealth. The Chinese team has very quickly self organized themselves in our biggest production location in Beijing to make sure that customer requests that were coming with a high volatility could be fulfilled. With that, let's move on to our business performance. LEM is delivering sensors into motors and drive business, area of power storage, renewable power generation and energy conversion as well as provides energy meters for traction application and fast charging stations for electrical vehicles. We are organized in 2 business segments; automotive and industry. That has, due to the growth of our automotive business, now changed from 20-80 to about 25-75 share of the total LEM turnover. Only the industry segment saw reduced sales in comparison to last year. Industry was reducing 6.3% in Swiss francs and 3.7% in constant currencies, whereas our auto business is growing by 12% in Swiss francs and [indiscernible] was 15% in constant currencies. Again, in total, the LEM Group was growing by 0.4% in constant currencies. Looking at the geographic spread of our business. You will notice that our Chinese sales were strongly growing in the fourth quarter, which led to an overall growth of our Chinese business of more than 14% against last year. All other regions were shrinking in comparison to last year. However, in Europe, the strong growth of new energy vehicles business, you see reflected in the positive Q4 performance. This explains that the Chinese share of our business relative to the other regions has been increased to now at 38%. The proportions of the other regions is Europe at 30%, North America was about 10% and rest of the world was 22% remains largely unchanged in comparison to the Q3 numbers. Now let us have a deeper look into our 2 business segments, starting with the bigger one, the Industry segment. All businesses, except the renewable energy business have reduced in comparison to last year. However, we witnessed an improved or even positive trend in Q3 and Q4 for each business. In drive, this was driven by Asia and the U.S. with restarting investments into automation. In renewable energy, the China solar market and the steep ramp-up of the DC meter business were the main contributors. Both the traction and the high-precision business were substantially shrinking against last year. However, we saw growth in Q4 that was slightly improving the overall performance against Q3. For the traction business with minus 25% against last year, I would like to remind you that we had strong growth in the last 2 years, still decline reflects lockdown impact, in particular from China and India with the late orders. The acquisition business is shrinking with almost 31%, reflecting the changed priorities during the corona pandemic. Protection this picture now from a regional perspective, you see that the real driver for the growth in the industry -- in Q4 with China with almost 17% against Q4 last year. This has been overcompensating the contractions in the other markets and led to a growth of still almost 3% in Q4. China is now representing 35% of our business and the other regions follow with 36% in Europe and 29% in America and rest of world. Important to mention here that in constant currencies, industry was merely shrinking by 3.7%. We continue to strongly invest into R&D and launched 10 new products in 2021. You can see here, from left to right, the HMSR, our first integrated current sensor that was developed in-house for drives, but also suited for solar investors -- inverters; the DC meter for fast charging stations that was developed in our site in Leon; the CDSR is a residual current sensor to measure leakage currents; the top 30 product for traction applications; and our outdoor Rogowski coil as well as an integrator that some Rogowski applications are using for smart grid. Let's then look into one application where auto meets industry. Here is a comparison between AC versus DC charging in the e-mobility infrastructure or onboard versus off-board. Now plugging in the charger of our electrical vehicle or plug-in hybrid in a normal AC socket uses the onboard charger of your vehicle. Your household socket is typically limited to 16 amps. Therefore, you are charging with 3.5 kilowatts, and the onboard charger converts AC into DC to charge the battery. This is a very slow process, and it takes between 20 to 30 hours to charge a Porsche Taycan depending on the battery size. The DC charging process is faster, however, needs pre-installed charging infrastructure and conference charges at a wall box with up to 100 amps and at a fast charger with up to 600 amps. DC charging needs certified meters that allow to bill only for the amount of energy that went into the car. Now let's look deeper into our second segment, the Automotive business. I suppose the situation in the overall automotive industry is well known. The change in powertrains from conventional combustion engines towards electrified powertrains has been burdened with dramatic falling car sales due to the corona crisis. On top of that, the semiconductor crisis is now an additional obstacle towards a faster sales recovery. We could profit under those circumstances from the momentum in the new energy vehicle market and had very strong growth of about 65% in Q4. This was even higher than our Q3 growth of 15% that led with more than CHF 21 million to an all-time quarterly high that we now again surpassed. In the battery management, you see still a mix of developments of combustion engine vehicles and new energy vehicles. Therefore, this segment is impacted by the general automotive market and our decision to focus our investments towards new energy vehicles, whereas motor control and charging systems profit from the increasing demand for electrified vehicles. Looking also here at the global distribution of our automotive sales, this picture has not been changing significantly. Both China and Europe were contributing to the impressive Q4 growth of 65%. The China numbers of more than 200%, however, needs to be understood that we compare here growth against the time where the complete car market in China was collapsing due to corona in the beginning of the calendar year 2020. We see an increasing momentum in the European market that we are profiting from, although still on a relatively low absolute basis. The decline in the U.S. market was slowing down in the course of the year and also applies to the remaining -- and this also applies to the remaining business in rest of the world, where we had strong sales in Korea, but weaker numbers in Japan. Also in the field of automotive, we've been launching new products. And you see here one example from a battery management as well as one from a motor control application. The intelligent battery sensor on the left is the newest member of our CAB family and fulfills functional safety standards at an [indiscernible] level, calculates state of charge and state of health information. And on the right, you find a PCBA mountable sensor for a motor control unit that is currently in the launch phase in Europe. Now you find these 2 sensors, again, in the middle column of this picture that maps out the 2 integration trends for sensing technologies in new energy vehicles. On one hand, functional integration that typically happens in the area of battery sensors; and on the other hand, physical integration that happens in the area of motor control sensors. Our strategic answer to those trends is to leverage our ASIC know-how by extending our product offering towards integrated current sensors, as depicted on the left side; and on the right, by moving more into the development of complex modules. With this, I would like to hand over to our group CFO, Andrea Borla.

Ladies and gentlemen, good morning, also from my side. As the group CFO, I'm pleased to report robust financial results for the financial year 2020/'21. During the last 12 months, LEM has managed to progress both on sales as well as profitability quarter after quarter and finishing off the year with a very pleasing Q4. Considering the difficult market environment, especially during calendar year 2020, the sales held up not so badly and decreased by only 2%, and at constant exchange rates even slightly increased. Despite the lower sales, the operating profit exceeded last year's results by 4%, thanks to better gross margin and lower SG&A expenses. Let's now have a closer look on the various P&L elements. The gross margin in absolute value dropped by CHF 2 million, from CHF 142.7 to CHF 140.6 million. In respect of the gross margin in percentage, we have though gained 0.3 percentage points from 46.4% to 46.7%. What are the main causes for this positive development? Both improved purchasing and production efficiency helped to drive the gross margin upwards. Those improvements were somehow dampened by higher freight costs out of China, which have negatively impacted the gross margin by close to 1 percentage point. Our 2 low-cost locations situated in China and Bulgaria cover 83% of all sensors produced by LEM. The percentage of our low-cost location will further increase in the future. In lieu of the soft top line witnessed in the beginning of the year, we have been vigilant on all SG&A expenses and new headcount hirings. We as well could take advantage from sanitary crisis effects such as less travels, government subsidies in China and basically no sales exhibitions throughout last year. As a result, we succeeded to lower the SG&A expenses by CHF 4 million, as you can see here, from CHF 56.5 to CHF 52.6 million. The R&D expenses remained stable at CHF 28 million, confirming the willingness of not jeopardizing LEM's future growth by optimizing its short-term profit through simple R&D cost cuts. We have continued to increase the number of R&D engineers by around 10% since beginning of our year, while at the same time, reducing the third-party subcontracting. We focus not only on renewing our current product portfolio, but as well on developing new product families, addressing new markets and applications in the future. Some exciting new product launches as the DC meter and our very first integrated current sensors are the very first fruits. Going forward, R&D expenses are expected to remain in the range of 8% to 10%. In contrast to last year, LEM did not suffer from any negative exchange effect as gains on euro transactions exceeded slightly the hedge losses. LEM policy is to fully hedge the net exposure of the cash flows nominated in the U.S. dollar, the Europe and the Japanese yen. As LEM has only limited third-party debts, the interest expenses remained modest, the main element of the financial expenses related to expenses on our lease liabilities. The effective tax rate, 2020/'21, is only at 8.7% due to nonrecurring tax benefits following an internal trademark user proxy transfer. I would like to remind you as well that in the fiscal year 2019/'20, LEM as well has a nonrecurring tax gain of CHF 14 million. If we exclude those nonrecurring tax gains, a tax rate of around 17% would result. This is a mix of the Geneva tax rate at 13%, the China tax rate at 15%, and the mix of all other countries between 25% and 30%. And here, you find now the full P&L for both the full year 2020, '21 and the Q4. As you can see, Q4 has definitely witnessed a pickup with sales level of CHF 83 million, while at the same time, further improving our gross margin to 48%. The very high Q4 net profit of close to CHF 20 million is impacted by the tax gain of CHF 3.5 million resulting from the user worked transfer, I just mentioned before. What are the highlights of the balance sheet for 31st of March, 2021? The net working capital has increased as a consequence of the net working capital elements DSO and DO -- DIO having deteriorated. The DCO has increased due to the strong Q4 sales growth throughout the globe and especially in China. The accounts receivables overdues remain well under control and amounts to only CHF 3 million. The DIO has increased as a consequence of a safety stock built up in anticipation of supply chain shortages increasing the inventory. The fixed assets, which you see there, leveling -- reaching CHF 123 million consists of basically 50% machinery and equipment and 50% of deferred tax assets. The net debt of CHF 2 million consist of CHF 24 million interest-bearing short-term debt and CHF 22 million of cash. The equity ratio remained basically stable at 50%. All in all, we can conclude that the balance sheet remains healthy. The free cash flow generated during the second semester was strong and reached CHF 30 million compared to CHF 8 million in the first half of the year, reflecting LEM's good finish during the second half of the year. For the full year, however, post the cash flow from operating activities as well as the free cash flow dropped compared to previous year. The main drivers have been the net working capital increase, previously explained, and the first tax payment of CHF 6.4 million, resulting -- coming from the IP transfer performed in 2019/'20. Please note that the second tax payment from the IP transfer of CHF 28 million will have to be paid during fiscal year '21/'22. As a summary, we have been faced with a challenging market environment, but we managed to protect, first, our overall profitability, reflected in a net profit margin of 18.5%; second, we protected our balance sheet, which reaches now an equity ratio at 50%; and third, we protected also our cash flow, and we generated a healthy positive free cash flow, especially during the second half of the year. You may now wonder what the future will bring? For that, I'm happy to hand back to Frank.

Thank you very much. Yes, so what are our expectations? How do we see the future? On the one hand, we see quite some positive developments. Vaccination rates increase and, therefore, positive stimuli towards the business can be expected. We see increasing commitments to a more sustainable way of consuming and producing, be it with automotive OEMs who declare not to produce combustion engine cars anymore from 2030, 2035, 2040 on, or governments who commit to accelerate their exit from CO2 producing growth. On the other hand, we see worrisome trends. New virus mutations coming up and causing question marks how the new post-corona normality is going to look like, substantial supply chain issues in the semiconductor world and beyond and also unfortunately, increasing number of conflicts in many regions of the world. Still, we are cautiously optimistic about what is going to happen in the next 10 months of our business year, mainly based on the geographic and sector diversity that we are having and, for sure, also on the fundamental long-term prospects towards renewable energy, mobility and automation. And with this, I would like to hand over to our Chairman, Andreas Hürlimann.

Good morning also from my side. Yes, multiple reasons last year to be distracted from our long-term view, but we were not. While COVID-19 with corresponding supply chain disruptions and tested -- and continues to test, in fact, our resilience, but also highlighted further digitization opportunity, we had no reasons to change our strategy. Our scenario for the future based on megatrends remain intact, so are our ambitions, plans and implementation actions, such as significant R&D investments, which starts to bear fruit, but also our projects to further derisk our supply chain and our efforts to enhance our regional competencies. This will make our company even more resilient, but also more agile and with this more competitive. Moving on to our dividend proposal. The BOD considered carefully profit and cash flow, the underlying strength of the business across diverse sectors and geographies, and the general economic uncertainty with the aforementioned cautiously optimistic outlook. This is why we are proposing to our shareholders a slight increase from CHF 40 to CHF 42 per share, which is a payout ratio of 86%, up from 75% last year. Our long-standing stated dividend policy is to distribute significantly more than 50% of our net profit. It also demonstrates our high confidence in the company's ability to generate strong cash flow. We continue to make significant investments in talent, R&D, business development and marketing as well as in operations, IT, infrastructure, resulting in new products, enhanced value-add, increased market share as well as geographic footprint expansion. With this, I'm left to thank you on behalf of the Board of Directors. I wish to extend special thanks to our employees worldwide for their expertise, reliability and innovative solutions. In particular, we are proud of how our teams have responded to the extraordinary challenges of recent months using their resilience and creativity to keep delivering products and projects on time. Also, I thank our leadership team for their prudent and empowering management and leadership. We also like to extend our gratitude to our customers, suppliers and business partners for their continued trust. Last but not least, we thank our shareholders for their confidence and they continue to play in us. And we thank you all on today's call for our interest in LEM's performance over the past year and our future prospects. Just remains me to wish you all the best and continue good health and hopefully, see you next year in person. With that, I would open the Q&A session. Thank you very much.

[Operator Instructions] The first question comes from the line of Michal Foeth from Vontobel.

3 questions from my side. The first one is you posted very strong order intake in both segments in the fourth quarter. And could you eventually comment on that and explain how that fits with your relative caution regarding the outlook? So how should we read this very strong order intake? The second question is just on finance. If you could just repeat the figure for the IP transfer payment to be made in the current fiscal year? I didn't get the number. And the third question would be on sustainability. Maybe you can let us know what you believe are -- is the most important progress or achievement in terms of sustainability that you made in the past fiscal year? And eventually give a short update comment on your culture journey program?

Thank you, Michael, for the question. Maybe I start with the question with respect to the order intake. Yes, it looks like overly prudent when you look at the increase in the order book. However, I think it's important to understand where that is coming from. I think we are, at the moment, in a phase where we cannot deliver all the demands our customers would like to get covered. The reason for that is the supply chain situation that we see also at our suppliers, in particular with respect to semiconductor. So that means, on the one hand, our customers over order in order to get their minimum quantity satisfied. So when you only get 90% of what you have been ordering, people tend to order 120% in order to get the 100% fulfill. On the other hand, since the lead times for the supply chain are extending and we have effect that basically, we have now a longer outlook for our order book than we had before. So typically, our order book has a length of about 3 months. And we see that this order book is now getting longer without really increasing monthly sales, but just having now a longer visibility of what is going to come in the next months to go beyond the 3 months. So therefore, I would be -- and we are very prudent to simply convert this increase of the order book simply now in higher monthly sales, but we are really seeing that there are some, let's say, long -- length extensions of your order book that need to be taken into account. Does this answer the question?

Yes, perfectly.

Good. Maybe for the second part, Andrea?

Exactly. So in the year 2020/'21, the tax effect is coming from a transfer of a trademark user proct between 2 legal entities within the LEM Group. And this resulted in a positive tax gain of CHF 3.5 million. There was nothing done on IP transfer. This was in the year before, in the fiscal year 2019/2020. And that's what I said is that in that year, we had a positive tax gain of CHF 14 million. So if you want to then really exclude this nonrecurrent element, you take those figures and you get to this, let's say, underlying tax rate ratio of around 17%, which is a good base going forward.

And maybe the third question, which was basically twofold, sustainability and also the high-performance journey. The sustainability, I think, probably most important to mention is that all the application fields in which LEM delivers our application skills that contribute to a more sustainable world, be it in the energy production area, be it in the electrification of transportation and be it in automation or in digitalization. So that means we see clearly that with the growth of LEM, we by itself already contribute to a more sustainable world in the future. This is, by the way, an important part for a lot of people who are joining us here in the management team or in lower rank because they clearly see here a very important purpose. But for sure, we also work step-by-step in all our processes to actually improve efficiency, improve resource usage or reduce resource usage. And just to give you an example where we directly also react towards the volatility that we see in demands that we concretely now invest into more flexible lines that have a higher flexibility towards the product range that is manufactured on it, and with this, we basically reduce investment but also resources and CapEx that is going into those lines. Maybe taking the second high-performance journey question. For sure, to measure directly the impact of the high-performance transformation is always not an easy topic. We have tools where we basically do regular surveys and where we basically see also a trend towards a more blue, as we call that sort of way of of working together of looking into improvement potential that we have in ourselves rather than into improvement potential that we expect around. We've been now successfully running workshops actually across the globe. And I think the way the organization was able to react to this rather, I think, big challenges that we saw in the market development in the last 12 months shows already that the team spirit, the global cooperation that we had between our different teams was able to deliver the results we see now also in our numbers. But it is clear that such a cultural journey is nothing that is finished within 1 or 2 years. That is an ongoing activity that we drive further also in the future, and that we clearly want to also further measure in the future in the performance of the behaviors in our whole organization. Hope that answers the questions.

Yes.

[Operator Instructions] The next question from the phone comes from the line of Serge Rotzer from Crédit Suisse.

I have 3 questions. Probably, I will ask one by one then. The first one is, given the order book you have and the higher order book compared with the visibility, can you tell us also something about the margin quality of these orders? Do you see margin improving on what you have in hand? Or what do you expect? Especially when I look in Q4, as margins in automotive were down and industrials were up, probably you can comment at the same time also these movements of the Q4? This would be the first question.

Okay. In respect of the margins, I would -- I always repeat a bit myself, you don't have to read too much in the margin of 1 single quarter because especially in industry, the mix effects are just very, very important. We would say -- generally, I would respond like that. Industry, our ambition is to defend the current margin level, if not to further increase and improve through efficiency measures as we have done in the past. Of course, we always face with substantial price pressure there, but let's say, that could be an ambition we can achieve. In autos, there's a clear tendency. We can -- we will have to expect that the margins will -- over the next couple of years will come down. And we have seen already the first signals in a single quarter, and you can expect that this will happen over the next couple of years.

And given the current order book, how is the feeling?

Yes, that's -- it's basically confirming that this will come over the next months and years. Again, this is a slow process. And again, it depends a lot also on the mixes that you have. We are very depending on that. But there will be a certain downward pressure on the auto will come.

Okay. Got it. So then again, order book. Can you give us a better feeling or some color for the subsegments of your business? So in drivers renewable energy traction, high precision, where are the most orders? Can you give us some -- or did you have some lower orders in some of the subsegments? If you could comment this, please?

Right. Typically, we don't break our forward-looking orders really down. What we can say is that we basically see the trends that we already see from Q3 to Q4 continuing. So we are seeing a good quality in the orders from the automotive business and an improving quality from also our strong industry segments, in particular, in drive and in the renewables business. However, the challenge order book versus rail sales is, unfortunately, the supply chain situation. And then there, despite the fact that we are working with our teams day and night in order to make sure that we can deliver what is getting ordered, it is and remains a challenge, in particular, for our automotive business to make those orders because we clearly see that we don't get all the semiconductors that we are going to need in order to produce what is getting ordered.

Okay. Got it. It's very helpful. Probably the last one for the Chairman. You had increased the guidance from CHF 40 million to CHF 42 million, but your net income was down by almost 10%, your free cash flow was down by almost 35%. Your order book, it looks better at first instance, but you said we have better visibility, but we don't expect higher monthly sales. So where is this confidence to increase the dividend by plus CHF 2? As you have mentioned, overall, we see a positive development. Therefore, you have increased the dividend. But given the fact, it's not obvious to me. So if you could elaborate on that, please?

Yes. Thank you very much for the question. Yes, indeed, we did look carefully at the free cash flow and the underlying strength of our business. We also have our stated dividend policy. But I think this payout, and that's the most important part, is not at the detriment of investments in sustainable future growth. We have the full collection of our R&D investments, but also our investments in infrastructure or operations such as the new plant in Malaysia, the new headquarter in Geneva. We have that all in our plan and still [ have ] in addition to the fact that we do have very little interest-bearing debt and almost exclusively finance ourselves. So we decided that we can support this dividend payout, which is a bit above the free cash flow.

So you want to tell us that you're not cautiously optimistic? You are optimistic for the current year. Is this...

Well, it remains to be seen what cautiously how you would define. But definitely, there is -- as our CEO mentioned, there is a cautiously optimistic outlook at this point in time, yes.

There are no further questions from the phone. Sorry, we have 1 last minute registration from Miro Zuzak from JMS.

Can you hear me?

Perfectly. Hello.

Congratulations for the excellent order intake, very good news. One question from my side. I hear from other components suppliers in the automotive space who have exposure to the EV segment as you have that the first orders from the larger platforms from the European -- from the German OEMs, from the premium OEMs, are coming in or are about to come in. And some of these suppliers, they also give quite a detailed view about their pipeline, so the number of platforms that are in the technical specification phase, the number of platforms that are in the design freight phase and so on. Could you please shed some light on your situation there? I hear from them, sometimes, also comments about other suppliers being on the same platform. And I'm questioning myself, whether you are really in the same situation that you have a number of platforms now in the design freeze phase where you basically wait for the orders because for these orders the volume ramp-up will happen in 2023, and you will probably get the orders, let's say, in the middle or at the end of the order stack, so to speak? Is this right? My assumption that basically the pipeline fills up now and there is a lot of design in happening, but the orders are not given yet because you are relatively late in the stage.

Miro, thank you very much. I think it's a very good question. For sure, you know that our order book does not reflect design ins. It really reflects delivery orders typically for a horizon from 3 to 6 months upcoming. So our R&D teams, and you see that in the R&D spend, are really, really busy in developing all customer versions, new platforms, managed design in basically all continents, but in particular, also in Europe, coming from an already strong sort of Asian position that we are going to have. So you see the rather strong growth on Page 16 of the presentation of basically 125% in Europe that the Automotive business had in Q4. And all in all, 63% from last financial year, that Europe is now also coming. And you're right, you cannot see that in your -- yes, in the details that you have in front of you, and where we are with respect to design ins. But we are very, very intensively here together with all major car OEMs and also Tier 1s to get designed in -- are designed in developing basically versions from the platform. So that is a very, very busy field at the moment.

Okay. And one other question, if I may. So if you look at the subsidy policies now in the EU and also the behavior from the German OEMs, is it fair to assume that there is a kind of basically the intention to build up a European value chain also for ESG reasons that the clients, they want the suppliers to produce within Europe? And this is an advantage for you versus your competitors because you have a plant in Bulgaria?

So I think at the moment, probably all automotive OEMs are still also about to digest the impact of the COVID crisis. So I think it's probably a bit too early to see these sort of developments already directly in the order book. Do we see it in discussions? Do we see it in discussions of this management consultants? Clearly, yes. Do we see it directly in, let's say, specifications and where -- and the subtext is written that it must come within whatever -- must be manufactured within 1,000 kilometers around the customer plant? This is not yet coming. This is not yet happening. But then we clearly see that already for supply chain security, this is going to happen. And this is the reason why we will use our plant in Bulgaria that at the moment, our focus is on manufacturing of industry products, also to produce automotive products within the next 12 to 18 months. And we see this development going on.

Okay. And then a last question, if I may. I hear from other companies in the DC, feels that there is a benefit to run DC networks in production facilities. Basically, there are plans also from other companies to build entire factories with a DC grid, basically being the energy supply or the electricity supply, because basically of the synergies with renewable energies supply from the rooftop, which is DC, so you have no conversion and so on. I guess this would also benefit you as a producer of current centers in the DC field. Do you see any -- is this a new business application for you? Do you see this also from other factories building DC networks and needing current sensors from you?

Right. It's a very good comment. And for sure, it's -- I would call it a little bit further looking, but we clearly see that the future will bring minimum hybrid grids where we will have DC and AC. And for sure, the reason why we go into the grid business is clearly also because we basically want to expand our business in this area, and we see there quite some growth. So yes, this is something that we also clearly see that is going to come in order to also avoid conversion losses. Do we really see already an avalanche? Do we see a huge demand coming? I think we are rather still talking about conceptual approaches rather than already real business. But you are completely right, this is the area to play exactly for LEM because this is DC current measurement that will even have an increased relevance. Just to imagine, for sure, to switch a whole plant to DC, it's not an easy topic. I mean just without going into detail, but a lot is based on AC. And for sure, you would then talk about a lot of specific investments, just imagine your light everything. So probably we will not see a pure DC but rather and sort of -- hybrid sort of network.

The next question comes from the line of Carlos Moreno from Premier Miton.

2 questions. Firstly, I know you haven't really done much M&A, although you've talked about it really over the last 5 years. Is there anything in the pipeline, anything interesting kind of being thrown up? Or is that kind of a bit on the back burn? Are there just any thoughts on any thing you got to say on it? And secondly, I'm just very interested just in the kind of build-out of your -- you're moving to like a Swiss campus aren't you? And you've been beefing up your French R&D operations in Leon. Is that kind of completed? How are those kind of structural projects going?

Right. So Carlos, thanks for your question. Sorry, there's not a very easy answer to both, but I try to do my best to give you here an heads up. The current sensing market is a growing market in itself. You basically would see a market growth of this market by about 8% year-on-year. Now LEM is at the moment serving only a part of this market. And we actually expand, and you've been hearing that DC meter, integrated current sensors, smart grids, these are areas where we are further expanding. So that means in order to grow with a decent growth rate, LEM does not need M&A. The market is big enough to allow growth also in the future. Where we, however, see, and this is a topic that we are constantly monitoring, reasons to probably do an M&A is when this would allow us to overcome customer obstacles, supply chain, so basically Tier 2, Tier 1 topics or technology topics. And at the moment, we don't see concretely there any reason to do an M&A, but this is a topic that we are constantly monitoring. Okay. Maybe this is for the first question. And coming to the second, the Swiss campus and also Leon. So let's say, strategically, how do we want to set our R&D up for the future? I think we would like to use the know-how that we have here in Switzerland and have been also strongly developing in the last 5 years in Leon with respect to DC meters, with respect to battery management system and, for sure, also the traditional current sensors. And in order to drive the innovation projects and also the, let's say, really new product sort of generations stronger, this is what we want to do in Leon and in Switzerland. However, we would, at the same time, because we clearly see a need for that, move closer to our customers. So more, let's say, project-oriented with a clear already target customer in front, activities will move closer to the markets and our R&D footprint is going to further develop towards this that really the customer projects are moving closer to the end market, whereas the innovation is going to stay here in Leon and in Geneva. And then is this finalized structurally? We are still a bit on the move. And for sure, we are still also about to acquire new competencies and growing, in particular, in the new areas, our teams, just to give here the example of software competence, but also of competence in the area of semiconductors. Hopefully, I was clear enough in my explanation, Carlos?

Very clear.

We have a follow-up question from Serge Rotzer from Crédit Suisse.

Only housekeeping questions. You mentioned given the ongoing pandemic, it's difficult to budget at the whole year. But still, do you plan marketing costs going up for these years? So I mean do you plan any fares and things like that? Or what is the view you have there so both on cost and really to meet in person -- that's people in person. This would be the 1 side and the other side. The second question would be then on inflation. Can you remind me how you are protected against inflation? So how your contracts look? Or how many times you make a price increase? Or what is the mechanism you have?

Right. Yes. So thank you very much, Serge, for the question. Looking to marketing costs, travel costs, for sure, we assume that we are going to travel again a bit more in the current financial year than we've been traveling in the past. And also, we are going to spend more on exhibitions because I think the closeness to customers is mission-critical. And yes, there is no way around this. However, do we plan to do it at the same scope and scale than where we are coming from? Clear no. I think we've been learning that we can use our means more to the point more efficiently in order to really achieve what we want to achieve. However -- yes, we probably don't need to go as broad as we were going in. On the other hand, we want to go into new fields. We want to acquire new customers. So they are also from this point of view, additional efforts to be done. Talking about inflation. For sure, you can imagine to protect margins to pass on increasing costs in the supply chain and passing on increasing costs. And also in raw material price increases, we try to do the max there in order to pass these costs on. But we are also not living in a world where we are alone in today's competition and for sure, and we don't want to basically pass on cost at the detriment of losing market share because we are getting too expensive. So in order to reduce here the impact of this, we are working on our process, we're working on efficiency in order to also minimum compensate part of those and cost increases that we see on the market. And like in all companies, even when they are already performing at a nice EBIT level, there is quite some potential to further improve. So we are working on both. Wherever we have the chance to pass on cost, we, for sure, do that. But we don't want to deteriorate customer relationships. We don't want to lose market share and to just defend margins so, therefore, here, and we are also working internally on efficiency.

There are no further questions from the phone.

Good. In this case, thank you very much for your attention. Thanks a lot for the time, and we've been spending here in the call. I would like to wish you to stay healthy. And I'm already looking today forward talking to you at our next investors call or even before. Thank you very much. Have a great day, have a great week and talk to you soon. Thank you. Bye-bye.