LEM Holding SA (LEHN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the full year results 2021/2022 conference call and live webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] And 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 Reifel, CEO. You will now be joined into the conference room.

[Audio Gap] about LEM's full year results of our financial year '21, '22. My name is Frank Rehfeld. I'm the CEO of LEM. And I'm here together with Andrea Borla. And Andreas Hürlimann, the Chairman of our Board. For those who are not yet familiar with LEM, LEM is providing sensors for measuring electrical parameters, namely current, voltage and energy. And for those help our customers and society to transition to a sustainable future. As you can see already on this intro slide, this is a very special year for us since we are celebrating our 50th anniversary. This is one of the reasons why the agenda today is slightly longer than normally. In the first gender point, I would like to review with you what made LEM to what it is today. And then I will talk about the business performance in '21/'22. Andrea, our CFO, has 3 chapters, and he will not only talk about the financial results as usual, but also talk about our strategy to CO2 neutrality, and close with a new reporting structure that we are going to implement from '22, '23. That is the result of an organizational adjustment that we decided to do. Afterwards, I will give due an outlook for the business year as much as this is possible in those volatile times. And Andreas Hürlimann, our Chairman, will introduce our dividend proposal to the shareholders. Now the LEM story started in February 1972, when LEM was founded by a small circle of people around Jean-Pierre Etter and his brother in Geneva. The first application of current sensors was around what we call today a traction application, but soon also renewable energy applications were entered. 1986, LEM had at this time, 120 employees, LEM was listed on the Geneva Stock Exchange. And LEM was quickly growing internationally, set up offices in the U.S. in '87, and established a joint venture in Beijing in '89. Further milestones, CHF 100 million sales in 1997, 2 million sensors in 1999. But already 37 million sensors in 2015. Sales in '15/'16 were CHF 262 million. Since then, we grew by more than CHF 100 million to this year's CHF 373 million, and produced in this financial year, 66 million sensors. So you might ask what is the reason for this acceleration. Now first of all, because the market allows to accelerate, since the mega trends of renewable energy, electrical mobility and digitalization drive our growth. But at the same time, it's also a new ambition level that allows us to move faster. This slide shows a bit, the journey of the product development side. Traction products have been the staff. And you can see over time that our products became smaller and smaller. It does not mean that all LEM products that we are selling today are only small products like the HLSR and the HMSR that you see in the very right. But the large volumes move into the direction of smaller products and the products of -- on the number of small current transducers that we are launching is, for sure, outweighing the ones of the larger ones. The decision to integrate more functionality like we do this today with intelligent sensors and the DC meter therefore direction to avoid that the average product price that you can see is proportionally developing is not falling too fast. Nevertheless, the trend to more compact solutions with less losses will not change and underlines, again, the reason for the strategic decision to also become a fabless company for a part of our product portfolio. With all these activities that we launched around our anniversary, we also met with Jean-Pierre Etter, who is now 87. And he shared his thoughts within what he's been doing when he was founding the company. Admittedly, a courageous visionary with strong values in the pragmatic business sense he laid the foundation for the success of them, working closely and respectfully with your customers have entrepreneurship, openness a failure culture that allows to admit mistakes and learn from them. We call that today the LEM blue behaviors. People who look for a purpose, have funds stretching the limits, and bring the agility that this decade needs, and work with ingenuity, this mindset to think differently, listening to others -- to one's instinct and working on practical solutions. The theme of ingenuity, we consider so important for the success of LEM that we've been weaving that into this presentation, but also our annual review. In this special year, and less than actually 2 months ago, the Swiss team moved from Plan-Les-Ouates where we originally were residing into our new headquarters. After being located in the south of Geneva since 1988, became time now to give our Swiss team a state-of-the-art home that also symbolizes our new way of working, described by the objective agility transparency, and collaboration, as you can see here. As we quasi given this as a birthday present to ourselves, and then at the same time, get daily new inspire -- inspiration from this very nice building. We will hopefully have the chance to celebrate this birthday together with you in November on the Capital Market Day that we plan to hold there on November 8, where we would really like to welcome you there in Meyrin. Please allow me to say a couple of words about talent as well as our cultural journey since both play just such an essential role in the business transformation in which we are in. LEM is the privileged situation that with the products we are producing and the applications we are serving, we are day-by-day delivering our humble contribution to make this world a better place. To increase our impact, and very much in the sense of what Jean-Pierre Etter has been sharing with us, we need passionate people with a learner mindset, hungry and ambitious to overcome the hurdles that the day-to-day business brings and at the same time, bridge cultural differences. Therefore, the behaviors that we want our people to show you see listed down here, innovation and continuous improvement mindset, customer orientation, team player mindset and also a learner mindset because this is something that obviously is the right way to react to everyday challenges in everyday changing situations. Now cultural transformations take time, and there is still some way to go, also for LEM. However, that we probably already gathered some ground, you see in this year's record financial results that we are introducing today. Supported by very strong market demand and an organization that was agile to react to those demands, but still hampered by supply chain constraints. We had 24% top line growth, and the EBIT margin was moving to almost 24%. Certainly, we need to put this year also into perspective to our long-term growth journey. And then we had our long term -- our previous all-time height in '18, '19 that was then followed by actually 2 weaker years due to the U.S.-Chinese tensions and the pandemic situation. Looking at an average growth rate since '18/'19. This '21/'22 results would lead to a CAGR of about 5% over this 4-year period, which still indicates upside potential in a market that grows at about 8% year-on-year. However, without the supply chain constraints taken into account that, unfortunately, we're also limiting our growth this year throughout the complete year. A CAGR of 8% would have been feasible, bringing us actually at a turnover of slightly above CHF 400 million. So we could not deliver this turnover, obviously. But this is exactly the challenge that we were facing in this year despite already the fantastic results. And for sure, we were disappointing customers here and there and because we were not position to fulfill their demands. The supply chain situation in '22 is unfortunately not yet improving, in particular, not in the semiconductor area and also lockdowns in China, in Beijing, in Shanghai. Logistics interruptions to and from China and also internally in China will make the situation even more complex. Now with that, let's move into the business performance '21/'22 into more detail. LEM is delivering it sensors into the following core applications that you can see here on the top motors and drives, power storage, renewable power generation and energy conversion, energy metering for traction applications in fast-charging stations for electrical vehicles. In '21, '22, we were still organized in 2 business segments that you see here, Automotive and Industry, where Automotive has about a share of 23% of the total turnover. And Andrea is going to introduce in his section, the organizational changes that are valid from '22, '23 reporting. Both segments saw nice double-digit growth over the full year, Automotive by 13%, and Industry even by 28%, in Swiss franc slightly lower at constant currencies. Now the global business distribution, this picture has not really been changing against what we've reported in our 9-month results. All regions were growing with a comparable double-digit speed. China is and remains with 38%, our single biggest market. In Europe, we are selling 31% of our business, and the growth engine in Q4 were, again, China and rest of the world with Korea and Japan. You will see the contribution of the Industry in Automotive segments, and again in more detail in the business performance by segment. Now let us look a bit deeper into the 2 segments, and I'll start with the bigger one, the Industry segment. Equally to the geographic spread, all our industries -- Industry businesses have strongly recovered in comparison with '21, '22. Even the traction business picked up about 13% against 2021 despite the fact that we saw there some slowness in the investments. The drive business that was weak throughout the last 2 years, strongly rebounded with almost 33% since the delayed investment into industrial and consumer sectors are now getting realized. Amongst those are also the investments, for instance, into semiconductor capacities. Renewable energy was mostly driven by solar in China, and the investments into the European vehicle charging infrastructure with our DC meter, and also nice growth we saw in high precision mainly driven by testing measurement equipment for the automotive market as well as medical equipments that recovered to pre-pandemic levels. As I said, projecting this business, now from a regional perspective, all also this picture has not been significantly changing against our 9 months numbers. You see Europe and rest of world has really seen the fastest growth, and all other markets grew slightly less, but still strongly in comparison to the 2 last years. The growth in Industry in Q4 was impressive across the board. However, we continue to see inventory fill effects after the stocks were depleted in the last years. At 34%, China remains the single biggest country for LEM Industry. And obviously, all regions benefit from the return of the investment confidence, and reflect strong customer demands. This is as well confirmed for the U.S. with 23% growth in Q4 and rest of the world, with 37%. What we've been launching in '21, '22 altogether across LEM were 7 new products. And you see here the product we've been launching for the Industry segment, the HOB. Now always a bit difficult to see what is inside this box. So it's actually a product that is responding with a high bandwidth up to 1 megahertz to the trend towards faster switching, sillites and carbide maybe as an key work here. The LWSR product. It' a close to current center for 300-kilowatt solar inverters, the main inverters actually that push the growth in China. Our traction meter that measures actually energy in the rolling stock. So basically, locomotives, according to the newest European railway standards that actually recently changed. And the IN200, a nice product that is used in medical and test and measurement applications. To give you a bit an example where our products are applied here, this little application sketch. You basically need solar inverters to connect solar panels to the grid. And they actually convert the DC current that the solar panels are producing into AC that you can use in the grid. And you see here basically the application of 3 different LEM sensors in such a solar inverter on the one hand, the HMSR semiconductor product on the DC side of the inverter. Our LWSR, the product we've just been introducing, on the AC side. And our LDSR actually as a leakage current detector that you need to protect your equipment, and then also the people dealing with this. With this, I would switch to the Automotive segment, our second business pillar. Now we saw an Automotive overall growth. You see this 13%. The main driver for that was, for sure, the increasing customer acceptance of new energy vehicles. Consequently, EV hybrid cars, sales in LEM, and growing, in particular, obviously, in those areas where we are designed in. After a strong Q4, already in the last financial year, however, the growth in the last 3 months was less pronounced than in the 3 quarters before. In addition, even stronger than in the industry, we were hit in our Automotive business by semiconductor shortages. This was, in particular, true for our charging systems. While motor control was growing by 28%, battery management applications developed substantially with lower speed. And the reason for that were, on the one hand, again, also microcontroller shortages, and also some reduction of the combustion engine, battery management systems that we have in the U.S. Now looking at the current supply chain challenges, we are getting amplified by the lockdowns in China. We are not foreseeing a normalization very soon. Also here, the regional split, you see that the importance of China for the LEM business is increasing. Now that is probably also not a surprise because the Chinese market in the whole world is the most important electrical vehicle market, with strong sales momentum at 32% in the whole financial year. But starting actually from a rather low base the year before. China is now responsible for 52% of our sales in this last fiscal year. Also, our European business has shown growth driven by the CO2 fleet targets that the European manufacturing have to achieve. Unfortunately, here the component shortages in Q4 have been reducing our growth speed. The performance of our business in the U.S. is not satisfying since the transition to the EVs was not yet sufficiently -- sufficient to compensate the decline in the battery sensors to combustion engine vehicles as recently as just said. Now rest of the world, namely the markets in Japan and Korea, the component situation also here, unfortunately, spoiled the overall performance, and also the business were slightly shrinking. Also, for our Automotive business, I would like to give you an application examples and what sort of different sensors are used. You can basically see the main applications areas here in battery management in motor control, and at the very top in onboard chargers, OBC in DCDT converters. And you can see actually that these products are looking quite different despite the fact that they are going into very similar applications. And this for sure depends very much on where which function is integrated and what sort of architectures our customers are going forward. You can also see the HMSR on the top right, actually a product we use both in the Industry and in Automotive. And the onboard -- in the onboard charger and the DCDT at the very top to the right, which is actually a residual current sensor that is protecting again the installations at home and the installation in the car. With this, I would like to hand over to Andrea to give you greater detail on the financial results.

Ladies and gentlemen, a warm welcome also from my side. As the group CFO, I'm proud to present very attractive financial results for the year '21, '22, slightly above the overall analyst expectations. Let me summarize the financial highlights in 3 points. First, the strong sales have been the key driver in achieving record profitability. Second, LEM holds a continuous strong balance sheet, reflected in a healthy equity level. And third, excluding a nonrecurrent tax payment, both the operating as well as the free cash flow grew substantially. The gross margin in absolute value increased by over CHF 35 million from CHF 140.6 million to CHF 177.3 million. In respect of the gross margin, in percentage, we have gained 0.8 points. What are the main causes for this very positive development? Both production efficiency improvements as well as scale effects helped to drive the gross margin upwards. Those improvements were somehow dampened by higher input costs. We expect the material cost to further rise during 2022, '23, and we will have to pass on those cost increases to our customers in order to defend LEM's profitability. Our 2 low-cost locations situated in China and Bulgaria cover, per today, 80% of all sensors produced by LEM. And this percentage will -- is expected to increase over the coming years. The SG&A could be reduced from 17.5% to 16.0%. As LEM achieved the 24% sales growth with limited additional structure costs. The absolute increase is mainly coming from head counts and salary increases as well as also higher external consulting expenses. We are working on several automation and process improvement initiatives, which shall allow LEM to grow the SG&As under proportionally for the coming years. Here you see the R&D expenses. The R&D expenses continue to increase, and this confirms our willingness of not jeopardizing LEM's future growth by optimizing its short-term profits through R&D cost cuts. The R&D expenses were lowered this year, thanks to R&D tax credits of CHF 1.2 million, which, up to this year, were reflected within the tax expenses. In R&D, we focus not only on renewing our current product portfolio but as well on developing new product families, addressing new markets, adjacent markets and applications for the future. As already mentioned, some exciting new product families such as the DC meter, and LEM's very first integrated current sensors have been very welcomed by our customers and the market. Going forward, the R&D expenses are expected to remain in the 8% to 10% range. In respect to financial expenses, LEM suffered last year from the euro depreciation from 1.11 early in the year to 1.04 at the end of the fiscal year, which resulted in a negative exchange effects. The gains in the hedges did not compensate for those transactional losses. LEM, overall, has a very limited third-party debt and the interest expenses remained, as a consequence, very low. The main element on the financial expenses relates to expenses on lease liabilities. Income taxes. Here, the effective tax rate over the last 12 months was at 15.1%, which is about 2% points lower than last year when excluding last year's nonrecurrent tax gain. The main cause is a favorable geographical profit mix, meaning that we realized higher profits in the low tax countries. We as well continue to benefit from the so-called HNTE status, tax status, in China, which results in a reduced tax rate of 15% instead of the normal 25% level. And LEM China just recently successfully extended the HNTE status for the years fiscal years 2021 to 2023. And here, you see the full profit and loss statement. On the left side of this table, you see the full year results. And on the right side of the table, you see the specific Q4. We can notice that the LEM's momentum continued during Q4 with quarterly sales of around CHF 100 million while at the same time further improving our profitability with an EBIT of close to 25%. Let's move on to the balance sheet. What are the key points on the balance sheet for 31st of March 2022? First point, the net working capital has increased. You can see that from CHF 26 million to CHF 72 million. And the 1 main driver is the CHF 27 million tax payment, this nonrecurring tax payment per May '21. And a second effect is, of course, the consequences on to the net working capital from the increased sales, increasing receivables, increasing inventory. The second point, the fixed assets. You also see here an increase from CHF 123 million to CHF 148 million, and this is primarily due to the capitalization of the right of use assets of our new rented head office in [ Meyrin ] in the Canton of Geneva. And the third point I would like to mention on the balance sheet is that the end of March, the net debt amount to CHF 23 million, and this consists, on the one side, of a level of CHF 80 million cash and CHF 41 million current financial liabilities. And altogether, this results in an equity ratio which slightly increased from last year from 50% to 53% in this year. Cash flow, again, excluding the so-called, let's say, the nonrecurrent tax payment of CHF 27 million, which is reflected in the adjustment for noncash items and taxes paid in the second line, post the operating as well as the free cash flow have increased compared to the last year. Again, the main driver for this improvement is the higher profit before taxes. You can also see that the investments in the line cash flow from investing activities has increased compared to previous year. This is due mainly to the new head office premises, the fitting of our new head office on the one side, and as well the very first part of the land acquisition for our future factory in Malaysia, in Penang to be more precise. In summary, we are very proud with LEM's 2021/'22 financial performance, which is reflected in a continued improvement in sales, profitability, balance sheet as well as cash flow. I'm now also very pleased to share with you another chapter, the CO2 -- LEM's CO2 strategy. The limitation of the global warming is possibly the biggest challenge for human kind over the coming decades. LEM's mission is to help society and its customers to accelerate the transition to a sustainable future. Thanks to our products, which measure current and measure voltage, we already help optimize and reduce energy consumption. However, we are now extending our efforts, and are working on how to reduce CO2 consumption within LEM. So we have identified various initiatives, which will help LEM to progress on this matter. We plan to become net CO2 neutral in Scope 1 and Scope 2 by 2025. This means that our entire energy supply and the company car fleet will be carbon neutral by then or that we compensate the remaining CO2 balance. In parallel, our priority will as well be to centralize our efforts on our Scope 3 emissions, which are really the very predominant element. The CO2 emission value must be considered as a new criterion in the selection of suppliers, transferred routes, internal processes, design and decisions. Our target is to become CO2 neutral on all 3 scopes by 2040, which is more ambitious than the Paris Agreement on climate change. We are convinced that all our stakeholders such as customers, employees, investors will follow our future CO2 reduction progress with lots of interest. We have as well extended our ESG reporting in which key KPIs are reported not only on the environment, but as well on social and corporate governance aspects. We followed the NASDAQ framework, which is coherent and appropriate for our business while providing us with the right tools to further improve in the future. Let's move now to the already mentioned changes in respect of financial reporting, where we would like to announce this upcoming changes more in detail. So in order to empower LEM's regions to speed up decision-making and to be close to our customers, we have moved into a regional organization structure, starting first of April of this year. This organizational change will support our growth plan, while at the same time, increase synergies. Consequently, LEM will no longer report the Industry and auto segment, but we are going to report the company profit and loss statement on a quarterly basis, and the balance sheet plus the cash flow statement twice a year. The quarterly sales will be reported in future along a slightly modified geographical and business criteria, which I'm going to just show in a second. So here, you see the geographically, the new geographies, we will report the sales according to those regions. So we have China, rest of Asia, EMEA and Americas as the new 4 regions. There are really slight changes to the way we reported in the past. And for your reference, we are presenting the sales also for the last 3 financial years with the new geographical setup. And on this slide, you -- we present the 5 new businesses which are automation, automotive, renewable energy, energy distribution and high precision and track. And this also here, we are giving you the transparency of the last 3 years where you can then also compare. The Automotive will remain completely comparable with the previous years. We have not changed any scope at all, but it's related to simplify and to clarify what is in -- we had in the past into renewable energy, a mix of various points, variance application. And here, it's more transparent. You may now wonder what the future will bring to LEM. And for that, I'm very happy to hand back to Frank.

Thanks, Andrea. Yes. We've just finished a fantastic new year -- fantastic year '21, '22 for sure. The question is what's next? And I think the situation is probably not that easy. So what you see is that besides the inflationary environment, where we managed to successfully passing on the pricing increases and the input cost increases to our customers. It is, in particular, the supply chain situation that is unfortunately even getting worse in combination with the lockdowns in China. We had the shortages in the semiconductor markets, several suppliers in China are affected by lockdown since more than 7 weeks, in particular, in the Shanghai area. As you are aware, the situation there has been improving in the last days, weeks. However, it remains to be seen what happens in the near future. Mainly driven by those lockdowns in China, we foresee already today a weaker first semester in comparison to the last year. The Chinese government is more and more reacting to the economic pain of the lockdowns. However, the impact that the lockdowns had already been causing actually in the worldwide supply chains will have an inevitable resonance to the global businesses, and I'm not only talking here about LEM. Now you could deduct maybe from my last statement here that we are now getting pessimistic after such a fabulous year '21, '22. But the opposite is true. Even after paying a special anniversary dividend that our Chairman is going to talk about in a minute. We have the financial means the agility and the commitment to weather storms. And as you can see already in this year, also appears stronger out of difficult situations. The mega trends are playing in our hands, and therefore, the long-term prospects remain strong in all applications and industries in which we are delivering. Our strategic decision to substantially increase R&D to move into tablets and, at the same time, forward integration of functionality are paying off. And in addition, our Malaysia facility has been kicked off. We plan to start production later in the beginning of 2024 in our new plant in Penang. Therefore, despite all the short-term headwinds, we are, and remain optimistic for LEM's future. And with this, I would like to hand over to Andreas Hürlimann, our Chairman, who will introduce the dividend proposal to you. Thank you.

Thank you. Also, welcome from my side as the Chairman of the Board. I'm pleased to draw your attention to the long-term view. We had multiple reasons this year to be distracted from our long-term view, but we were not. While the ongoing pandemic with corresponding supply chain disruptions tested and continues to test our resilience, we have no reasons to change our strategy. Our scenario for the future based on the mega trends but also the structural growth remain intact, so are our ambitions and strategic investments, as we mentioned, R&D -- significant R&D investment that start to bear fruit, but also our projects to further derisk our supply chain and our efforts to enhance our regional competencies. This will make the company in the long run, even more resilient but also more agile and business more competitive. Moving on to the dividend proposal. The Board considered carefully profit and cash flow, the underlying strength of the business across diverse sectors, and geographies and general economic uncertainty ahead. Our long-stated dividend policy is to distribute significantly more than 50% of our net profit. Considering the excellent result as well as to mark the 50th anniversary, we are proposing to our shareholders an increase from CHF 42 to CHF 50 per share, which is a payout ratio of 78%, down from 86% last year. It also results in a dividend yield of 2.2%. It also demonstrates our high confidence in the company's ability to generate strong cash flows going forward. We continue to make significant investments in talent, in R&D, in business development and marketing, but also in operations, infrastructure, IT, full lanyards and obviously, that is important that we can continue to do so. Moving on, thanking you on behalf of the entire Board of Directors, I wish to extend special thanks, definitely special thanks to our employees worldwide for their expertise, reliability and innovative solutions. In particular, we are very proud on how our teams have responded to the extraordinary challenges of recent months to deliver this, what we can call a record result. So a big thank you to the employees, but also a big thank you to the leadership team here for their prudent and empowering leadership over this -- one could say sometimes a bit roller coaster year that we had, and seems to be still ongoing for a couple of more months. We would also like to extend our gratitude to our customers, suppliers and business partners for their continued trust, and sometimes we can add for their patience that they had also with us. We thank the shareholders for the confidence they continue to place in us. And we thank also all of you here present, for your interest in what has been happening in the past year and how we see future going forward. And now we look forward to taking your questions.

I would suggest that if you have a question, just you raise your hand, you say your name and the name of your company, please.

Okay. My name is Serge Rotzer from Credit Suisse. And probably the first question to Mr. Hürlimann. Many thanks for the explanation for the dividend policy, as you said, low 50%, but you distribute a high 80% as we have seen in the past. So now you have increased the dividend to CHF 50. Would you rather say that you stick to a stable dividend, a growing dividend? Or would you see also a declining dividend the years to come?

Mentioned that for the year to come is rather uncertain. But you have seen in the past that we also lowered the dividend according to the results received. I mean at the end of the day is, I think, considering all of the aspects, what the net profit was, our dividend policy, but also the required investment going forward. We take this decision individually.

But still increasing to CHF 50, should I take as a positive sign, isn't it that also do we have confidence in ability going into the current year? Or are you a blind sight?

No. No. That's -- I stated that we are confident that in the long run that we will be -- continue to be a successful company.

Okay. Then the more nasty questions to Mr. Frank Rehfeld. On sales, you have been guiding H1 below H1 previous year. So what is it below? Is it -- can you give us a little bit of flavor of what is below? This would be the first question. And then obviously, we would make the mathematic for the full year, where it needs to grow in the second half as consensus is at the CHF 410 million, something like that? Or even if you take the current year with CHF 380 million.

Yes. You know that typically, we don't guide. And I also -- I'm not actually in the position even if I would have my best willingness to give you more transparency to come up here really with percentages or concrete numbers. I think it depends very much on, unfortunately, decisions that are not in our power, and it will be mainly about basically how this situation in China is going to develop with respect to lockdowns and the effects on the supply base. I am, however, optimistic that there will be good solutions found because the consequences in China -- and therefore, so the relevance of those decisions for China is probably factors bigger than the impact on LEM. Therefore, I'm of a very good spirit that there will be a solution. But then again, it will be difficult to quantify that any further at this point in time.

Okay. Let's assume you are slightly below the current year, the first 6 months of last year, it was around CHF 180 million, so CHF 183 million I have in mind. So let's take CHF 180 million. So you should achieve more than CHF 200 million in the second half come to the level where the market is currently. So even in case, could you do that based on capacity, supply shortage, all the menu you need to be a good cook?

What we can probably share here is that since we believe in the long-term growth of LEM, we don't slow down any investments. So that means in all the areas where we see market growth and also demand growth we continue our investments. And so that means we want to make sure that LEM is not the bottleneck to further growth. However, again, how that plays out in detail is difficult to foresee from today's perspective.

Okay. I give Michael for the margin questions then.

Michael Foeth, Vontobel. Actually, now just a follow-up on the visibility. Obviously, the last 3 months of the year were much better than what you expected 3 months ago when you communicated. Now you give a view for the next 6 months. And the question is, obviously, what visibility do you really have? I mean there's so many uncertainties out there. How can you actually come up with a view on the next 6 months at all? And that's one question. And the second question would be more specifically on Automotive. Obviously, a lot of constraints right now due to the supply chain situations and lockdowns. And the question is really, do you expect once those constraints ease a bit? Will the demand in Automotive really pick up? Or will it remain constrained by potentially recession setting in triggered by inflation over the next 6 months?

Yes. Two very good questions. Now let's give you my opinion that I have at a very high level. What is the difference between the supply chain situation last financial year and this financial year. It's basically the additional effect of lockdowns. So that makes the huge difference. And what I see is that we are at the beginning of seeing the effects of those lockdowns to the Chinese, but also the worldwide economy at the beginning because there are still stocks around, and we have not yet seen the real impact of that, and that is still to come. And it's clear that the longer this on-off lockdown is continuing, the more severe the effects will be both for the Chinese economy and the worldwide economy, and also LEM to make it very simple. How much -- are we at the bridge at the bridge of a recession? I think also this depends very much on how well the complexity is managed again. And I see very much there also and wait in China. Because the Chinese supply chains, the Chinese inputs are so important across the world that yes, we will see probably a higher likelihood for a recession if the lockdown situation across the Chinese economy is continued. We probably talk today about that 1/3 of the Chinese GDP is locked down in terms of people who produce this GDP. So therefore, this is probably the most decisive factor. And for sure, the input cost increase that has been accelerated with the energy cost increases coming from the Russian-Ukrainian war, but also the overall inflationary scenario have been already before important input factors. But this is for sure, for me, at least the decisive one in which direction the economy is going to develop.

And then I have to just ask the margin question, obviously. So you have shown very good leverage to the upside now with the higher sales volumes. I would expect that eventually we will see the opposite effect if sales are lower in the first half of your year. And the second point to that is how good, can you really pass on those higher input costs over the coming months?

I think for the second part of the question, input costs, basically over the last 12 months, we managed that nicely. That we basically succeeded in passing on the price increases to our customers. Now we see that this is actually accelerating over the next 12 months. We expect important price increases on several key inputs. And also on, let's say, freight costs, energy prices and so on. And here as well, let's say, our ambition is crystal clear. We are working very focused on passing on these price increases to our customers. And this is on all the worldwide customer base. So we are confident that we will be able to do so. On your first part of the question, the volume effect is important. So we have seen it this year, over the last 12 months, that of course as soon as volume picks up, you have economies of scale the fixed costs are absorbed through more units. And this will -- in case, let's say, the scenario comes through of a slowdown on the top line, this will also have an impact on the gross margin. This is to be expected, yes.

Ferran Tort from Kepler Cheuvreux. I actually have 2. I'm looking a little bit more into the midterm. You mentioned in different interviews that you were targeting to be like a CHF 500 million company by 2024, 2025. Are you still confident on that? And then on the Automotive side, like could you mention a little bit how are you going or developing in terms of designs, please?

So yes, we have this ambition to basically grow to a CHF 500 million level with around '25, '26. Now it's clear when economy develops downwards, it will be difficult to achieve that. So for sure, we are depending on, obviously, a certain environment. But the when you see the overall trajectory on which we are growing -- and I've been mentioning here a couple of figures, taking the reference point of our '18, '19 last heights against this. You can see that there is a growth path that is intact. It will also allow us to achieve this number. So I'm optimistic. But again, there are a couple of factors that we cannot influence when there are macroeconomic effects that need to lead to a delay then it will be a delay. But the good thing, again, is I think we have the financial means to also survive that or to manage that. I'm not worried about this growth path. It is -- and you see this cultural elements that we've been starting. It's about with which speed LEM can grow. It's about to have the means in place to have the closeness of the organization to the markets, and the decision power there in order to make sure that we are fast enough. But the market in average is going to grow just following the megatrends. Automotive. Automotive is an important business for us. And I think we don't yet leverage here, our full potential. That was also one of the reasons why we believe that the organizational merge in Industry and auto will allow us to even stronger focus in a couple of application areas. We see, in particular, the U.S. market as 1 important market that is going to leverage -- allow us to leverage the business further, but we also see further growth potential. In Europe, we work very, very close with, in particular, the European customers, and now intensify our activities further in the U.S. I'm there -- again, very optimistic that we can even accelerate further in auto. And again, the organizational step that we did was moving closer to the markets, having a little bit less focus of doing decision-making through Geneva, but rather in the regions. This will allow us to be faster in the market. And you know that this Automotive business is a very fast-moving business because even the Tier 1s and also the OEMs don't always know what is next. Everybody has an enormous cost pressure and everybody has enormous technical challenges. You, for sure, read maybe a couple of articles how also companies like software -- like Volkswagen are struggling with setting up software organizations. These are challenges that need to be managed in the future. But okay, that's where we can play a role. That's where we can offer our service, and that's where we can probably also leverage again the synergies between the 2 businesses.

Are there any further questions coming from here? Yes.

Thomas [indiscernible] with VV AG. I would have a question regarding salary -- cost inflation on salaries. How strong is the whole group affected with that? And what are your steps which you are taking against that?

Yes. So over the last 12 months, again, we have -- as we are present in various markets, we have different situation in respect of pressures. So primarily, let's say, sites like in Sofia, Bulgaria, where we have high, high salary expectations, salary increases where the competition is very, very tough, competition for talent. So here, over the last couple of years, we always provided important salary increases. A second place is, of course, China, where, again, if you look back the last 5 years, we always gave substantial salary increases, again, to keep and attract the best talent. The other places in the past, were rather -- we were rather a bit more conservative. But again, we are paying market prices. Now we see this inflationary pressure coming up in all sites in Europe, in U.S., and we will now decide about the salary increases of the year '22, '23 in June, July. So this is upcoming. No, I will not provide any figure, but let's say, it can be expected that we will provide probably more than what we did in average in the past just to really defend. But again, it's a very market-specific decision where we really looked at the situation in detail together with the local management.

I think what is important here is to understand when you don't pay market prices or even slightly above market, you don't get the right people, you don't manage your growth. So for us, it's not so much the discussion about salary increases about the discussion to do the right things at the right place. And therefore, when we look at the outlook for the Geneva headquarter, we also don't see the head count increasing. We really look into doing the right things in a high-cost country like Geneva -- like Switzerland, because we are convinced that the value add, the education system, the experience people can have is helping the whole organization to grow with the right decisions and the right strategy across the world. Whereas the more transactional activities are more and more moved out from Geneva then going to shared service centers, for instance.

[indiscernible] Just to get a little bit more flavor how you're perform in this inflation environment. You can give us -- elaborate a little bit about the price sensitivity of your products by application. I could imagine it's very low. And then just remind me, and you drive a cost-plus model. And last question, also probably a little bit elaborate about your market position and -- market position, competition by application?

Perhaps I take the first the market position. So the question was how we deal with this inflationary environment. Again, what we do is very specifically by site, by customers. We look at -- in a very systematic way with the sales organization, how to contact them. We have done that over the couple of the last 12 months. Now we think about revisiting them, reincreasing prices. We do -- and that's your second part of the question, we do market pricing. We do not cost plus. We have a quite big variances of profitability in respect of the various applications, application in the renewable energy, where we have -- it's a more commoditized segment. The products are more similar. There, of course, let's say, the profitability level is lower than other very custom-specific solution. So we have here very much market-based prices. And anyway, our competitors, the market overall everything is increasing. And I think at this stage, also our customers, they do accept important price increases, at least that's the experience we had so far. And about the third part, I pass to you Frank.

The competition, so for sure, we are acting obviously not alone, and there are some markets in which we are present since by far longer time, like the typical Industry markets, drive, renewable and HIP, high precision that lost traction, where you could say we can subsegment this market further, and we have about a market share in the order of magnitude of 40% to 60%. Automotive is -- the situation is different. So there, we are across the board around 20%. Now this is a very fast-growing market. And one also needs to clearly see the direction in which these markets are developing. There are very interesting developments that allow LEM to even progress faster because certain steps are in the future done by the customers themselves, certain steps like, for instance, sensing functionalities are getting kept, basically outside. So there's a lot of things that are still going to be developed. We try to work basically on all levels of the supply chain to be their present. But also here, important to mention is, again, to have here products that are basically integrating the whole sensor functionality in a semiconductor, are mission-critical to participate in this growth path in the future.

Like in an e-car, how -- what is the -- what do you sell in the car? How much in dollar terms, for example, just to give a little bit flavor.

This is exactly the challenge. I'll give you an example. You can have a battery sensor that is worth USD 20. But you can have at the same car, similar functionality, only sell semiconductor, where you basically then get the price of maybe USD 1 to USD 2. So these sort of ranges you have, and it really depends on how are the integration strategies of customers. Do they have the expertise, the competence to do certain things themselves? And so that is not that easy to see really -- or to calculate in the future out of the number of cars, the number of sensors and therefore, also the revenue for them, right? So that is the challenge here that not only you have, also we have. Therefore, you need to basically be present in the mainstream. We call it the expert makers and the expert buyers, but also the niche players who have less engineering horsepowers where, for instance, the content you can be selling, can be bigger.

Daniel Koenig for Mirabaud. I have a question on the renewable thing. I read that the Chinese government is pushing quite heavily some solar parks somewhere in the desert of China. And I can understand your guidance for H1, but does this cautiousness also include renewables for H1? And the second question would be, are you also somewhat involved in these wonderful parks? And then I have the final question. There were many, many shares splits in Switzerland. Was this ever considered for LEM? Or is this a no-go when you think I don't care or do you think it's the right price.

Maybe I take the first question, and Andrea, if you want to -- what's the talk -- you adress it, Andrea? So let me take the first one. Yes. I mean these solar parks will be built up by know-how competence in production means existing in the East Coast. When the East Coast is locked down, the solar parks will be delayed. Because when you look at China, you can basically draw a line in the middle. And basically 90% of the people are living then from there on the right side. And obviously, the availability of the production means people being at machines, people being able to produce the solar equipment is the precondition having them push. But then what you just said is just a confirmation of the strong willingness of China to basically make it on the journey to sustainability. And you know that the target is to reach neutrality towards 2060, which still have a country with, let's say, today still doing 50% of energy production out of coal is quite a journey because of the energy needs are still rapidly growing. Now what does LEM share in that? Now I don't know about this particular park there. But looking at our rather strong presence in the solar inverter business, it would be a shame if you would be not there. So I think we are rather there because we are working with the 9 biggest solar inverter manufacturer that not accidentally are all Chinese.

And in respect of the share split, we have reviewed and assessed a possible shares paid a few years back. But at that time, we have decided not to pursue. And at this stage, it's not on the agenda of the management and the Board.

Reto Huber, Research Partners. You're mentioning that Chinese car manufacturers seem to go better with this supply chain or semiconductor shortage issues. Why is that? I mean better than the Europeans, maybe also the Japanese and South Koreans. And the other question relates to the train -- or traction segment. There's quite a pickup in Q4. What drives it? It seems to be Europe and India. You also mentioned some regulatory change. What's to expect there?

Now first question about Chinese car manufacturers coping better. I don't recall that I said that explicitly. I think the Chinese car manufacturers are also suffering. And when you just see, for instance how many cars Tesla was producing and selling in April, really, the numbers dramatically dropped, I think, 65,000 that is normally the monthly production to, I think, 1,500. So obviously, there is an impact. And now you can, for sure, debate whether Tesla is the Chinese car manufacturer. But you see that obviously, everybody, this applies to these [indiscernible], the Great Walls whatever the names are, and everybody is suffering from the situation. And for sure, also the market has been substantially collapsing in the last 2 months based on the lockdown situation. And obviously very much in parallel, right? So demand collapsed and also supply collapsed. And looking into traction business. Now traction was growing actually probably until 2 years ago rather than with a nice speed because there were substantial investments in part you also pushed by China, but you're also right. Also India is playing an important role. And it has then been slowing a bit down because quite some investments were delayed, also in those times when LEM sales was rather a bit weaker. And therefore, the pickup is now from a rather low level, and we basically see there, probably not a momentum at this level sustainable because this whole market is rather a market that grows with 1% to 2% year-on-year in the overall capacity. Looking at this meter that I've been introducing there. That's a very interesting sort of development and probably indicates that the potential of LEM in particular, in DC metering is a part of the growth story that we will stronger focus on. And here, it was just important for us that Europe has been changing regulations because they're talking about energy billing basically to the different countries in which those trains are driving. And for this, you need a precise meter. And then we have here a product already developed with a partner quite some time ago. We had to update that and basically bring the Gen 2 to the market and that was very well managed and in time, and we talk now and already got orders from the big players in this market for delivering this traction meter. It was too fast.

So what can we expect from Europe?

From Europe, we expect, in particular from the meeting area, quite some substantial further investments. And still, I think Europe -- since the regulation density in Europe is rather high, I don't expect now really a fast boost in the general investments.

Serge Rotzer, Credit Suisse. So Mr. Borla, we have to talk again about margins. How much our SG&A is growing this year?

I'm not sure if I fully understood. How much it will grow or...

What's the growth rate of the SG&A for this year?

Of the gross margin, you say?

SG&A, sorry.

SG&A. Okay. Sorry, I misunderstood. Sorry. SG&A, again, at the risk of disappointing you, I will not give any figure. But let's say we intend, of course, to continue to strengthen the organization worldwide. So we are still acquiring expertise, talent. So generally speaking, the overall head count will increase worldwide. You just mentioned before the salary increases, which we expect in this coming year. So we will have here a certain pressure here. So you can assume that here in absolute terms, this will increase over the coming 12 years. Now again, overall, if you look also back the last couple of years, the SG&A developed. You could not see huge jumps over the last couple of years. So I don't expect a huge jump there, but there will be further increases in absolute terms on SG&A. And the percentage, of course, is a function of what the top line -- how the top line will develop.

But maybe to just add on that. We work in parallel also on quite some efficiency programs. And then I think to update processes, to look into supply chains, to do things in a more automized way is something we do in parallel, obviously, this across the board. So I think we have also quite some means in place to reduce the increase. And therefore, exactly what Andrea said, it will be a substantially under-proportional increase in comparison to the midterm growth ambition.

Again, this would have been my follow-up question. What is the exact program to grow under proportionally?

You want to...

Where is this particularly coming from?

Let's say, we have 1 key initiative is that we will introduce some best practice, robust processes. You must imagine that LEM coming from where we are from a small mid-cap, and still where we're Geneva-centric. We will now introduce a worldwide best practice ERP without mentioning what it will be. What the name it is. And this will provide us really very highly automatized robust, best-practice processes, which will allow ourselves to further increase productivity, back-office productivity. And this will allow ourselves to get this ambition of growing the overall SG&A under proportionally in the coming, let's say, coming 5 years.

And this starts or in next year?

Let's say, this year, the effect is not yet seen because we will launch, and we will work on it. And you know that these kind of programs, they last quite a long time. So this year impact is very, very, very limited.

Now you have introduced a math explanation. So by definition, is give 20 managers if you have 5 markets and 4 geographies. You have 2 members on the director team and the executive team. Can you help me what this means? Are these managers are now upgraded, if there are trends, I think there are some are in 1 person combined? And what does it mean on the cost base also in the salary cost? Do we see this year a huge jump in salary costs for all the managers, and the big mess because of decision responsibility problems, challenges? Please help me here.

Good. I see you've seen -- a lot of companies didn't manage business transformation as well. Now are we perfect? No, we are also not perfect. But for sure, we have been preparing this transition for over a year. And we carefully thought what we do and how we do that. Is everything working according to plan, also not? But I think we are preparing for the right steps. Now concretely, at the moment, the former auto Industry managers are taking double roles. So basically, the Industry manager is operations in Asia, and the auto manager is focusing on Europe mainly. So -- and I'm taking in addition also, basically, the CTO role. So there are some changes with respect to this. Is this something that is, let's say, causing turmoil in the organization? No. Because I think again, the whole layout -- the business consistency towards empowering the regions has been understood as the most important driver for LEM picking up the right speed. So it's now about to deliver this, to do the right things in the regions, to enable the regions to make this happen, for sure, in an economic environment that also allow us to implement that. So I think we are here on a good path, and I'm optimistic that we will also succeed.

But again, do we see higher personnel costs out of the organization, point 1. And point 2, in the executive team, we have Ryder and Rebecca what's the role in the future? Or will you add other managers to the executive team?

So for sure, I mean, where you should probably here not discuss the details of how exactly the executive team is going to develop. But it's true that in order to be able to grow to this growth of CHF 500 million, and even beyond, we need to further strengthen our management team. And in particular, a CTO role is for us mission-critical because we see all this parallel developments from LEM becoming a fabless company for a part of its product portfolio, further growing software functionalities, splitting software between different sites. Just imagine when I joined LEM, we basically had already 1 person working in software. Now we have a sizable team. So there are some developments that need people with experience to exactly avoid what you just were talking about that basically an organization is not able to manage a transformation because the experience is missing. So certain experience, we still need to hire. And this is for sure what we also have on the right mind.

Thank you. Is there further question from the audience?

[indiscernible] VV AG. I Have a question on your new plant in Malaysia, which goes live early 2024. Can you say, is there only production? Or will you do there also R&D? And what special product of your range are you going to produce there? And for how many people will work there.

So very good question. So the strategic logic behind setting up this plant was to, on the one hand, balance our worldwide footprint. And secondly, provide obviously additional growth space, and certainly to take advantage of the fact that in the Penang area -- and that's where we will be, since 1980, the Asia and Silicon Valley has been established. There are special competencies in particular with respect to back-end processes in semiconductor production. So what we want to do there basically run a highly automized products that we do already today. And in addition, we will focus there the LEM back-end part of our integrated current sensor production. So that means, in particular, the testing, we will test our semiconductors ourselves in Penang.

Daniel Koenig, from Mirabaud. I have 2 questions. First question, I don't know if you want to answer it. I was wondering if we have April and now we have already May, has these 2 months -- or almost 2 months been confirming your cautious guidance for H1? Or will it be more coming very soon, but not yet? And then I don't know if you want to answer this. And the second question I'm more interested in is, it's actually what is the program of the Capital Market Day? Can you give me a map or size of what to expect?

Right. Maybe I'll take the first one, and also the second one. So for sure -- I mean you know when the lockdown started, right, it started basically end of March, and then continued throughout now, now first steps are to lose in there, the one or the other compound, but still Shanghai is far away from being back to the normal rhythm. So for sure, there is a visible impact already today. And one should not expect that this sort of extremely harsh measures are remaining impact less for the industry. And again, we are only one -- that is -- some don't see it yet. Some don't fear it yet, but this will -- I mean, look at the logistics industry, when the workers are not in the harbor, and look at the importance of the Shanghai Harbor for world transportation. We will see ripples. Second question, referring -- you need to quickly help me...

Capital Market.

Capital Market. What's the idea? The idea is to give you, on the one hand, a chance to see our headquarter to see the place where we are now living in. At the same time, we would, for sure, like to share a little bit with you what topics are we working on high level for sure, but still think relevant and interesting for you enough to see what developments we see in the market, what developments we see about energy measurement, solar and so on. Automotive will be an important part. So we would like to give you a bit of more flash to what we show here only on dry slides that you can get a bit of touch and feel where we are working on.

Ferran Tort from Kepler Cheuvreux again. I have one question regarding the supply chain. You have been mentioning, and I understand that all of them are equally affected. But you also mentioned in the 9 months call that you were rather concentrated in terms of suppliers, and that you were trying to -- or diversify sources, at least. I mean that it would be a long process. So I would -- if you could give a little bit of where do you stand there? And when do you see like a positive coming?

So yes, very important topic. So we dedicate, and we'll probably, in the future, dedicate even more resources to establishing basically second sources and qualifying those. So that's 1 important part, and we are working on. However, one needs to also differentiate here. When you are talking about a second source for a semiconductor, you talk about easily 1.5 years until you can introduce and qualify such a supplier. When you talk about, let's say, another supplier for resistor for, let's say, plastic housing, then you saw probably about 6 to 9 months. This is a bit -- the challenge that you have in the Industry to way out. Is it worthwhile to invest now into this second source or whether you go rather for, let's say, innovation projects. So there is certain trade, right, because you cannot do at the same time everything. And you can also not hire these competencies overnight because, therefore, this question with the salaries was so. We are talking about war for talent. Now we speak about this since 20 years. Unfortunately, we didn't do enough against it. And we see now the effect. So the competitiveness for certain qualifications, people who don't fear current, people who understand system complexities, people who can think electric vehicles, they are under such a high demand that they can almost ask whatever they want in order to get employed. So this is a bit the challenge in which we are. So we have a limited resource pool. And it's about to allocate that best. And -- but in particular, the area of qualifying second sources remains in high focus. But we will not redevelop, for instance, a new microprocessor for a certain product because this is a process you talked rather about 2-plus years.

From the audience at the weather, we will take the questions coming in via phone if there are any.

[Operator Instructions]

There seem to be no questions coming in by phone. If there are no questions by phone, we'll proceed to the questions coming in via in writing. We have currently 3 questions. The first question coming from [indiscernible] from [indiscernible]. First of all, congratulations to the successful year, and thank you for your continuous efforts. The EBIT margin in the Automotive segment improved substantially in Q3 and Q4. Please provide us the reasons for this. And whether or not this level is sustainably going forward?

So I always tell to be very careful to over-interpret quarter results on the auto because the volume is limited, and it's enough to have, let's say, some nonrecurrent elements to really influence the results. So I can clearly say, no. The EBIT margin from Q4 is not sustainable for the auto segment. And now in the future, you will not be able to follow that anyway. But let's say, our target would be that we will remain as a realistic target for the auto business, about [ 15% ]. That I think is the long-term sustainable profitability for that segment.

The next question comes from [ Milena Celin ] from AWP [indiscernible]. Do you make sales in Russia, Ukraine or Belarus? Does the war also affect -- does the war also have a direct impact to LEM?

Right. Yes, we do have -- we did have sales, I can now say, in Russia. Now the percentage in comparison to the overall LEM turnover is rather small. It's below [ 2% ]. Now looking at the situation with the war from Russia against Ukraine, looking at the reaction of the European countries, and also the Western world altogether towards that. We've been obviously following that, also decided to suspend our operations there, and also ourselves. So as we are speaking, we basically are neither producing anymore nor are selling to the Russian market. But we still continue to pay our Russian team. It's a team size of about 20 people. And we plan to continue that at least for this calendar year, and we for sure hope that by when the situation gets this catastrophe, gets stopped. And we have, by any means an opportunity to continue the activities there. Because just looking a bit in the LEM history and you had this picture before the sales operations were established in 1990, so basically 30 years of business experience, 30 years of customer closeness, 30 years of working together, and it's always a very, very sad signal when you basically have to hard interrupt that, and basically stop that.

The next question comes from Andres Gujan from Carnot Capital. Looking at the large order book, will you run into a margin squeeze when input costs rise as expected? Two -- and the second question to what have could -- what have -- could you hedge the procurement costs?

So on the order book, no, I don't see. What gives us confidence is that we have lots of volume ahead, lots of demand, which is underlining and confirming the demand for our products. And per se this -- if we can produce, this will rather be helpful on our margin. So I don't see here any pressure on the gross margin at all. So here, no. On the second, on purchasing, very difficult. Our key components are really the electronic components, electronic chips and very difficult to hedge there on this. It's more about being sure and making sure the availability, all the points which Frank just mentioned before, long term, look at -- evaluate the possibilities for dual sourcing. That is really the most important and key vital point. In respect of input cost increases, here, we really work on passing on these price increases to our customers.

There are no further questions.

Good. Thank you very much. Thank you again for the trust in LEM. Thank you for investing the time. Please don't forget, eighth of November. That's the day where we would like to see all you here, assembled back in Geneva in order to see a bit, what we are doing there and how the whole thing looks like. With this thank you very much, and have a great day. And by the way, we still have a parole that is getting...

There is [indiscernible] standing lunch in the room [indiscernible], and we will show you where it is.

Thank you for everybody online. Thank you very much.

Thank you.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.