LEM Holding SA (LEHN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the LEM Holding S.A. Full Year Results 2023/'24 Presentation. [Operator Instructions]

[Technical Difficulty] I'll repeat that sentence so that everybody is aware of that. Together with all the employees, they have accomplished despite the uncertain and challenging environment, a solid result that they will be presenting today. Thank you.

Thank you very much, Andreas. Good morning, ladies and gentlemen. Also, a warm welcome from my side. My name is Frank Rehfeld. I'm the CEO of LEM. And 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 in society to transition into a sustainable future. This is the agenda for today. So I will basically start with a little intro. Afterwards, we introduce the business performance. Andrea will focus on the financial results, and I will then both introduce the outlook as well as the sustainability report before Andreas Hurlimann, our Chairman will share the proposal to our shareholders with you. When we met last time 6 months ago, we looked at our half year results and could report an impressive revenue growth of 22% at constant currencies and 13% in Swiss francs. We already foresaw that this growth speed would not be sustainable short term and that we would have a rather difficult second semester ahead of us. This is exactly what we've been facing 7.2% revenue growth in constant currencies that translate in no growth against '22, '23 in Swiss francs. In particular, our China sales were weak throughout the whole financial year caused by slow investments and high stock levels in the supply chains. At the same time, also the fact that we've been losing market share in automotive and renewables during the supply chain crisis. And not to be forgotten, 1/3 of the low sales in CHF can be attributed to exchange rate effects. Our other regions could overcompensate this in the first semester. However, not anymore in the second. We nevertheless managed to keep both gross margin and EBIT at good levels despite the fact that we were continuing investing both in people, as well as in infrastructure. Growth stories are no fairytales. LEM is facing headwinds, and we take the challenge. We further drove our transformation also in '23/'24 and will continue to prepare LEM for CHF 600 million and plus in the future. We fully believe in a more sustainable way of living and working in the future, and that will drive our key markets. We are committed to continue to invest in R&D also in difficult times. We're about to extend our Chinese research activities by an additional R&D site in Shanghai. In Europe, we've been establishing 2 new sites: a new R&D center in Sofia that is going to focus on software development and the development of products for the smart grid infrastructure. It is located close to our manufacturing site in the capital of Bulgaria. And we opened an R&D center in Munich in order to extend our semiconductor activities. The electrification of mobility, the generation of renewable power, as well as the more efficient energy use must be affordable. We therefore plan for the next generation of current sensing that will be used in miniaturized power electronics. We've therefore entered a partnership with TDK, the company with most and longest experience in TMR technology in order to prepare this future. And we're also committed to invest into our manufacturing footprint. We've been inaugurating our fifth plant in -- on April 19th in Penang, Malaysia. That was finished ahead of time and where already the first production lines are running. This new plant that has about the size of Beijing will help us to give LEM sufficient space for the next growth steps, [ balance ] our manufacturing footprint in the world, especially for Asia, this means that our Beijing plant will focus on China for China and Penang on the deliveries to other Asian countries, the Americas, as well as Europe. And last, but most importantly, the new location of Malaysia will allow us to tap the talent pool of Penang with respect to semiconductor competencies in particular for back-end processes. We have today in Penang a team of 70 people, who are eager to make this plant a lighthouse for the new LEM manufacturing and supply chain standards that we are rolling out. Now let's move on to the business performance in more detail. Following our business structure, you see here the development of the 5 businesses in comparison to last year. Important to mention is that all businesses, except automation have been growing at constant currencies and have been differently impacted by the strong negative currency impact depending on the exposure to the different geographies. I will explain each business segment in greater detail in the next slide, but would like to mention that all those markets cannot easily be compared, as they are following different cycles and growth rates, different geographical exposure and technically and as well as cost-wise, different challenges. Here, you see the distribution of our businesses relative to each other and their development against '22, '23 in CHF. In comparison to the half year picture, '23/'24, there have been no major changes in the business sizes relative to each other. Since the automation business was shrinking by almost 12%, mainly impacted by cautious investments in uncertain times and strongly impacted by negative exchange rate effects, its share in the total business reduced from 33% for full year '22, '23 to now 30%. In [ Q3 ] and Q4, our weakest quarter of the financial year '23, '24, all businesses were below Q3, except energy distribution and high precision that grew mainly driven by DC meter deliveries. The long cyclical traction business showed growth against '22, '23 in each quarter, driven by order backlog and equipment upgrades in the traction metering area due to updates of standards in Europe. Analyzing the business now one by one, I'll start with our biggest business automation that represents 30% of our global business. You see here a turnover plotted for the last 5 years. Our automation business was shrinking 5.5% in constant currencies and, as I said, by almost 12% in CHF. Growth, you only saw in the first quarter, the following quarters were all weaker than in the previous year. The development is not a surprise, delight of the drives, robotics, automation business development of our customers that saw all in all reluctant in investments and also rather high stocks. Also, the business in China was subdued based on the low export volumes that China showed throughout the last year. Our automotive business was growing by 7% in constant currencies, however, shrinking 2% in Swiss francs. Here, in particular, the weakening renminbi has had a strong impact. The new energy vehicle market is a game changing. While we were once convinced that PH EVs plug-in hybrid vehicles would be only a bridge technology that would quickly disappear. We see an increasing share of plug-in hybrids worldwide and slower growth of pure battery electric vehicles. We see the reason in increasing energy prices, the slow build of energy of charging infrastructure and the lacking subsidies in the light of the still higher battery energy vehicle prices. Nevertheless, the new energy vehicle market is growing globally, and we have been losing market share in China to aggressive competition. We learned our lesson and the new leadership team in China has a particular focus in automotive, fighting back through cost optimization, R&D investments and strengthening the customer-facing teams with sales and feed application engineers. Renewable energy, now 17% of our business is including the solar and wind power generation. The business was growing by more than 15% in constant currencies or 5.6% in CHF. However, looking at the global growth of the installed solar capacity of more than 50%, we see in the midterm by far more growth potential than what we showed in this year, in particular, due to the lost market share due to allocation times. The second semester was weaker than previous year, mainly driven by Chinese inverter manufacturers that have high stocks and foresee also a difficult year 2024. Chinese exports declined as a result of the geopolitical tensions. Nevertheless, we see the market for renewable energy generation continuing to grow and with it the need for energy storage. Energy distribution and high precision continuing to represent 15% of our global business contains our high precision business, smart grid solutions, energy storage, as well as DC meter for fast-charging stations. The business grew by 8.2% in constant currency and 2.6 in Swiss francs. Also here, we saw a slowdown in the second semester in all application areas, except for the smart grid products. The charging infrastructure as a key enabler of the BEV growth is under heavy cost pressure, and we see numerous Chinese players entering with very competitive prices. We are working already today with several of those Chinese players for the export business and to design in our products to them. At the same time, we work on next-generation DC meters that are cost optimized to new architectures and also standards. Our smallest business truck contains all solutions LEM has to offer for trains, metros, subways, trams for both rolling stock, as well as trackside. It grew to a 14% share of our global business and had an exceptional growth with 35% in constant currencies or more than 29% in CHF. We grew in every quarter against previous year and eventually could deliver outstanding orders from the previous reporting period and profited also from the update in our energy meters in locomotives, as well as the very strong demand in China. This very strong growth rate has to be understood also in comparison to a rather low base in the first semester '22, '23. Now projecting the business from a regional perspective, we see important changes in comparison to '22/'23. What is most apparent is that EMEA and China changed their positions. For a long time, China has been dominating our business geography with shares of around 40% and has now become second after EMEA that moved up from 31% at full year '22, '23 to 39%. The drop of the Chinese share from 39% to now 29% is the result of multiple factors. On the one hand, the strong depreciation of the Chinese currency, the slower economic growth, including also the negative export development, but also the loss of market share in e-mobility and renewables. Our new leadership team in China is fully empowered to take all necessary measures to increase speed and improve our cost positions. Nevertheless, the markets outside China developed nicely, as I already said, in particular, rest of Asia, as well as EMEA. The Americas showed a solid performance with 2% growth in constant currencies. We've decided to further invest into the team to accelerate growth. With this, I would like to hand over to Andrea, who will introduce the final -- financial results in greater detail.

So ladies and gentlemen, also from my side, a warm welcome. As the Group CFO, I will present solid financial results for the year '23, '24, even though they are below the analyst expectations. Let me summarize the financial highlights in 3 points. First of all, LEM had managed to grow its sales at constant exchange rates by 7.2%, which reflects a solid performance in view of the -- of some weakening markets such as our automation business. Second, LEM maintains a solid balance sheet, which is reflected in the equity level above 50%. And the third highlight, the free cash flow generation is solid even though it dropped mainly due to lower profits and higher investments. Now let's have a look more in detail line by line of the P&L, I will start with the gross margin. The gross margin in absolute value decreased by CHF 3 million from CHF 192 million to CHF 189 million. In respect of the gross margin in percentage, we have lost 0.7 percentage points. What are here the main causes for this margin deterioration. In order to secure our supply chain, LEM decided to accept price increases on some very, very critical key components. Those material cost increases could only be partially be compensated through purchase cost reduction on other components and also positive sales mix effects. For the future, we expect the material cost to come down, which we actually need to face a more stiffening competition. Our 2 low-cost locations situated in China and Bulgaria cover today, 80% of all sensors produced by LEM. The construction of our Malaysian site is now finished, and we will witness a shift from China to Malaysia over the coming months and years. Overall, the percentage of our low-cost location is expected to further increase in the future. SG&A, those increased by CHF 6 million compared to previous year, which are mainly related to increased investment in our digitalization projects and as well in our Malaysian production site. LEM as well decided to lay off 40 employees during the fourth quarter of this year, which resulted in additional non-recurring severance costs in our profit and loss statement. Overall, the personnel costs, they remained basically at the same level as last year, as the total headcounts remained stable with the exception, of course, of the new Malaysian site. Let's talk about R&D. The R&D expenses, those increased by close to CHF 2 million, whereas the R&D percentage increased slightly to 8.3%. That increase of those R&D expenses is mainly driven by the R&D head count increase of 30 employees compared to last year. 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. For that, we have now additional R&D centers, as mentioned before by Frank, in Munich, in Sofia and also more and more in Shanghai, and they shall contribute to this positive development. Going forward, the R&D expenses are expected to remain in the 8% to 10% corridor. Financial expenses, so below the EBIT now. Even though a currency gain of CHF 1 million could be realized during the fourth quarter of this year, LEM suffered the full -- for the full year, a foreign currency loss of over CHF 3 million, and this as a consequence of the Swiss franc appreciation over the last 12 months. This Swiss franc appreciation is against all major currencies of the last year. The gains from the hedges, they only could marginally compensate those losses. The financial expenses were also impacted by the IFRS 16 lease expenses on the one side and as well higher interest expenses on loans, primarily due to the increasing interest rates in Swiss franc, where we have today around 2% and on the Malaysian ringgit, where we have interest rates of close to 5%. On the taxes, the '23, '24 effective tax rate is at 12.9%, which is well below last year's level. There have been, however, been some 2 non-recurring elements. On the one side, we had the tax rate increase in the Canton of Geneva, starting on January 1, 2024, and as well, we had an IP transfer from our Swiss company, LEM International to LEM China. And those 2 effects resulted in deferred tax asset setup. So if you exclude those 2 non-recurring elements, the tax rate would have amounted to a level of 15.5%. LEM continued as well last year to benefit from the HNTE tax status in China, which results in a reduced special tax rate of only 15% instead of 25%. As we speak, we are currently reapplying for the HNTE status for the years '24 to '26. And here, you will find the full profit and loss statement for the proposed full year results, which is on the left side of the table and on Q4, which is on the right side of the table. The Q4 sales ended at a significantly lower level compared to previous year, reflecting the ongoing market weakness and market share pressure, especially in China. The Q4 EBIT rate ends up at 13.2% only. Excluding non-recurrent elements such as mainly the severance costs, which we reflected in the Q4, the EBIT rate would have amounted to close to 17%. So let's move now to the balance sheet, what are here the key points of the balance sheet per end of March 2024. The first highlight or first point I want to mention is here the net working capital. It increased slightly, and this is mainly due to an inventory growth, as a consequence of the lowering sales during the second semester. Second point, I want to underline is the fixed assets increased, and this is mainly due to the investments in -- both in new assembly lines, but as well, of course, in our production -- in our new production site in Malaysia. And the third point is about the net debt. Those increased to CHF 43 million, and this is due to the free cash flow of the year '23,'24 being lower than the dividend paid out in July '23. All in all, those points result in an equity ratio, which is, as I said, in the beginning, remains above 50%. Talking about free cash flow, here, you find the cash flow statement. Both the cash flow from operating activities, as well as the free cash flow dropped compared to previous year, mainly due to lower profit before taxes and higher investments in our new production site in Malaysia. In summary, LEM has achieved solid results in the year '23, '24 with 2 very, very deferring semesters. LEM was faced with slowing markets during the second semester and the impact on the financials are very visible. You may now wonder what the future will bring to LEM, for that, I'm happy to hand back to Frank.

Thank you very much, Andrea. Yes. Let me now elaborate a bit on the outlook for our business. For those who are attending our Capital Markets Day 18 months ago, this slide might look familiar. However, I wanted to share with you again how important the business transformation is that we are driving that is yielding results. We see here the share of the 2 business types that we are calling heritage business in blue and our megatrend business in green. And what is actually comprised in these businesses -- for megatrend business, automotive, renewable energy, smart grid, charging infrastructure, and for the heritage business, the automation, track, HIP and UPS. This shift towards more and more megatrend business gets driven by the substantial R&D investments we are doing, while upgrading our processes and also working on our corporate culture. Alongside with that, we see that the megatrend markets are growing faster than the heritage markets. Whether this development continues also in the future with this speed will depend very much on the geopolitical tensions, in particular, the shift of substantial financial means into defense budgets rather than into the transition towards a more sustainable world. Now what do we expect for the current financial year '24-'25? Looking at all our markets in which we are delivering, we see a rather moderate development in '24, '25 for our global business. The development we've seen in the second semester of the last financial year will continue for some time, mainly driven by inventory levels that result from overstocking during the supply chain crisis and investment reluctance. However, we hear positive signals from our customers with respect to the second semester and expect some improvements from autumn onwards. We continue to invest into R&D, into our customer-facing teams, as well as an improvement of our processes since we are confident that the megatrend of sustainability is going to further drive our growth. Now we've been taking a new chapter in this year's agenda, the sustainability report, and I'm very happy to shortly also introduce this to you. Under the leader of our Chief People and Sustainability Officer, Rodolphe Boschet, we have published this year for the first time, a sustainability report. You find the document on our website together with our annual review and this presentation. LEM is committed to reduce its Scope 1 and Scope 2 emissions by 2025 to net 0 and Scope 3 by 2040. Consequently, the senior management, including the executive team have accepted to link the bonus payout with the achievements of those targets. A cross-functional team has been re-baselining our situation according to the Swiss law and prepared a long-term road map following a double materiality assessment that allowed us to prioritize the top 8 focus areas on which we want to work. We are very much aware that the achievement of net 0 by 2040 and therefore, the reduction of our today 200-tonne CO2 footprint to -- 200,000 tonne CO2 footprint to less than 20 tonne will still grow -- while still growing is a huge challenge, and we are just at the beginning. However, the high level of engagement of our teams to work on this target in line with our purpose, makes me and the leadership team confident that this target can be reached. And with this, I would like to hand over to Andreas, who is going to introduce the proposal to the shareholders.

Thank you very much. Thank you, Frank, for your introduction also to the non-financial reporting, which is new. Can you hear me? Yes. Okay. Good. Well, let's move on. I'm pleased to introduce you to Dr. Libo Zhang. Ms. Zhang is an experienced Board professional, corporate finance adviser, and brings multiple years of experience in management in areas of finance, controlling and commercial processes having worked in international industrial companies across Europe, Americas, and Asia as well. Among other mandates, she is a member of the Board of Directors of the Swiss Technology Group, VAT, whom probably you know most of you. Ms. Zhang was CFO in the automotive manufacturer Borgward Group in Germany and of FFG Europe and Americas, a worldwide specialist in tooling machine industry. So both industries, which were very active. Before she held management roles in finance and commercial operations at SGL Carbon, MTU Aero Engines, MAN, and Siemens. Ms. Zhang lives with her family in the [ Swiss Romandy ] to be more precise in the Nyon area. She is German citizen and holds a PhD in Economics and an MBA from Georg-August University in Gottingen, Germany. The Board of Directors is convinced that with her background know-how and experience, Ms. Zhang will be a very valuable contributor to the future of LEM. We had multiple reasons in recent years to be distracted from our long-term view, but we were not. We are now, what I would call, at the tail end of the supply chain bullwhip effect, namely overstocking at our customers, yet we had to -- we had no reason to change our strategy. Our scenario for the future and Frank mentioned the megatrends, they remain intact and will provide structural growth that we can capture. So are our ambitions and strategic investments, such as the significant R&D investment in -- with the examples of the new centers in Munich, Sofia or the collaboration with TDK, our projects to further derisk our supply chains, as evidenced by the go-live of our factory in Penang 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. The Board considered carefully profit and cash flow, the underlying strength of the business across the various business sectors and geographies and the general economic uncertainty ahead. Our long-standing dividend policy is to distribute significantly more than 50% of net profit to our shareholders. We are, therefore, proposing to our shareholders a dividend of CHF 50 per share, which represents a payout ratio of 87.3% and a dividend yield of 2.9%. It also reflects the solid performance and demonstrates our trust in the long-term fundamentals of the business and LEM's future. We continue to make significant investments in talent, R&D, business development and marketing as well as operations. IT, in particular, infrastructure, which results in new products, enhanced value-add and increased market share, as well as our more robust geographic footprint. With that, -- we've had that. That's a long-term view. And with that, I would like 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. I also thank our management team for their prudent and empowering leadership. We would also like to extend our gratitude to our custom suppliers, the business partners for their continued trust. We thank our shareholders for their confidence, as many of you represent here for their confidence and they continue to place in us, and we thank all of you for your interest in LEM's performance over the past year and in our future prospects. Now let me wish you all the best, and we are now looking forward to taking your questions. Thank you very much.

Please allow me organizational work before we start with the Q&A, as we also have audience joining us on a web call, on a telco, on the webcast. I would ask you to take the microphone to ask your questions, so that they can hear you. We would like to ask you to introduce yourself with your name and name of the company. We will take first the questions here in the room, then they will go to the questions coming from the telco and then from the webcast, and then we do another around. So please, who would like to have the microphone for the first question.

Tobias Fahrenholz from Stifel. Sorry, but I have to ask on the guidance again. What do you mean with moderate? Can we maybe overall expect a flattish top line development this year? And especially, could you comment a little bit more on destocking. This looks very volatile from competitor to competitor. What the size you have -- you're looking at? And is the destocking mainly coming in the running quarter or maybe also the quarter afterwards? And what does this obviously mean for EBIT margin? Do you expect the 20% or not?

So you want us now to project us at the end of March 2025. And if I would be able to do that, that would be great. But unfortunately, we are not. So for sure, there are uncertainties in this market. And obviously, these uncertainties vary market by market and depending on the cyclical and -- on the cycles each market has. So we typically forecast basically total year revenues and EBIT spends by yes, after 6 months of the financial year. At the moment, we basically cannot go beyond what has been already said. Just to repeat that, we rather see the level of Q4 continuing for the time being and expect a pickup depending on the different markets for sure, not equally, but rather in the short cyclical market from autumn on, that's basically what we foresee. And for margins, we typically talk about 15% to 20% as the ambition for our profitability, and we don't want to make changes here to this ambition. I hope that this justifies all its cloudiness your question.

Okay. And maybe on the midterm view then, is it still valid, the CHF 600 million in '27, '28.

So we -- we still have the same ambition, and we have no doubt about the long-term growth. And therefore, the CHF 600 million, even a longer outlook towards CHF 1 billion is from the markets and the market growth that we see very, very realistic and this ambition has not been changing. The short correction effects that we see here, and you see that also in the way we react. We don't basically reduce our R&D investments. We go further forward and also invest into manufacturing capabilities. We are believing in this growth story also for the future.

Charles Bordes [indiscernible]. Do you hear me? Can you be more specific on China, maybe the situation, and the key question for me would be business seems to be under pressure on pricing, competition, quality seems to come up to your level. So do you deliberately let go business and in which area would that be? So what's the strategy in China, so to protect margins, prices, et cetera?

I think a very good question. So China is, for sure, one of the most debated markets. And obviously, this was also the market, where we were not performing as we wanted. So China has been basically strongly developing in the COVID's time and basically switching 2 gears up, where we were busy in making sure that our kids can go to school, and we see basically now the results of this. So we see an increased competitiveness and increased knowledge level, and we need to face this. And LEM is, I think, very well set up to face this because every second LEM employee works in China and basically has a Chinese DNA, and we want to, for sure, leverage that. So with the organizational change, we want to make sure that this team is empowered in order to shorten R&D lead times get down in the cost to become Chinese, Chinese and drive with the right ambition basically. So we don't want to give up. We had to give up some because we could not deliver, but we strategically want to regain those market shares and believe also that we have all the means to make that.

Other questions?

Arben Hasanaj from Vontobel. First of all, on those layoffs. So I was wondering those severance costs, will they -- will you also have some of those in the start of the year? And also, specifically those layoffs kind of in what areas were they? Or did you relocate maybe if you could elaborate?

So the severance costs were booked in the Q4. So we have no further costs coming from there. The positions concerned were a bit throughout, but it was mainly in operating expenses. So SG&A, EBIT, R&D. And some of those positions, yes, they are being affected in Geneva and then created in other places, more cost competitive places.

And in terms of those digitalization investments and also R&D, can we expect that to remain rather elevated, let's say, in the near term?

So in respect of digitalization, we do -- and maybe you recall we have a major, let's say, project in introducing a new ERP and lots of other systems. And the ambition is really to provide a very automated, strong best practice backbone for our processes. And we are in the middle of the implementation. So in the year, '24, '25, those investments, those expenses will still persist. So we see that. In the, let's say, more in the medium term, of course, we will then reap the fruits, saying we will, of course, not have those investments anymore. And we, ourselves, give ourselves the ambition to actually increase efficiency, and this will then to support, as well, the future growth. On the second point, R&D, yes, we will also here continue to invest -- the investments because in the end, it's so critical. The long-term success of LEM is that we develop products, which are competitive and which the market actually demands. So you will see here continuous investments. And Frank just mentioned, we have actually just opened up a couple of new R&D centers, be it in Munich and Sofia. So this is a very clear commitment to the long-term growth.

And then just a final one in terms of those integrated current sensors, so if you could comment maybe, yes, how happy you are with the success of the products you've launched maybe market share, how that has developed?

So we've started this endeavor in 2017, and we are not yet fully happy with the success. That was the reason why we've been opening a second R&D center in Munich to actually accelerate to boost the activities. I'm very clear, we have been building up a group around Geneva, but see that the ecosystem in Geneva doesn't really allow us to get all the talent that we need to further boost. This is the reason why we eventually decided to move to Munich and actually take over a complete team from another company, and we expect that is also going to further grow. So at the moment, we are a bit too slow, which is, for sure, something we are reacting to. On the other hand, the future conversion from conventional current sensors towards ICS products is so important that we have sufficient opportunities to also grow and have an important position in this future market. So we don't plan to give up.

Ferran Tort from Kepler Cheuvreux. I would have a couple of questions on the sales development. If you could give like a little bit of guidance on the difference between like -- or the impact from market share loss and economic slowdown, how would you categorize more or less? And then on pricing, could you comment a little bit on the development there on pricing? And then, I would have like a question on the heritage and new business. How would you split like the difference between like a cost-competitive business also like which part of the new business is defended by IP and innovation and which part is going to go down to cost competition, like basically, what you mentioned before, going back to China and compete there. So somehow more protected than just volume business.

Thank you very much. It sounds like we can do a complete business review across all the businesses. Let me give a couple of bullet points here. To differentiate between economic slowdown and market share loss is not always easy because even when we see that end markets grow since basically the amount of money you get per current sensor is going down. This is obviously not directly linked or there is at least a correction factor that you need to have in mind. We clearly saw that -- in China, we lost market share in automotive and in renewable, in particular due to the fact that we could not deliver in the supply chain shortage times. And there is obviously no room to catch up. Pricing will, in particular, in China, always be a very, very important part and it's rather increasing than becoming smaller. And we have to react as an organization to that. We also see that the competition in China amongst Chinese is as tough as it is also with us. So it's us to obviously need to be able to respond to that. Therefore, we are set up to do that. And the team has been understanding the situation, we see also positive customer reactions to the new speed that we are already showing in the market. So I'm here rather optimistic. But the topic of cost pressure will prevail, and there is no way out, and it's not only cost pressure, it's also speed pressure. So what we do in 3 years is done in China in 18 months. And also here, we need to follow, we need to basically be fully in this rhythm. And like I said, we've been with our organization that is basically focusing on Asia and on Europe, Americas with separate leadership teams also set up that these fully empowered teams can do that and execute accordingly. Talking about competition, whereas competition fiercest, it's probably true that in all these markets that are led by China, the competition is most fierce. So we talk on the one hand about the automotive market, where 60% of the world market is happening in China. And also talking about the renewable market, where from our customers, more than 80% of the global market and our customers are the inverter manufacturers, so those who basically provide the equipment between the solar panels and then the grid. And again, here, this is 80% a Chinese market, and they are driving this market, and it is a ruthless competition between those players. And these are all not small companies, who faced very, very tough competition, and we are in it, and we need to face it. But I see that rather as a sporty challenge then as a reason to complain.

Daniel Koenig, Mirabaud Securities. I have one nice question and then one more difficult question. I was wondering, EMEA is so positive? Is that likely to continue this year? Or I'm just wondering what the medium term and the short term brings. That's the nice question.

Good that you say it.

And then the second question would be your plant in Penang. I was wondering it's now in a ramp-up phase and I saw a statement that it would be at full capacity in '27, '28. I was wondering, does this mean -- ramp-up means always a little bit lower profitability or one-off costs or things like that? Can you elaborate what Penang means for profitability this year and maybe next year?

You take the less nice one and I talk about Europe.

For sure. Good.

And so, in Europe, we don't see a short-term improvement. So when we talk about improvement and improvement signals, then we expect them rather coming from Asia and Europe, we see rather a subdued numbers also minimum now for the foreseeable time frame. And when I talk about foreseeable, it's sort of a 3- to 6-month time frame. That's what we see. Asia, more agile, in particular in the renewables market. And we see the first glimpses that this could start probably not fully in 2024 and very strong then again in Q2, 2025. That's at least the messages, but we expect to see signs already in 2024. And in respect of, say, the less nice question about Penang, it's really about absorption of the fixed costs. That's the question. And what kind of fixed cost we have. The major one are supervisors, the personal cost of supervisors, the amortization of the assembly line, these are the main fixed costs. And the most critical thing is that the few assembly lines we have in this year in Malaysia, they're running at full steam. This is then really helping the profitability. The amortization overall of the factory itself, it is not as a huge financial impact. So it's really about -- even though, let's say, the factory is not fully loaded, the question is more are the lines loaded. That's the most critical one. But overall, for this year, '24, '25, one can expect a certain, let's say, pressure on the gross margin, slight pressure coming from, let's say, the underutilization of this factory.

There are currently no other questions here in the room. Please, operator, do we have questions from the telephone conference.

Thank you. [Operator Instructions] At the moment, we have no questions in coming, so I would hand over back to you for now.

So then we go to questions from the webcast. As a reminder, there is a question mark sign on the webcast surface on the left-hand side, if you want to ask a question. And there is the first question from Reto Huber, Research Partners. He asked how many extra costs, meaning costs related to the renewal of the ERP system and similar costs and other restructuring are you expecting in the next few quarters?

So in respect of extra cost for the ERP project here, you will see the same level as this year. We cannot expect any major increase or decrease on the P&L. In respect of severance costs, one cannot foresee. This is not one thing that we now would publicize, but it depends also very much on, let's say, the future development of our business.

And then the Reto's second question regarding DC meters, demand for DC meters for charging stations slowed significantly why? And what are your expectations for the next few quarters?

Yes. DC meters have been cooling a bit down now not really because the market is down, but because also our customers have been losing some market share. At the same time, we see increasingly Chinese players coming into this market and providing solutions that are by far more competitive than what the established players are able to offer. So we are already working with them in also -- in order to get our products designed in. And at the same time, we expect that our future solutions that are basically meeting new infrastructures and new standards are able to grow again. But these will then be at substantially also lower cost level. So the story that applies in the, let's say, standard current sensors also implies in these more expensive energy meters. There will be cost pressure everywhere in order to make this a way to sustainability affordable. So we expect growth, but it will probably be less steep than it was when we launched the DC meter for the first time, but further growth in the future. Hopefully [indiscernible] the question. Yes.

Yes. I presume. There's another question from Lucas Glemser from Berenberg, who asked you if you could talk about the potential effects of the newly announced U.S. tariffs and how they will impact LEM?

Andrea, do you want to.

Yes, okay. We -- of course, as you heard before, we have transferred or are transferring quite some assembly lines to -- from China to Malaysia. And the whole purpose was really to get, let's say, not exposed to further increases -- tariff increases because at the moment or, let's say, over the last -- in the past, all the Chinese products were suffering these kind of tariffs. So in respect of priority, we, of course, shift assembly lines to Malaysia, also which -- for products, which go to U.S. So in the short to midterm, we will -- this will not have an impact on LEM.

There's another question from Miro Zuzak from [indiscernible] Invest, who is asking, which P&L lines, the one-off costs have been booked?

Yes. Again, as I said, it is on different lines. You have -- but the majority of it is in operating expenses. And I would say, it is probably 2/3 SG&A and 1/3 R&D, so over the rule of a thumb. And here, I'm talking about the severance expenses.

So there are currently no more questions from the webcast or questions here.

Ferran Tort from Kepler again. I have one question related to your tariff in China. There are some rumors or it's been published that China is intending to basically localize more of the supply chain, especially on the OEMs. So I was wondering how that could affect you? And then somehow related to the HNTE tax benefit. How likely is it that you're going to basically renew it?

We'll start with the first localization of supply chain. Yes, this is happening, while we are speaking, and we do exactly the same. Now we are already localized in China. So a large extent of our bill of material that we are using for our products are already localized, and we will further work on localizing this. And the intention is very clear. The independent from outside is a strategic key criteria for China being faced, obviously, with multiple decisions to basically not being allowed to ship to the -- to China, in particular for U.S. players. We believe that being a Swiss company, we rather have here an advantage coming basically from a neutral ground and being fully localized in China. HNTE, Andrea, maybe you want to so...

Of course, tax regimes, you never know how they will evolve forward in the future. At the moment, there is no indication of any changes. So we are currently applying again for the years, '24, '25, '26. But in the long term, we can answer. But I would say in the short midterm, I think we will be able to defend this so-called HNTE status.

And sorry, a follow-up on the IP level on the localization, does it have an impact? For example, if you have to transfer any R&D from, let's say, Munich or any R&D is going to be done in China for China from now on basically?

So the IP level has a big impact on the HNTE status. So the prerequisite to get this high and new technology status in China requires that certain IP is also in China. So this is, for sure, a very key topic also for us to basically make sure that the status can be guaranteed.

But what we do is, all our R&D centers, they do our R&D -- contract R&D, and they are invoicing their services to our head, let's say, to LEM International in Geneva. So the owner for all the IPs developed is LEM International until we decide to partly transfer it to LEM China to defend a potential HNTE status.

[indiscernible] from AMG. Maybe a simple question, but this -- can you elaborate a bit more on the geopolitical tensions between China and U.S.? And how would your business be impacted if Taiwan would be -- become a conflict?

Now already many people elaborated on this. I think the way we believe we can react on that is to basically be fully flexible. You've seen with the organization that we've implemented in April 2022, we somehow were already foreseeing that there will be 2 probably differently behaving worlds. And with further localization in China with basically reducing export from China, in particular to the U.S., but moving this to Malaysia, there are a lot of steps that basically will allow us to be least impacted by those tensions. And we believe we are here really on the way to set that up. Now Taiwan is something that probably is very difficult to foresee what would be the global reaction towards China, when China would make such a step because this would then be potentially have, again, an impact on whatever sort of supply chain. So therefore, here a forecast is probably very, very difficult. But I don't foresee something like that in the next 2 years, 3 years, 4 years. This is probably something rather -- when you look at the China ambition to having finished this by the 100 years of the establishment of China. So that means in 2049, there is still a bit of time until something like that would have been realized. We don't foresee that for the very short term, in particular, since also China has a couple of challenges internally with an aging population with basically not having yet a social network that I would not assume and for sure, also China, the Chinese renminbi is not fully convertible that such a step would be foreseeable for a short-term sort of look.

Daniel Koenig, Mirabaud Securities. I had just one question because I remember a previous meeting, there were at least 3 or 4 questions on the cooperation with TDK and now I haven't heard anything. So I'm very curious what has happened with that cooperation of TDK and their TMR product?

Okay. Sure. I've been mentioning this. So I'm sorry, when I was there not clear enough. So this was on the R&D slide. So this is ongoing. And we are working very well together and very closely together. So this is making progress. And we basically expect towards a time frame, let's say, '26 to have products on the market. So this is something that works very, very well. And both companies are committed to this cooperation, and we fully believe that this was the right step to move forward.

Seems there are no more questions here in the room. There are no questions either in the telephone conference nor the webcast, which means so we're coming to an end of the official part. We say thank you very much for your interest in LEM Holding. We say goodbye to the participants that joined us virtually. And of course, you here are all invited to the standing lunch, which takes place in the [indiscernible] room. If you leave the room to the right-hand side and LEM Management will be glad to continue this discussion with you. Thank you very much.

Thank you.