Sensirion Holding AG (SENS) Earnings Call Transcript & Summary

Dear, ladies and gentlemen. We would like to welcome you to Sensirion Holding AG's conference call on the results of the half year 2021. From Sensirion, Marc von Waldkirch, CEO; Matthias Gantner, CFO; and myself, Andrea Wüest, Direct of Investor Relations are present. There first will be a presentation, followed by questions-and-answer session. Please note that this event will be recorded. [Operator Instructions] The presentation can of course be viewed online during the call if I had to go with continuing access. Alternatively, in case you only dialed in by audio, the presentation can be accessed with Sensirion's Investor Relations website under Reports and Publications. With this, I hand over to Marc von Waldkirch.

So thank you, Andrea, and also a warm welcome from my side to this earnings call this morning, and thank you for your attending and for your interest in Sensirion . You hopefully see the slides -- the shared slides. Otherwise, you have also them the -- on our Investor Relations site on the Internet. I start with a short business review before I hand over the -- to Matthias Gantner for -- the CFO for the financial details. So if we are looking back for the first half of the year 2021, this was, again, an extraordinary time. It was different than 2020, but this was still extraordinary. Besides all ongoing corona restrictions, we have faced a very strong recovery and demand increased across all markets. But in parallel, we had a very, very strange and challenging chain -- supply chain situation. And this supply chain situation remains also extraordinary in the upcoming months. And it was not put for the wafer supply, but it was also for any other materials. And I'd like to start here, probably also in an extraordinary way with a big thanks to all our employees in that respect. Because at the end of the day, all the financial data we can present today, and they are pretty good, is actually based on the great efforts all our employees have done in these very strange and challenging times. So a great thanks to all the employees. If we come to the business, a short review. First of all, we have our core business that means all we are doing in normal times, excluding the additional sales from the COVID-19 ventilator business. So we -- in these core businesses, we reported very strong growth of more than 35%. This was driven by 2 different parallel aspects. On the one hand side, our established products like gas flow and humidity sensors, they have recorded a significant post pandemic recovery. On the other hand, we have a numerous number of successful ramp-up with new products. So CO2, but also formaldehyde, particulate matter, and they also contributed significantly to the growth rate. In this COVID-related and extra business is medical ventilator sensors, we have seen a decrease as expected, but we had still a contribution of CHF 17 million to the revenues this year. As communicated in March already, we assume that this extra business is doubled and will continue as normal business from now on. Beyond the normal business, we were able to further strengthen our technological base through targeted acquisitions in line with our long-term growth strategy, which was, in detail, presented in March on our Capital Markets Day. Finally, before I come to the financials, I would like to say a few words about the current allocation situation in the semiconductor industry. As I have already mentioned at the very beginning, the situation is and remains very difficult and it's not limited to wafers and semiconductor-related products. But also affects other material groups such as chemical adhesives or compounds. We do not foresee any relaxations in these regards in the coming months. However, we are proud that despite this tense situation, we can continue to offer reasonable, not the normal one, but reasonable delivery times to our customers, and provide our customers with added value compared to certain competitors. Some words about the financials. The favorable conditions in this half year is also reflected in the financial figures. We closed the half year with a strong growth all in all. So including the extra business with a growth rate of 27% to CHF 144.3 million. Profitability reached extraordinary 61.9% for the gross margin and extraordinary 31.8% for the EBITDA margin. The details will be provided later on by our Chief Financial Officer. However, I would like also to emphasize already at this point that this current profitability levels are exceptional and not sustainable. We benefited from strong one short-term economy of scale effects, but also from onetime effect. On the other hand, we are in the process of further strengthening our efforts in R&D and business development in order to be able to address additional longer-term opportunities as we have outlined them in the Capital Market Day in March. However, the necessary increase in personnel has not yet fully impacted in the cost structure today. For the full year 2021, we confirm the revised and raised guidance as communicated in July, and I will comment it further at the very end of this short presentation. Now on Slide #4 to 8, I'd like to shortly review the business market by market. First of all, about the automotive. We recorded a strong growth of 33% in this market. In contrast to the previous year, this was mainly driven by the Tier 1 -- Tier 2 sensor components business rather than by Tier 1, which was actually very strong last year. At present, we do not see any reduction in demand as a result of the numerous automotive production closures due to the shortage of raw materials. We, therefore, assume that part of this demand will be used to build up stocks. This is just an assumption we have. We do not have any hard facts from our customers. In addition, we see a steadily increasing market share as well as an increased penetration rate of our sensors solutions. In the medical market, we are, as already outlined before, we are back in normal business. In the first half of the year, COVID-related sales reached another CHF 17 million for special sales. However, the backlog has now been processed. So we do not expect any further special sales in the second half of the year. The normal sustainable business developed flat and stable. A completely different picture can be seen in the broadly diversified industrial market. Here, turnover increased or exploded by a very strong 68% to CHF 61.9 million. The main drivers here were important customer ramp-ups with our environmental solutions such as CO2, particulate matter, the PM2.5 and also our new formaldehyde sensor. In addition, we recently launched an environmental combo modules which is consisting of 5 parameters in 1 single housing. And this is best suited, especially for air purifier applications. And air purifier applications. On the other hand, is highly driven by the post-pandemic discussions about our world's infection. By the way, in any way, the pandemic has greatly increased the sensitivities to good indoor air quality. It's actually not just a driver for air purifiers, but we see also a triggered demand for CO2 sensors not just limited to school room as they are typically -- we have the discussions here in Switzerland, also in the newspapers. Last but not least, the consumer market, some words about that. This market, again, to remind you about that, is a highly fragmented market. They are not actually main players there. There are a lot of smaller or mid-sized customers there. Here, we see a similar picture as in the industrial markets. Also there, the demand for gadgets to monitor indoor air quality, so that means a table-based small gadgets to indicate the CO2 level and so on, is strongly increased and which also triggers the demand for humidity. I would like now to hand over to the Matthias Gantner for all the details about the financials and his comments about it. So please, Matthias.

Thank you, Marc. Dear audience, and also welcome from my side. Of course, it's a pleasure for me to report about this good numbers we achieved in H1 2021. Here you see, again, the set of KPIs, Marc has already spent some words on that. It is -- we are very happy to see that from our perspective of our KPIs, we can see this set in a very good shape from the perspective in terms of the market demand, in terms of profitability and in terms of cash generation. So for us, it's, number-wise, a very successful period we can report about. For the sake of good order, I just want to recall that with this first report of H1 2021, we, for the first time, report following the accounting standards of Swiss GAAP FER. We have communicated this change early this year in March. But as you might remember, if we look at the profitability numbers, KPIs, especially EBITDA, there is no significant change following this change in the accounting standard. Looking at the revenue development. We see overall 33% organic growth. When we eliminate the COVID-19 impact, which was declining from CHF 21.4 million, down to CHF 17 million during the last 6 months. This is a decline of minus CHF 3.8%. So -- and also, if we look at the contribution that we got from our newly acquired companies, young companies in a more or less start-up phase, this contribution is only marginal with CHF 1.5 million. For 2021, the FX impact is according to the currency development where our main portion is in U.S. dollar and euro and with a minor impact also from Korean won, we lose here another CHF 4 million. So all in all, this ends with the already mentioned CHF 144.4 million of total revenue for the first semester. With the strong growth on the top line, of course, the result is a much better gross profitability. Gross margin is jumping up to CHF 61.9 million (sic) [ 61.9% ]. So the driver here is that we now see a much better capacity load on our operations facilities. This is valid for all the 3 production sites that are up and running, Switzerland, China and Korea. And so we look forward that we can have the opening of our new production site in Hungary quite soon. That will give some relief, especially on the operations organization in Switzerland and to take out a lot of pressure here and also, of course, to support the further growth. Looking at the overhead situation, the development is quite smooth. So also here, we get out some economy of scale by not increasing our overhead cost linear with the growth on the top line. Of course, we would have liked to engage and to empower our R&D resources much faster as Marc already mentioned. So -- but the job market is dried out. So it's very difficult to find good talent for us, but we do our best. So for R&D and SG&A, the increase of the cost is mainly driven by the overhead cost of the new acquired companies and, of course, by initial costs that are coming up with the start-up period for our production site in Hungary. As a result of this variable and fixed cost deducted from the top line revenue, we see this already mentioned impressive 31.8% EBITDA margin in absolute numbers, close to CHF 46 million. On the bottom half of this page, it is illustrated with the waterfall chart what is the driver for this. As mentioned, it is mainly the increase in the gross profit by more or less stable overhead cost and depreciation. A look top-down at the income statement, especially below the operating profit, net finance result is driven by unrealized/realized gains on FX. And especially the income tax, which is here, if you calculate it down in a lower percentage, this is mainly influenced by all the initiatives we took with the Swiss tax revision, STR 17, where we can get quite a good benefit out of that. And we, of course, calculate with all these elements focused on R&D expenditures, the patent box model, all that is possible. So also for midterm, we can calculate with the tax rate for the group. Of course, if there are no structural changes of the group structure, then we can also, for the future, calculate with a tax percentage rate in the lower 10%. A look at networking capital. The inventory has only marginally increased in 2021. This is not -- was not our ambition. We even would have liked to build up some buffer stocks due to the harsh situation in the supply chain, but driving here the net working capital up to CHF 56 million compared to the CHF 46 million at the end of year 2020, it is just the trade receivables at the end of June, which amounts up to CHF 36 million. But looking at the receivable situation, we see absolutely no additional risk on our debtors management. DSO remains stable with around 45 days. Talking about CapEx, we see this very stable compared to the previous periods. Also here to recall all the invest that is done in Hungary, especially about building. This is a build-to-suit project. Here, we don't spend money in concrete. We have a long-term lease contract for that facilities there. About the statement of cash flows. Here, according to the Swiss accounting standards, we can report CHF 39 million operating cash flow and accounting standards asked us to report some proceeds of CHF 30 million of financial assets that we had deposited over the year-end 2020. So to make it more readable and suitable for your calculation model that you might have is we just transfer this CHF 30 million down to cash and cash equivalents. As you see in the left column of the numbers and really show a cash flow of investments of CHF 19.5 million cash out, which represents definitely the spending for CapEx and the spending for our M&A activities, the 2 companies we have acquired, IRsweep and Qmicro, the Dutch company. So again, here shown free cash flow development, just visualized CHF 33 million free cash flow before merger and acquisition activities. And this, of course, gives us a quite well headroom in terms of available cash also for future activities and underlines also with 71.9%, a very good cash conversion rate. A look on our financial position as at 30th of June. The balance sheet also here according to Swiss GAAP FER standards, of course, is dominated by the strong cash position, which is more or less 40% of our total balance volume. All the other positions, no disruptive changes compared to the previous statement from end of December 2020. And this, of course, gives us, as I said, a strong position for operations and investments for the future. So with that, I'll close with my remarks and hand back to Marc.

So thank you, Matthias . I would like now to further summarize the achievements on the strategic level in the last 6 months before closing the presentation with some comments on the guidance. As we have outlined in the Capital Markets Day on March -- in March this year, our growth strategy is actually based on 4 pillars. And I'd like today just to focus on the achievements of the last 6 months and not to comment again the growth pillars individually. So the basis of our growth and also our innovative strength is and remains our corporate culture. So that's the fundamental. And also the basis is our all employees worldwide. And this -- I think this is extremely important, especially in extraordinary times. I have already mentioned that at the beginning. In these times, in the last 6 months, it was more than important that all our people, they spend an extra mile. Either to organize more wafers than our suppliers would actually deliver or to find good ways in order to make the shipments to our customers ready in time and not delayed. So I think this is also what reflects in the strength of the financial figures we have seen today. We're also very proud that we have once again been awarded by the world very well-known organization, Great Place to Work, as one of the best companies or employees -- employers in Switzerland. And this is also a clear commitment for our Executive Board and our Board of Directors to continue this way to take care of our culture. In focus area 1, we were able to offer our customers an additional unique selling points through a favorable delivery time, which is not standard now in the markets. And we could also gain some market shares in certain areas, thanks to this delivery reliability. In addition, we launched the fourth generation of humidity centers to underline our clear technology leadership. And last but not least, in recent weeks ago, we have reached the 1 billion sensor mark we have shipped since the foundation of the company 20 years ago. In focus area 2, we successfully launched various new products I have already mentioned them before. For example, this miniaturized CO2 sensor, which is significantly smaller what -- compared to what is already existing on the market. And we have also launched our first formaldehyde sensor. The environmental area, excluding humidity, is now already generating 25% of sales with a clear rising strength. As our third strategic focus, we intend to develop or acquire technologies or technological pieces for further long-term growth. Looking back, the successful technology acquisitions in recent years have often been the starting point for -- or an acceleration point at least, for successful internal product development. For example, formaldehyde or our PM2.5 sensor was recently -- was actually kicked off by an acquisition of technology, also our Tier 1 and automotive business. As part of the strategic goal, we could close 2 additional strategic acquisitions. On the one hand, the Dutch company, Qmicro, the founder-managed company that develops and produces compact and highly efficient micro-gas analyzers for the ongoing analysis of the composition of gas mixtures for applications or sophisticated applications in environmental monitoring as well in the natural gas market. These are applications we cannot address with the sensor we have in our portfolio. So it's a very good extension of the portfolio we have anyway in the company. On the other hand, we completed the full acquisition of the Swiss company, IRsweep. They are anyway located in the same area as we are here in Staefa, after having been a minority shareholder for several years. This company develops, manufactures and supplies mid-infrared optical spectroscopy solutions. Although this is on the higher level of performance, but is a good extension for the portfolio we have within Sensirion. These are some remarks about the strategy. Now I close with the outlook. We can -- overall, we can actually confirm the raised guidance as we have communicated in July 2021. However, I'd like also to point out here that the outlook still now, we are end of August, but still now the outlook for the 2021 financial year remains volatile and difficult to assess because of the unclear -- of the global corona pandemic and the allocation situation. We continue to face unexpected plant closure due to COVID, not here in Switzerland or in Europe, but in Asia, either on customers, but also on supplier side, which may affect the supply chain or the ability to ship to our customers. In addition, it is currently unclear how long the challenging situation in the supply chain lasts. And this also triggered some inventory effects, which might stop or being even increased again. So the supply or the allocation situation is one of the big unclear situations for assessing the full year 2021. Coming to the peers, we expect a significant growth rate of 32% up to 43% in our core business. Again, core business means that defined as excluding the onetime ventilator business. If we call -- calculate them in, we expect a revenue increase by 3% to 10% due to the fact that the COVID-related business is going down significantly from CHF 70 million extra business downwards to CHF 17 million as we have already recorded in the first half of the year. The gross margin is expected to lie in the high 50s, but is exceptional, as already commented, and above average. On EBITDA level, we expect the profitability in the mid- to high 20s. Both profitability levels are exceptional and driven by the strong economy of scale effects and some onetime effects this year. And again, I'd like also to point out here that thanks to the promising business opportunities in mid and long term, we -- and a very pretty -- fully loaded R&D pipeline, we are working on intensifying our R&D and business efforts, but they are not affecting the cost structure this year fully. These are my comments about the guidance of 2021. And so we came to the end of this short presentation, our comments, and we are open for questions from your side. And I give back to Andrea.

Thank you, Marc. We now come to the Q&A session. [Operator Instructions] Thank you very much. [ Varun ], please go ahead.

Can you hear me?

Yes, we do.

Perfect. I have a couple of questions. Firstly, on your comments around inventory levels. You referred to that in your press release. What do you see in terms of your channel and inventory levels at your customers? How do you see the inventory levels at the moment? Also, what is your order backlog and the duration of your backlog? So that was my first question. And second question on your guidance. So your full year guidance essentially implies a flattish sales development half-on-half, if we exclude the onetime COVID-19 effect. Is that because you're constrained by your supply constrained? Or is there any other factor that we should consider here? And then on your EBITDA margin for the second half, can you help us understand the bridge between the first half and second half EBITDA margin. You reported 32% in the first half, your full year guidance implies somewhere around 24%, 25% EBITDA margin in the second half. So can you help us understand what are the factors driving the reduction? I mean, clearly, there were some onetime effects in the first half, but we would just like to understand what are the different moving pieces?

Okay. I'm not fully sure whether I have got your second part of the question, but I'll start with the first one about the order backlog and about the inventory level. So -- and order backlog is actually not an extremely promising or a reliable indication of KPI for Sensirion because typically, especially in automotive, you have rolling orders. So they can also be shipped that they can push out, they can -- at the moment, it's hard, but they can actually pulled in. And so the backlog, typically, we experienced in the last couple of years, the backlog is actually a pretty bad indication for the upcoming business for the next couple of months. What we do, and this is actually the base of the guidance we can share with you is actually we have a kind of a best estimate forecast, which is based on a lot of discussions we have with our customers. So we asked them about their demand for the next upcoming months. Especially now, it's more important because we have to organize the supply chain. And based on these indications, we actually built up -- bottom-up a kind of a best estimate forecast, which is the base for the guidance. But backlog is the wrong KPI for us. And about the inventory levels for -- we have no indication from our customers, and it's even harder at the moment about their inventory levels. Because at the moment, it's the same as we do with our supply chain. When we are in hard discussions with our suppliers to get enough raw materials, we would never disclose on which level of inventory we are, especially if we have some because otherwise, it's very likely that you will be reduced in allocation because all the suppliers are at the limit of what they can actually produce and ship. So this is an indication, we don't -- we typically -- we do not get from our customers. What I can say is up to -- and I'm really proud of that, that up to now, we could actually serve all our customers in a very agreed version. But there were definitely moments, we had also to shift out some limited shipments, but all in accordance with our customers that they are fine to get the material 1 week or 2 weeks later than expected. But we have no hard discussions with the customers if it comes to some delays. So we are already there in a very good situation, but it's hard work every day. Now about the second question, probably my colleague can support me shortly. And -- okay. About -- about the comparison of H2 to H1. I think more or less, we -- at the moment, we expect that the second half will be pretty similar to the first one, limited to the core business, definitely. So note that without the extra business of ventilator. And if we calculate historically, that we -- so we have generated CHF 130 million in the core business, roughly spoken. And this doubled, we commented actually with CHF 260 million. And additionally, the CHF 17 million is again from the first half, which is extra business, then we end up with CHF 260 million to CHF 280 million. The only risk we have still in the systems are, as I have outlined before, the supply chain and the situation and this extra demand, which is driven by inventory build up, assumingly, we do not know how long that lasts. So I experienced, for example, in 2018, the very same situation that we have a very strong demand in the first half of the year, and then it's changed. So it can change pretty quickly. We have no indication at the moment that it will change now, but there is some uncertainties in the industry. In EBITDA, I think more or less, we are a company -- we have a pretty large portion of fixed costs and not variable costs. That means typically, our EBITDA is highly influenced by the top line. So whenever the top line is stable, you can, roughly spoken, also expect that the EBITDA level is on the very same level. The only -- what is affecting more and more is our efforts to intensify R&D. So we are in the process. We have a lot of open positions. We are in the process of hiring more people to address all what we are -- we have in our minds to address in future. And that these people are coming in more and more, and they will affect or will increase the cost structure step by step. So that's the reason why we expect -- even with the same line -- same level of top line, we expect reduced EBITDA level in the second half of the year. All in all, we indicated in the high 20s for the whole year.

Marc, just to clarify, so the second half -- the flattish sales guidance for the second half is more a function of your demand visibility rather than supply constraints?