Sensirion Holding AG (SENS) Earnings Call Transcript & Summary

Good morning. Let's give everybody one minute to dial in and get set for the call. Okay. Again, good morning. My name is Lars Dunnhaupt. I'm the Director of Investor Relations from Sensirion and I would like to welcome you to Sensirion's investor call regarding the decision to end our operations in condition monitoring. With me today, I have our CEO, Marc von Waldkirch; and our CFO, Matthias Gantner. Please note that the event will be recorded. Looking at the agenda for today, Marc will open the call with the CEO statement. And after his statement, we will open the floor for questions and answers to both the CEO, Marc and Matthias, CFO. And with that, without further ado, Marc, I would like to hand over to you.

So thank you, Lars, and also a warm welcome from my side to this call this coldest morning, and thank you for joining on short notice. So I'd like to shortly summarize what we have published this morning before we start with the questions. I have already mentioned during my investor call mid of March for the full year results that we are going to review all our innovation projects over the past few weeks with the aim also to further increase our innovation efficiency. As part of this review, we have now decided to discontinue our activities in the condition monitoring area and consequently as a result of that, also to give up the site of Berlin. I'd like to explain you shortly about this decision and the background of that. Sensirion has acquired the startup AiSight, as it was called, the 2.5 years ago. And our ambitions at that time was definitely to become a leading provider of complete solutions in the field of condition monitoring as one of the pillars to develop additional business model of data-driven recurrent revenue streams. After this additional assessment we have done in the last couple of weeks, we learned additional insights. First of all, the condition market is much slower and much more fragmented than we anticipated than we have originally [indiscernible]. There are a large number of competitors, especially in the U.S. market against whom it will be difficult to achieve technical differentiations. These markets become the leading -- sorry, this market structure does not strategically fit to Sensirion's ambitions also to become a leading provider. And we have, with not just this project, but all of them, and we have realized that at the end of the day, this project has a less promising ratio of costs and returns later on compared to other innovation projects we are focusing on. On the other hand, I'd like also to note very clearly that we remain committed to our goal -- our strategic goal to develop a business -- a data-driven business in the future, in addition to our very important OEM business. But for the time being, we'd like to focus there on the methane leakage emission monitoring for the oil and gas industry, which seems to be very promising. So we are also progressing very well, and we have the full support of newly defined regulations in the U.S., but also the European Union markets. After this review for AiSight, we have evaluated different options how to proceed. And we have, at the end of the day, decided to discontinue the business. There was also the options to try to make kind of a trade sale, but we have realized that this is not in a good balance between likelihood and the proceeds we potentially can expect so it does not justify the additional costs associated with the process of trying to sold the business. I like -- but also I'd like to deeply regret the loss of this quality, high-quality job positions here in Berlin, but also some in the U.S. I personally know how much passion but also spirit, innovation spirit, they, all our colleagues in Berlin, all our colleagues in the U.S. or anywhere otherwise in Europe have put into this project. This loss of drops is undoubtedly painful, however, justified it may be from an economic point of view. I would like, therefore, also to take this opportunity here to thank all our colleagues for their commitment in the last 2.5 years. It goes without saying that we are doing our best in order to support our colleagues to find a new employment. I'm here in Berlin and also in other places in Dorth. In financial terms, I'd like to comment for the continuance this decision. On the one hand side, it leads to an extraordinary noncash value adjustment of around CHF 25 million and the elimination of tax loss carryforwards of more or less CHF 5 million. The value adjustments of the goodwill due to the goodwill recycling required the Swiss GAAP FER according to which the goodwill offset against equity at the time of acquisition must be amortized now. Secondly, we also expect one-off restructuring costs and provisions of around CHF 3 million up to CHF 5 million to affect the P&L of 2024, for all the termination of activities. And secondly, we also expect that for the operating business, looking down the road, we expect a slight improvement of the cash flow profile starting in 2025 in the low single-digit million Swiss franc tariff. Again, I'd like also to state again that we adjusted for this one-off special effects regarding the closure. We confirm our guidance we have published 4 weeks ago in mid of March for 2024. Also for our mid- and long-term perspective, the growth potential, we do not see a significant impact triggered by this decision. Now at least, I'd like to conclude my explanations with a short personal note. Innovation -- and I've been in the business for many, many years already for more or less 19 years. Innovation is always linked to risks but also for opportunities. And for innovation like a company like Sensirion, it is extremely essential to monitor all innovation projects carefully and closely and to make clear decisions in case the project is no longer meeting the expectations. Looking back, many innovation projects in the last couple of years were pretty successful. For example, the entire environmental center initiatives, which is now contributing heavily to the top line. But also the A2L campaign, which is very close to be ramped up in the next couple of months. Both initiatives were also starting at a very small pump which was an innovation project, and it went well. Unfortunately, this condition monitoring project is on the other side of the range. So we very much regret that it's not going to be successful, but also this part of being an innovation-driven company. By commenting this probably more philosophical aspects, I'd like to conclude my explanations, and I'm very open for any kind of questions. Thank you very much.

So this is Lars again. I will be the host. I see questions are coming up. First, Tobias Fahrenholz, please go first.

Could you tell us a little bit more about figures? I mean just on top line, I remember when you acquired it, I think it was a minor 1% sales impact or something like CHF 2 million. Is it still the case? So is this the size that's going away? And about what kind of EBIT or EBITDA are we speaking here? That would be my first question block. And the second would then be on the general business review. I mean, is this largely complete now? Or do you see further innovation or critical business areas where we might see additional or not?

So first of all, top line is more or less ignorable still today. So it's below -- it was at the moment of the acquisition, it was even 0, so 2.5 years ago. And also now we are talking about less than CHF 1 million in the top line contribution. So we do not expect any further impact on the company-wide top line of 2024 going forward. So therefore, also, I state, again, that the guidance can be confirmed for the guidance 2024, but also the mid- and longer-term growth potentials are not heavily affected by this decision today. Secondly, about the EBITDA, also there, as I have indicated, we expect the next year. We expect a lower single-digit million Swiss franc improvement of our cash profile. So this is also indicating the EBITDA, which comes with a -- or the loss. It's not a negative, negative EBITDA, which comes with the AiSight business today. About the whole -- we went through all these innovation projects in the last couple of weeks. So we are more or less -- overdue there is always small projects they might be on hold -- put on hold or even canceled, but this is the daily business, which is not common with any kind of one-offs. This is just a normal business as we are running anyway for all the internal projects, but we do not expect to have any kind of one-offs -- additional one-offs in the next couple of weeks or months.

Good. Then I would like to hand over to Mr. Reto Huber.

I was wondering how many headcounts can you save through this decision? And then maybe more importantly, why would the data-driven be saying emission monitoring business need fewer people than the condition monitoring that you're shutting down now?

Well, so the number of affected people is 45 headcount, including also temporary people like students and -- so all in all, most of them are here in Berlin and some others are either in other European countries or in U.S. And in terms of FTEs, are 42 to be precise, affected people. About methane leakage topic, I think this is a misunderstanding. It's not the way that this is linked to fewer people than the AiSight business. I would say it's more or less in the same level of people engaged. There is one difference. The fact that the methane leak business is more or less driven by people from the headquarters. So all the supporting functions can be fit so HR and all this stuff. This is probably somehow different while Berlin as the result acquisition was fully focused on the condition monitoring and activities. But all in all, it's more or less the same kind or the same level order of magnitude of people engaged. And what is different is our -- the cost and the potential we see. So we see there, a good progress also a good driver from the markets and the regulations. And also, we see a natural chance also to have a kind of technical differentiation. And again, this is our key factors. We like to drive business. We don't mind if it takes some years. But we like to drive businesses strategically. They have a good potential that we can become one of the leading suppliers and we can differentiate by technology rather than by prices. We don't like actually to start any kind of price wars. We like to differentiate by technology. And this is exactly what we have depression today. This is the case for condition for the methane emissions, but it's not very beneficial in terms of condition monitoring. That's the difference in our investments between machine and the condition monitoring activities.

Okay. And so for the methane, you don't have people in the field that do the installation or do you have partners there?

Yes, there are some partners that are supporting us down 1 or 2 people. definitely, they can also go to the fields in order to install this. But mainly, it's done by either our customers or by partner companies.

Then next line is Michael [indiscernible].

Just a question on the AI acquisition in the first place. And maybe you can comment on the sort of market due diligence process that took place at the time. Do you think that due diligence was adequate? Or are there any things to be changed in the -- in your approach to M&A or have all the conditions basically changed since you acquired the company? Anything you can comment on your M&A process there?

So I think it's fully fair to say that you should -- always, you should learn from especially unsuccessful adventures like AiSight is definitely what we have already done, but we also continue to do about lessons learned for our -- in order to be better for the next [ m-day ] activities. But to be very precise, and I think there are 2 aspects we have to keep in mind. On the 1 hand side, this market is just evolving it's not an existing market where we can say, okay, that market is fully clear. There are a competitor number 1 up to 10. They are behaved this way and they have market shares of so and so -- this is not the case in this field. And this is also, by the way, the beneficial fact that this is not the case because whenever you like to enter as a newcomer into a field which is anyway covered by some big guys, then you shouldn't do it at the end of the day because then it will be very hard, except the fact you have an outstanding technology in hand, so you can actually change the market completely. But in this case, our assessment, 2.5 years ago was more there seem to be a more or less blue ocean situation in Europe, not [ Blue world ], but definitely not the red one. In Europe, while in U.S., it used to be many competitors. What has changed in the meantime is not this assessment, but the fact that in Europe, the drive or the pull from the market is less strong as we anticipated. Therefore, we have also decided already 12 months ago to focus more on the U.S. market because in the U.S., they are -- have a higher pay in or stronger pay in, in the reliability and the uptime of their machine due to a lower level of maintenance. So there the pool of market is definitely strong. And this is also correct. So this assessment was fully fine. The problem there is actually that in the U.S., you have more players and you have especially one larger player, which is definitely very good in the field. But this was -- and this play, by the way, called Oguri, this was already fully known at the moment. We started this adventure, but this Oguri fully focused on U.S., but we have actually to focus more on U.S. compared to the moment we have acquired the business. So this is one of the aspects. The other one, what we have learned, and this definitely, a new fact for us that the rollout, that adoption of the technology is significantly slower than expected. So our impression at the very beginning was more after a lot of interviews before we acquired the business, that we have -- there is a buying center typically the headquarter where you have to convince the respective people and responsible people about the technology. Whenever you are successful in doing so, there will be more or less smooth rollout in the respective company. And this is not the case. So you have actually to go from after the connection of the headquarter. Typically, best case to get a recommendation. But afterwards, you have actually to convince one of the local operations center management team to the other. So the adoption rate is significantly slower than anticipated. And this is definitely one of the topics we have to learn and which can hopefully be done better next time for another acquisition. But these are the main aspects we have learned in the meantime of these 2 years.

Then I would hand over to Michael Inauen.

I have a couple of questions. You were talking about the savings, obviously, if you lay off like a, let's say, 50 people, we can probably make the calculation. But how much R&D intensity was involved in AiSight at all? That would be my -- one of my questions. And also overall, if I remember correctly, yes, you acquired a start-up, you acquired people but you also acquired technology, yes, motion sensor basically. So my question would be, is there no value in this technology at all that Sensirion can use or that you can at least sell for something? I mean is that just basically gone in the wind now the whole motion sensor technology. It's not -- of course, not a core technology for Sensirion, but I was just wondering if there's been no value to that at all. And maybe just for Matthias a very short one, what the tax loss carry forwards, what would that mean for the tax rate going forward? I don't know if it's the right way to calculate it. But just to understand, does it really change anything in the taxes going forward?

Well, so first of all, Michael, about the R&D intensity, I would say, again, 45 people involved, I would say, more or less 3, up to 4, 5 is supporting. That means from IT about HR because it's a stand-alone site in Berlin. And the others are half, half roughly broken between sales, business development and on the other hand, R&D. So you can actually calculate for your 20 people R&D, 20 people, sales worldwide and 5 people supporting roughly. The second question about technology, definitely, there is some kinds of synergies. We can also continue to use. This is about the whole software and cloud stack, which is also used or partially used for the [ methane ] leakage. So it's not the case that the whole technology is actually to be lost, but we have already taken some parts of the software stacks we have acquired by the acquisition of AiSight and is already in use for the methane leakages will continue to be used in methane leaks. So therefore, there is a kind of reuse. In terms of the hardware, I think looking back, and this was already clear at the moment we acquired the company. The hardware was not the core of the technology because it's not motion, it's more or less a vibration sensor, which is hardware-wise, not that outstanding that you can't do it on your own. So this is more a part the nodes they are used for the condition monitoring is more or less a kind of -- part of normal over-the-counter components. So there's nothing that outstanding, but the software stack, this was definitely of value and it still continue to be for value. And the third aspect of technology was the understanding of vibration expertise. And there are also some very good experts in the Berlin team for vibration and the translation was part of the interpretation of vibration information to the condition of equipment. And there, we have to be very honest that this is not a value for the company after the stop of the condition monitoring activities. For the tax loss, I'd like to hand over to Matthias to comment it.

Quite I think for all the modeling for the company in the future, we can still stick with group-wide tax rate between 12% to 14% with a continuation of having the advantages of the tax situation we have in Switzerland, especially with the main portion of tax burn here.

And can I maybe ask an add-on question, sorry, to the topic. I mean, you have given us your guidance, let's say, about a month ago on the EBITDA margin, 5% to 10%. Of course, that's -- now we're taking out all these additional the impairment and everything, the restructuring costs. But have you included already any positive effects when you have given the guidance? Or can we really expect basically the closing of this to have an impact just from '25 onwards?

Look, no, we haven't included already some positive effects because the decision has not been taken at the moment of the guidance. This was taken yesterday. And -- but we have also to keep in mind that I indicated already that we expect the cash flow profile improvement from 2025 of lower single digit. So we have also to -- it's not a big project, it's -- there are many of this level in the company running at the moment. The only difference here is the fact that it's based on an acquisition. So whenever this would be an internal projects and not have this called organic project we are developing internally only then we would not even communicate about it. and therefore, also indicating that we are not talking about the significant improvement of the EBITDA profile. And going back to the guidance of 5% to 10%, it's within the uncertainties of the market anyway for 2024. And the first quarter is already over. So it's only 3 quarters looking ahead of us for 2024. So therefore, we are not going to change our guidance because it's in the -- within the fluctuation and uncertainties of the year anyway.

When I look across the group, I currently, I see no more raised hands. Are there any additional questions to either Marc or Matthias, now the time to speak up. I see a hand coming up, I can't see the name. Tommaso?

Yes. Just a short question to ramp this up. In terms of the capital allocation, I'm wondering does this change any of your plans of potentially -- or does it change anything in your strategy in terms of looking at potential future acquisitions? Or does it kind of translate into a preference for starting to develop things more in-house and leaving away the acquisitions going forward?

No. As I have already commented before, definitely, we take our lessons learned, as you definitely should do, not just in case of failure, but also in case of success, you can learn a lot always. And we are definitely also doing so for this project, but I don't think that we -- there will be a tremendous change of our M&A strategy. Anyway, we are a company they are first -- primarily focused on internal organic projects rather than M&A. M&A is on top of that. And I think that's also looking forward, is a very important contributor to our innovation pipeline. And looking back, we had Qmicro acquisition where the [ AIC ] the acquisition, which was the startup of the -- or not startup, but the starting point of our automotive direct business. So there are also some other acquisitions. They were pretty successful in the last couple of years, not in this case, unfortunately. And on top of that, we had also some very inspiring technology acquisitions in the last couple of years. So particulate matter sensors, for example, but also electrochemical sensors was originally based on an acquisition of technology, which is now an integral part of our portfolio. So I think we have to keep that in mind. And therefore, we have to take our lessons learned. We definitely can do it better. we can also do a better relations of the market. It was also highlighted before, but it shouldn't be changed our strategy completely. And also our strategy to develop a kind of a database business is still fully valid.

Good. So one more time, any additional questions from the floor? No. Then I would like to thank everybody for dialing in. Again, the event will be recorded and available on our website. Then thanks a lot for your interest and for the good questions. I wish you a nice day.

The same from my side. Thank you for joining, and have a good day.

Have a good day. Bye.