Elmos Semiconductor Ag

Good morning, ladies and gentlemen, and welcome to the Elmore Semiconductor AG conference call on the first quarter results 2020. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Dr. Anton Mendel, CEO, and Dr. Anna Schneider, CFO. Thank you.

Okay, thanks. Good morning, ladies and gentlemen. Warm welcome from my side as well for our conference call on the Q1 2020. Also available, as you've heard already in the introduction, to answer your questions today, following my introduction, is our CFO, Dr. Arne Schneider. I will start with an overview on the development of the first quarter. As a summary, I can assert that the quarter and the report turned out as expected. We recorded a sales growth of 3.3% versus the prior year quarter, resulting in sales of 64.2 million euros. Just for the sake of clarity, we of course compare our results against the continuing operations in order to account for the sale of our subsidiary SMI, which took place as of end of Q3 2019. As expected, the first quarter revenue 2020 was not affected by the corona crisis. This is due to the order lead times and the time it takes until the lower demand from the core manufacturer trickles through the whole supply chain to the automotive semiconductor manufacturers. EBIT margin reached 11% and reflects the expansion of our development resources. As we reported, we built up a new design center in Dusseldorf in 2019 and invested in general in our research and development capabilities. CapEx amounted to €5.8 million, or 9.1% of the sales. This rather low level is due to the fact that we already saw a weaker development of the automotive industry. Going to the lower CapEx, as well as thanks to a high operating cash flow, we recorded a quite strong free cash flow of €30.5 million in the quarter under report. At the end of the first quarter, we have conducted a share buyback offer. at a share price of €70.50, Elmos now holds close to 10% of its share capital. When we come to the question, what's lying ahead on Q1 and its achievements are history. And we have to reflect on the consequences of the many planned closures of practically all OEs and most of the Tier 1s. These closures and the first consequences have also reached our order boards. So the question is, do we now see what many of the well-recognized institutes forecast, the minus 20 to minus 25% in core cells? Well, anyhow, be careful when you trust those well-known institutes too much. The same ones bravely forecasted half the decline just a few weeks before. This reminds me a little bit on the forecast from the Roland Koch Institute on the corona crisis itself, where more or less in the course of two to three weeks, The risk of infection came from no danger to a very high risk. It seems one shouldn't try to forecast what cannot be forecasted. So when we look at our overall situation, our conclusion after many internal discussions is to rather forecast what lies closer at hand. Instead of giving a guidance for the full year 2020 based on very few really reliable facts or emotions like wishful thinking or fears or even the Chrysler board, While giving no guidance at all, we rather concentrate in this exceptional situation on the potentially doable, and that is forecasting Q2. Doing so, we expect sales of between 55 and 60 million euros and an EBIT margin of between 1% and 6% of sales. Based on the minimum order lead times, we can foresee the sales volume with some certainty within a limited point frame. The width of the guidance range is due to the fact that there is the usual insecurity with respect to cut-off date effects, withdrawals from consignment stocks, and don't forget certain changes in customer behavior, in these times more probable than ever. One last remark on the rest of the year. With the rule of three, one can easily calculate that if you would have to mirror minus 20 to minus 25% of the car sales profits in our figures, Q3 and Q4 wouldn't be precisely delighting. The first half, taking a midpoint assumption for Q2, would end up with slight decline compared to the first half of 2019 regarding revenue. Rule of three tells us to make the minus 25 for a full year where the first half turns out to be only slightly down, requires minus 40% in the second half. Quite a drastic slump. Do we believe in such a scenario as the most probable case? No. But is it in the range of the possibilities at hand? Yes, of course. The fact is, we have to prepare ourselves for this kind of scenario as well. And that's exactly what we do. With this, let me come to what we did up to now. to weather the crisis and how we will continue. At Elmos, we have taken numerous preventive measures. On the one side, to protect our employees and their families to the best we can, and on the other side, to avoid being directly affected by corona infections in our business operations early on. Already at the end of January, the first measures have been imposed. and have been intensified at frequent intervals since then. Just to name a few, these include travel restrictions, which were noteworthy when we introduced them. They now seem obvious, yes, but that's much later now. We introduced social distancing, temperature screenings, meeting prohibitions and limitations, home office for literally most of all the employees, closure of the canteen very early on as well, buying masks for our employees and firm rules to wear them on site, but also supply these for their private safety, and lots more. We have seen some infections at the Amos employees, but due to our measures, none of them endangered our employees or their daily life and work at the Amos premises. Because some as vacation returners, they were quarantined right away in their home office at any time. By safeguarding the health and safety of our employees with respective measures, at the same time we have implemented operational measures, including short-time work in selected areas, and we will expand those measures to manage the economic effects of the crisis caused by the pandemic. Thanks to our headlight strategy, we have the ability to first reduce outsourced share of our weather production before having to cut into our own structures. Apart from the current uncertainties, we are confident that Elmos has a bright future. We will continue gaining market share in our core business fields and extend our technical capabilities in all the high-growth areas, such as sensing, especially dedicated for autonomous driving applications, efficient drive, all kinds of auxiliary motors in the car, be them based on combustion engine or electric-driven engines, on lighting, be it ambient or taillighting, and much more. We see this confirmed by the ongoing high level of design activities. Even in times of home office and travel prohibitions, we maintain close contact to our direct customers and the OEMs. Developments of new chips are continuing and many new designs are being discussed or have been started. And these activities concern various fields with numerous customers around the world. Furthermore, our very solid financial setup provides us with the opportunity to withstand such a crisis for quite some time. We have a comfortable gross cash position of €133.6 million at the end of Q1 2020. Even when subtracting the roughly €26.9 million for the share buyback and the proposed dividend payout of €9.4 million, this leaves us with sufficient room to maneuver. And of all that, we recorded an amount of €84.7 million as of the end of Q1 2020. With this, I'm done with my presentation and I would like to open the floor for questions.

Yes, ladies and gentlemen, if you would like to raise a question, please press 9 and star. If you would like to withdraw your question, press 9 and star key again. And we have the first question. coming from Mr. Johannes Ries from APOS Capital. Please, the floor is yours.

Yes, hello. Glad to hear you're all healthy. Maybe first on the split of the business, your tab light model, how much you can reduce maybe the outsourced proportion of your production? Maybe if this worst case is really coming, Can you go to zero? Is it maybe a national bottom you have to, a normal bottom you have to stay in, even to stay connected to the guys in Taiwan and so on?

Most probably we don't go to zero because we, as you assume, we have to keep up a relation with them. I mean, a relation is the very least of all that. But most importantly, we also have to have a few lots running there. But this is definitely an area where we can reduce a lot in the weeks and months coming. And please don't forget that up to the end of the last year, we were at a third of the production being outsourced. When it comes to the second half of this year, then Duisburg will be phased out. And then we have more portion that has to be supplied by foundries, or when you turn it around, you can say we have more reserves to breeze. What has to be looked upon separately is all the processes that are not, let's say, dual source in our fabs and in the foundry fabs, and that are processes smaller than 350 nanometers, they anyhow will go to the foundry partners because they are, for these purposes, the single source. But in general, you know, we still think that I talked in my presentation about the measures that we can undertake. And, of course, a big area of cost-bound potential in our whole business scenario is to buy less wafers, of course. That's a big portion of it.

And how much in your Q2 forecast, although some underutilizations on idle cost nevertheless in your FAB in Dortmund, or is it still at full capacity even in Q2?

No, our FAB is still in full capacity. So we try to keep up the FAB as long as it's sensible. Okay. Okay.

Maybe what is your impression about the stocks at customers and how do you handle your own inventory? Yesterday in the conference call with Infineon, I've also called with Melexis, they claim there is no overstocking in the customer side because they had some fears that customers overstock because they fear maybe there could be a supply chain hiccup if they start again, that maybe some parts would be not available. The argument was there was a destocking last year, and customers just started to restock a little bit again, and they see normal inventory at the customer side, and they don't see measures at the customer side on the other side to bring up cash by working down inventories in the working capital. Therefore, how do you see the inventory there, and how you handle your own inventory as additional question?

I mean, we discussed that during the last quarter. We at our side do not see any urge to be nitty-gritty, let's say, on spending for stock as long as we think that our chips are worthwhile to be stocked because they are in fantastic programs that continue for a longer period of time. We have no software changes. and you think they are rock solid, then we don't have any problem in stocking a little bit more than maybe we would have done in other periods of the time. Coming to the stock at our customers, I might remind you that one of the reasons why we outperformed our peers in 2019 was that we all in all, let's say historically, have been much less dependent on on the stocking at our customer side. I mean, we saw some stocking, but we still have, let's say, only a limited amount of our business through distributors that are untransparent for us. So I wouldn't say that this is a big, big risk for us. I mean, in general, also, the attitudes at our customer side are, let's say, differentiated or have to be differentiated. We have customers. that have been more optimistic, and some of them still are, and say, well, please continue with your deliveries because after the downturn, there will be an upturn, and we want to be sure that we are able to serve our customers. But there are other customers that are, let's say, more restrictive, maybe because they also are more vulnerable to cash leaves that they might have for their businesses. So in general, I wouldn't say that we have a problem with overstocking, nor do we see empty stocks. So I would consider the situation rather normal.

Okay, super. And what is your experience in Asia? You have 30% in Asia, and it looks like China and now Korea are coming a little bit out of this crisis. And I hear from a lot of companies, even from the automobile sector. I heard it from Alexis. I heard it even from... that they see clear recovery of demand and demand for automobile has nearly gone to the pre-crisis level in China. Do you also see this, that the customers are coming fast back in China and maybe in Korea too?

They are coming back. I wouldn't say they are already at the pre-crisis levels, but definitely the activities see the ramping in demand. more in China than in any other Asian country, because in the other Asian countries they are still much more restrictive than they are in China, but we see business coming back in China. What I'm curious to see is, let's see how, to what level the factories will ramp up, because what the problem seems to be in the moment is less the capability of the factories and the ability of the owning companies to organize the work in a way that still the employees are safe. It's more a question, is the market ready to take the cars? And so not only the German government is discussing with the car lobby, but all the other governments are discussing with their car lobbies as well. Do we have to put incentives on the cars or not in order to make the market aware again that cars might be a good idea to be bought?

But so far you have no idea, no implications about how the anti-mark in China came back. I heard also the anti-mark is coming back, but you have no indication so far.

We see increasing numbers from China, but I would not say that we are at the levels we have been before, never ever. Okay.

That was one. Maybe another question to a little bit away from, maybe first for the ramp-ups. You have a lot of design means on ramp-ups. Do you see that customers pushing out maybe the launch of new cars because of the uncertainty of market and that push out also some ramp-ups? We see this.

And the only reason is not only the market. Well, it's also the fact that many of the short-time working schedules are in our customer companies or in the OE companies, even extended to the engineering. I mean, this is a thing we don't do and we don't foresee for the moment because we have, as I presented in the introduction, we have our heads full with contracts and designs that we are doing for the customers. But what we see is that on the other side, when it comes to discussing intermediate results, not always you get a grip on all the persons you need because they are in short time working schedules or they are completely sent at home or whatever. So let's say it's a secondary effect, I would call it, of the crisis that not only let's say production is hampered and hindered but also in some areas we feel that engineering work is handled.

Okay, but like I said before, the discussions on new designs and so going on, there's definitely no breaks there.

Yeah, we have fantastic products, very attractive ones.

Maybe on your own supply chain, any hiccups? I think there was not a lot, otherwise you had mentioned it, no?

We had hiccups from time to time, but we could manage them. We had problems, but we managed them. Okay.

A final question more to Dr. Schneider. The dividend payout. I saw companies who canceled the dividend because there is political discussion. If you pay a dividend, you are maybe not allowed to do short-term working anymore. Is that a topic for you? As you discuss this, do you see this risk?

Well, we do see the political discussion and we do discuss potential implications. However, this seems for us to be far away from being the regulation or the law. We, in terms of whether it's right or not to pay a dividend, think it is right for us to pay a dividend because we are in a very, very special situation. We have all the proceeds from the SMI sale, so our liquidity position is really excellent. There have been people even pushing for extra dividends due to SMI, and this for sure will not happen this year, which is good and adequate for the situation. But to cancel the regular dividend is not what we propose.

Last question, also a little bit in the financial direction. You had a very good free cash flow in the first quarter. If the business is shrinking, normally good companies have a positive free cash flow because some things are maybe coming down like receivables and so on. Do you see this too that maybe due to the crisis, your free cash flow will be better? Also, partly maybe why you canceled the one or other capex too, right?

That is true. Limiting capex helps free cash flow, and the crisis is not the time for growth, so we just use the machines we have and not even these we fully utilize. So, yes, capex in a crisis is a lot more moderate, though at the end of a crisis, of course, when you can already see the additional needs, you will also have to make decisions on how quick a ramp-up is. how much you want to invest to be ready such that you're not capacity constrained once you come out.

And working capital will also more decrease than increase.

This is an interesting question because we are generally willing in this zero or negative interest rate environment to be flexible on working capital when we capture business chances by having for instance more inventory such that we are able to deliver while others are not. We also think that while customers should pay very much on time, we will kind of have responses for people that do not pay on time ready that are also tailored to the type of customer. We think that we should be flexible. We should make use of our cash position when we can use it to our advantage, such as having a certain SKU on inventory when we know that they will be sold and only maybe a customer is a little bit too cautious to order straight away, but we are together very sure that the demand is there.

Okay, super. Thanks a lot. And stay healthy.

You too, Mr. Reed.

And the next question comes from Mr. Malte Schaumann from Warburg Research. Please go ahead.

Yeah, good morning. I want to answer most of the questions, I guess. With respect to the short-time work, can you share how many of your people, which is probably mostly affecting the back-end production, are currently in short-time work?

We're going in the direction of minus 20%, so an amount of 20% for the back end only, but we have also plans to expand that. What we try to avoid is having this also in the front end. But we are in discussions with our workers' council, and we... We will go ahead as the needs arise.

Okay, and the back end accounts for 30% of the production guys?

We have around something over 200 people there, maybe 220 or something like that.

Okay. And then on the payout for the restructuring, that will then happen in the current quarter, in the second quarter, with the $11 million provision for the closure of Duisburg. Will that affect Q2, or will that only come in later in the year?

Maybe I take this question. Hello, Mr. Schaumann. We will see a payout that is mostly later this year. in the year and these are HR related payouts and we try to keep the facility running and this currently works very well until the very end of the first half with only limited kind of scaling down effects so this is our plan which also means that the people will only leave at the end of H1 and then all the HR related payouts will only be after We closed the cash accounts in the second quarter.

Okay. Then, with respect to M&A, I mean, there are not that many transformative potential companies available, but these three opportunities that came up recently due to the situation that became more attractive, potentially smaller design offices as well as adjacent activities and industrial applications or whatever. Is there anything, has the pipeline changed in that respect?

I would say the pipeline has changed, but not due to the effects you just mentioned, more due to the reason that we enlarged our capabilities and the corporate strategy, so we have more human power working on increasing long lists and short lists. And unfortunately, I have to stay with my comments like I always have stayed there. If you would have anything specific in store, we would tell you, but then we would have to tell everybody. So we have our typical long list. We have our short list. We always discuss with other companies. And yes, there are definitely interesting things in the world. No doubts about this.

Okay. Okay, thanks. Thank you.

Ladies and gentlemen, if you would like to ask one more question, please press 9 followed by a star key. There seem to be no further questions in the queue.

Okay. Thank you. So thanks for your interest and your participation in the call. As a final remark, as always, I would like to draw your attention to the upcoming events. First, we will conduct our AGM on May 22nd, 2020, as a virtual event, like most of the guys. And of course, for the first time, there was no need for this up to now. In case you're shareholders, we would like to ask you to register and submit your votes. As you know, this year's agenda for the AGM is the SE conversion, which we believe is a beneficial step for the company and truly reflects the international character of Elmos. Secondly, the half-year results are planned to be released on August 5, 2020, and we would be happy if you would join us for the conference call again. Finally, I would like to wish you personally and professionally all the best in these turbulent times. Goodbye, take care, stay healthy and confident. Thank you.