Elmos Semiconductor Ag

Good morning, ladies and gentlemen, and welcome to the ERMOS Semiconductor SE conference call regarding the results of Q3 2020. At this time, our 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 to your host, Dr. Anton Mindl, CEO, and Dr. Arne Schneider, CFO.

Thank you, and good morning, ladies and gentlemen. I would like to welcome you to our conference call on the results of the third quarter 2020. Our COO, Dr. Anton Minder, is here as well. And of course, we are both available to answer your questions and give comments following the presentation. To start, I will briefly give you an overview on the current business sentiment. The third quarter turned out as expected within our given guidance range. It marks the trough in our business development and is significantly hit by the corona pandemic effect. As we pointed out already in our last earnings call, the order situation is showing a more positive development, indicating a revival of the business. This continued, and over the course of the last week, Q4 orders again rose significantly. Thus, we are seeing a strong sequential sales growth for the fourth quarter 2020. The recovery is widespread. However, the strongest impetus is coming from Asia. So far, we have seen no effect from the recent lockdowns, but we would also not expect that to show so quickly in our orders. With this, I will go into detail on the third quarter results. As mentioned, the results turned out as expected. The quarter was affected significantly by the crisis. What automotive manufacturers, tier ones, and most of our competitors experienced a little earlier this year, driven by lockdowns of car dealers and plant closures, is what hit our results in the third quarter with delay due to the rather long lead times. We recorded a sales decline in comparison to the respective prior year quarter of almost 40%, resulting in sales of 40.9 million euros. Just for the sake of clarity, we compare our results against the continuing operations in order to account for the sale of our subsidiary SMI which took place as of the end of Q3 2019. Because the sales level of Q3 2020 is way below the volume needed for a profitable production, and below the level that we are able to compensate with the Fab Light strategy and corresponding outsourcing share, we recorded a significant loss. On an EBIT level, we lost 10.5 million Euro in the quarter under report. Because of the fixed cost, the gross margin was under pressure and came out at 29.1%, reflecting the underutilization in production. The fact that we did short-time work in production throughout the third quarter helped to reduce the cost, but of course not as much as sales declined. At this level of sales, most of the proportional costs have already been reduced to the maximum, so that the residual costs have a predominantly The fixed nature and operating expenses are, of course, mostly fixed as well. Furthermore, other operating expenses for restructuring purposes are included in the EBIT. CapEx continued to be on a rather low level, amounting to €3.7 million or 9.1% of sales. This is due to the fact that we are currently still very restrictive with respect to new investments in hardware. The adjusted free cash flow was almost balanced in the third quarter. We have implemented operational matters to cope with the economic impact of the corona crisis. Our cost-cutting measures include short-time work, which throughout the third quarter has been practiced in all production areas and most of the administration departments. Just recently, as of the beginning of this week, we suspended short-time work due to the current upswing in orders for the time being. These measures will be adjusted as appropriate and as needed in the future. Another measure taken is the selective reduction of personnel using a voluntary leave-in scheme and not prolonging fixed-term employment contracts. No one knows how many more waves will come or when a vaccination is available, but there is one thing we are quite sure of. We can rely on our very strong financial basis to weather quite a long and intensive storm. We have at our disposal gross cash of more than 85 million euros and we are using the crisis to improve our internal setup as well as to enhance our product portfolio, which brings us in a position to come out of the crisis in good shape. Now I will come to the guidance. Based on the status of the order book and the customer feedback, we expect total sales for the full year 2020 to be within the range of 227 to 233 million euros. This implies sales for the fourth quarter of between roughly 63 to 69 million euros. And this means that sales will be approximately on the level or even a bit higher than sales of the first quarter 2020, which is noteworthy insofar as the first quarter's top line was completely unaffected by the corona crisis. With respect to the bottom line, we're expecting an EBIT of between 6 and 9 million euros for the full year, This translates into EBIT margin expectations for the fourth quarter of between roughly 10% and 13%, and we base the guidance on an exchange rate of 115 euro to the dollar. So despite the fact that right now the normal life and the business is, of course, dominated to a great extent by the coronavirus, we would like to stress that we are positive with respect to the medium and long-term future of Elmos. We are working intensively on numerous new projects. We are well on track to achieve another very good year for design wins, even in this challenging month that we currently experience. Our existing strong product portfolio also makes us confident when it comes to our success at customers. Our market-leading positions in selected applications, such as, for example, ultrasonic distance measurement, motor control, sensor ICs, or LED lighting, help us to also win completely new customers. So overall, we are therefore convinced that in the medium and long term, we will participate disproportionately in the dynamic growth of semiconductors in vehicles. With this, I would like to open the floor for your questions.

Ladies and gentlemen, if you would like to ask a question, please press 9 star on your telephone keypad. Please press nine star if you'd like to ask a question. And the first question comes from Mr. Stefan Ruhi. Your line is open.

Yes, hello, good morning. So my first question was about the visibility that that you may have on 2021, because your level of sales in Q4 is back more or less to the level in Q1. I always think to myself, maybe if you multiply the level of Q4 by four, then you go back to 260 next year, which would mean a double-digit growth. Obviously, I assume you don't have a number to give us, but would you say that 2021 can be a good year of double-digit growth, according to the visibility that you have? And second question is, if you could tell a little bit more about the DesignWin activity, from which customers, which regions you have started to say about which application, but if you can give examples that would be helpful. And the last question is about the margins in Q4. So given the guidance that you gave, it looks like you're back to double-digit margin in Q4. Is it because the growth margin is coming back to a more normal level, or is there a lag in the growth margin improvement? And what about the OPEX in the fourth quarter? Thank you very much, and sorry for asking three questions at the same time.

Stefan, perfect, and thank you for your three questions. It's good to ask three or even more, but we also take less questions from A11. So, first question. 2021 visibility. Of course, we can give a guidance, and visibility is not great, but If it's true what all the prognosis institutes like IHS and strategy analytics tell us, that the number of curses is going to go up in a nice way, we would also expect that Elmos has a recovery that extends into the next year. So currently we are not negative, but it is a very early prediction. to kind of speculate about it. We have, of course, some developing orders for next year. For now, everything is good. The current lockdowns will not show, cannot show so quickly, but we look positive into the next year. Second question, the design one activity. actually pretty widespread. I believe there is no region that is not present. There is no business line that is not present. So there is no kind of leaning towards the one or the other. As mentioned, we have a very good status given the time of the year. So we are on track for a very good design win year. On the Q4, margin, your third question. We still have some short-time work in Q4, which tends to weigh a little bit on the gross margin. OPEX is a really predominantly fixed nature with some effects fluctuating around. I mean, something like vacation provision always leads to fluctuations, some other effects in OPEX as well. We see that given the sales growth, it is a very reasonable guidance that we're giving there.

Okay, so reasonable means potentially not easy to beat, but you think you can do better, right?

We think we'll turn out within the range as we do most times.

okay okay thank you very much there are no more questions for for now there's another question from my to showman your line is open yep good morning

The first one is on free cash flow. You had a slightly positive free cash flow number after nine months. I was wondering if you're in the position to already provide kind of a really guidance that potentially range. Do you think the balance free cash flow in the full year would be a popular measure? Do you think that in the fourth quarter free cash flow would be positive? I understand that there are many moving parts, especially in the burgeoning character, but maybe some of color and that will be appreciated.

Well, usually we say whether free cash flow will be positive or negative. Now we are at around about the zero mark. We can't give you a guidance on Q4. There are a lot of moving parts. I mean, we had little revenue, I mean, compared to normal times in Q3, which is certainly not helping cash because there's just, given the times when the cash flows in after the revenue recognition, there's less inflow than normal in Q4. This is certainly something to keep in mind, but we can't give you a guidance.

Okay. Any soft indication in which direction it should move, or is it even that too difficult to assess at the current point in time?

I mean, we tend to not – it's me now. I'm too middle speaking for a second. We tend to not give you a guidance, as Arne said. But would you also aside the fact that you already pointed out, you have to have in mind the fact that we have less inflow from the reduced revenue activities. If, let's say, things look as positive as we highlight them for the moment being, then we also said in our Q reporting that the investment up to now was very low. So whether we can keep this level of investment is not clear for the time being. So if business takes up much more inconsistently, then we have to react as the necessity appears. And this is also contributing to the many parts moving, determining what the free cash flow would look like in the fourth quarter. So I think it would not be a good advice to give you any hint in which direction it would be going.

Okay, fair enough. The investment would be my next topic. I mean, obviously, CapEx is down strongly this year, understandably, but growth could be quite strong then going into next 2021 and then thereafter. So what's your take on required investments to then support the growth? I mean, usually one would then expect a strong pickup again next year in investments, especially in the, still in the backend area.

I mean, let me jump in there as well because I got you, we entered the route of investment. I mean, we don't do this at this point of the year, and you won't get any number from Anja or me now in the discussion that we are taking up with you, but maybe also a little bit more explaining around the surroundings that move us. On the one hand side, we definitely have our system for the front end that's called Z-Lights. Now, I would say really under good control, so if If it goes around investments, then everybody's used to, and that is also true for the next year, is used to that we won't do anything in the front line if it's in the front end essence. On the testing, we also, since quite a few months, are working very much on programs that should help us to invest a little bit less than we did in the past years. Our hopes are that when it comes to the guidance next year in the first quarter, that even, let's say, if business should continue in a positive way, which, by the way, which is not absolutely clear in the moment. I mean, Stefan Uri pointed out justifiably that Q4 looks like completely, or the prognosis for Q4 looks like a completely undisturbed one. And what about taking it four times for the next year? But, I mean, we all know that we have big effects in the moment in the economic environment that could disturb the times for quite a lot. I mean, maybe you have a lot of the momentum still in Q1, but nobody knows anything about Q2, Q3, and Q4 of next year. We have the elections in the USA, which are, I think, very important for economy, and we don't know what the coronavirus will develop to. I mean, in the moment, we have the highest infection rates more or less in all countries. So I think visibility for a full year is absolutely not given at the moment. So it would be hazardous to give any guidance for a full year for the moment. Coming back to the investment, my hopes are that the company is better prepared than it was in the past to make increasing revenues with less investment. But as I said, no guidance for the moment. we are doing the very best to be as invest-efficient as we possibly can. And we have plans to improve that, but it will also very much depend on what the product portfolio and what the momentum looks like in the next year.

Yeah, okay. And then on the visibility, again, on the stability of your pipeline, I mean, maybe not that stable, but maybe a bit more color on the trends you saw over the recent weeks. And it appears that things are potentially accelerated, especially during the past few weeks. So maybe can you elaborate on the trends you see across different regions and from a timing perspective?

So we see that, as we wrote, it is a widespread recovery. We also did some analysis on the continent, and Asia features very prominently. So this is, I would say, in line with the general assessment of the world economy. China will be back quickest. Generally, Asia will be back quickest and have not that big effect from the coronavirus, maybe for the time to come from now. We have to be careful, however, because all the recent surge in infections and the recent lockdowns, for all we know, none of that and none of the follow-on effects is included in what we see in our orders today. Order development will of course reflect what is happening in the general economy and with the cars sold, but this is not instantaneous. It takes weeks and weeks, sometimes months, for the effect to really feed through. So what we're seeing in our orders right now, and which will of course translate into revenue in Q4, is a situation that we had in summer this year, and maybe early autumn. So it's not that easy to interpret. If you only look at the numbers, you say, well, there's a stable and nice trend. But if you look at the general world, you maybe have to modify that assumption.

Yep, sure. Okay, thanks.

And the next question comes from Mr. Stefan Uli again.

Yes, I'm back for maybe a more long-term question because I understand there is a lack of visibility in the market right now for the reasons you mentioned. So I was asking myself what, in your view, did you learn during this crisis? Did you make some important savings that you think you can continue in the long term and the question behind is should we expect a change in the margins because sales growth you don't control, you control a bit with the market share gains, but the cost structure and the way you manufacture, should we expect an improvement into the long term margins of the group and if you can maybe precise what you have in mind for the target. Thank you.

Well, generally, we of course do some savings. The organization always learns something new, but it will not be drastic or dramatic. So I think it's not the time to change our guidance on what we can achieve in terms of EBIT now or anything of that sort. I mean, what was a drastic change this year is that we ended the cooperation with the Fraunhofer Institute and could not reach another prolongation concerning the Duisburg site, so that changed. And when volume picks up again, we will come to be an even more fab-lite company. This is a change in the wafer production setup that took place this year. We also have a voluntary lever scheme. However, this will not totally change the profitability. It is still the right thing to do. It helps the company. We often also have people that are towards the end of their employment life and maybe a few years are left and they may not be comfortable with the shift system and everything. So quite often it's also good for the people involved. So these are things we do now in these times of crisis, but I wouldn't say this necessarily translates into a better margin profile in the mid or long term.

Okay. Thank you very much. That's it for me.

There are no more questions. If you'd like to ask a question, please press nine star on your telephone keypad. There's another question from Malte Schaumann. Your line is open.

To me again, a quick one. It appears at the R&D level, it appears that the capitalization effects, I mean, in the past years, you had partially pretty strong capitalization effects from which you benefited. It appears that this is more or less balanced now. So should we expect kind of a more balanced with rising DNA amortizations and less capitalizations, kind of a more balanced effect in the future, so that is more or less predictable?

We had quite a lot of projects this year that were new projects that we just started, so no capitalization for them. This may change from year to year. I mean, we are relatively small. There are not hundreds of projects that you could say the law of big numbers dictates this is all very stable. There are big projects that we do and that kind of drive it up and down a little. So I would foresee that over the years there will be fluctuations. But you're right, this year it's more or less comes out to plus or minus zero because there's actually a very large share of early stage projects.

Okay, so that's not necessarily... That cannot be a guide for the future.

This will vary.

Yeah, sure. But maybe the high difference we saw in the past is probably less likely because amortizations have obviously increased.

Amortization goes up, and this, of course, as a tendency, reduces that overall effect, but it will fluctuate. There's There is just no, I mean, this is a project by project thing. It's an intricate process, and then something comes out. So in a way, it's also hard to have a prognosis or an estimate on that. We do not know exactly what projects we will start, and we do not know exactly what projects, for instance, next year will contribute or will reach milestones or won't reach milestones. And these are So you, in a way, have to add it up and then interpret the result and say, ah, it's low because, yeah, we see all these early stage projects. This makes sense. But to know that a year in advance is really hard. This would mean you know all milestones, you know all new projects. We are way too dynamic for that.

Yeah, sure. That's okay. Thanks.

And the next question comes from Mr. Robert Sanders.

Hi, yeah, it's Robert Sanders here, Deutsche Bank. Hi. I just had my first question was just in reference to one of your competitors, Melexis. They were saying that distributors have been restocking, but OEMs and tier ones have actually been reluctant to build inventory because a lot of them are in kind of cash flow preservation mode. Have you seen... that difference in your business? That would be my first question. Second question relating to that would be, given the OEMs and Tier 1s are kind of in restructuring mode, have they come back for any more requests for price downs or are they leaving you guys alone just because obviously a lot of these companies are under a lot of pressure? And the last one, would be, given the whole strength seems to be coming out of China at the moment, how levered are you to the China recovery, particularly in regard to your design wind pipeline? I remember you talking about things like rear lighting. Are there other applications that are very geared to a China recovery that we should be aware of? Thanks a lot.

Thank you for your question. Firstly, we couldn't make out any specific trends towards distribution stocks versus Tier 1 or OEM stocks. Most of that is also data that is unavailable to us. We can, of course, ask a single person at a single point in time, but it is hard to get a generous statistic to really make these statements. So we think From what we see, it's pretty widespread. It distributes that orders, but it's also tier one. And yes, it's a lot of Asia, but it's not only Asia. On the price downs, it's a yearly exercise. And the exercise is always painful and it's always hard. And we cannot really say that we see a structural difference this year versus the other years. We always don't want to give and they always are hard on negotiating that they need. I do think that the procurement in the auto industry is quite professional, but I wouldn't see a big trend in the professionalism or in the negotiation strategy over the years. This has always been hard and good negotiations, but they happen every year, so there's no real big change there. You asked on Azure. We do have pretty good Azure exposure, I would say, also rising over the years, which is due to both things, people producing in Azure as well as exposure to the local Asian car markets. Asia is, of course, not only China. It's also Japan and Korea, and a little bit the rest of Asia, but the three big things are China, Japan, and Korea. So we're happy with the Asian exposure. Currently, the Asian share in revenue goes up. We also have a good auto intake share from Asia. So that is, for us, in line with the general economic expectations, and it works out fine for us.

Maybe one more hint, because you mentioned the rail lights and how you're dependent on your success in rail lights, majorly from a region like China. I think Arne alluded already that Asia is not just China. It's Japan, Korea, and China. We're happy about this, let's say, undependency in a more detailed look and more precise look on the regions there. And what you also have to take into account is that when we talk about the shares, for the different continents, we talk really only about the point where we deliver the parts to. So when it comes to rear light designs, we have many rear light designs for American customers that are done in parts in Europe because the tier one is a European tier one. And tier one's in the USA, which because the DOE lives with the tier one from the USA. But where will this be delivered to? It will most probably be delivered to some Asian states, Taiwanese, or wherever. So in the end, if you look to that in our revenue distribution, you see it ending up in an area where the business creation didn't take place. So when we talk about the fact that we are very successful, and that's been more highlighted in the polls that we had before, in this daylighting scheme. Then we talk really with tier ones all around the world. We are in no ways in this specific area dependent from China. In general, I wouldn't say, I mean, we participate in the good development of the Chinese market, but we are not solely dependent on China up and down. Of course, if China goes up and down, we will see this in our figures, but it's not the case that it can be only solely dependent referred to China as being the background of our increasing success now in revenue.

Got it. And real lighting is really the most exciting content growth opportunity right now for you, or is there another two or three that are really exciting?

No, I took it up because you mentioned it. Real lighting is an exciting one, but we are also very excited about the other segments. I mean, I When we had our last quarterly conference, we were excited about sensor signal processes that is for battery packs that is meant for detecting early phases thermal runaways. We have very good design in the new HMIs, which is based on our HALIOS technique. We have a new successor project there, which is based on time-of-flight products. Across all business line segments, we have good participation in the revenue growth. I took realize only because you mentioned it.

Got it. Very clear. Thank you.

And the next question comes from Mr. Werner Friedman. Your line is open.

Hello. This is Werner Friedman. There's only one question left from my side in And it's about the restructuring you mentioned, the voluntary leaving of some people, maybe other measures. Is there some expenses or provisioning taken for that in Q3, or is something to be expected in Q4?

Yes, we took provisions. They go into the other income. and they actually make up the biggest chunk in the other income line for Q3. As of now, we wouldn't expect anything additional in Q4, but things are fluctuating. I mean, with the voluntary leaver scheme, you don't know how many volunteers there will be and how many you actually want to accept their offer of leaving. But generally, We have good provisions now in Q3 and wouldn't at this point in time expect anything big additional in Q4.

Okay, great. Thanks a lot.

There are no more questions. Ladies and gentlemen, if you'd like to ask a question, please press 9 on your telephone keypad. There are no more questions.

So, perfect. Thank you very much for your interest and your participation in the call. I would like to remind you that we will report our preliminary full-year results on February 17, 2021, and the final results a month later on March 17. And we would be happy if you would join us for that conference call again. And finally, I would like to wish you personally and professionally all the best in these turbulent times. For now, goodbye, take care, stay healthy, and stay confident.