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Ladies and gentlemen, welcome to the uBlocks Q3 2024 Trading Update conference call and live webcast. I am George, the chorus call operator. I would like to remind you that all participants will be listened only more than the conference has been recorded. The presentation will be followed by Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Rafael Duarte, Head of Investor Relations at Hublox. Please go ahead, sir.

Thank you for joining us today. I'm Rafael Duarte, Head of Investor Relations at Hublox. Here together with our CEO, Stefan Tsitsala, and our CFO, Camila Japur. We will not be presenting any slides today. This Q&A session is to give you the opportunity to address any potential questions regarding our Q3 trading update. But before we start, Stefan, I'm open to you. So hello, everybody.

Today's announcement reflects a slowdown in our business performance for Q4 compared to Q3. The gradual improvement we have seen throughout the year has been temporarily interrupted. This is a shift from the expectation we had earlier And it's a challenge we take seriously. However, we are not alone facing those challenges. Many companies in the semiconductor space are experiencing similar trends, particularly in the automotive sectors where the market has deteriorated over the past few months. We have been proactive and took action. To date, we have implemented about 70% of our planned cost reduction measures announced in August. This is ahead of schedule, and the majority of the remaining measures will be completed by the end of this year. That said, visibility into the near-term future remains limited, nevertheless, early indicators suggest a return to growth in 2025 with a double-digit growth expected in our locate business. Despite the current challenges, my confidence in our long-term prospects remains strong. We continue to see solid structural demands for our solutions as evidenced by the design wins and partnerships we announced earlier this year. we will emerge from this even stronger. And with this, I would hand over to Rafael to guide us through the questions.

Exactly. Operator, do we have already any questions on the queue? So we're ready.

Our first question comes from Harry Blacklock in UBS. Please go ahead.

Good afternoon. Thanks for taking my questions. The first one is just in terms of the Q4 guide. Could you maybe call out any kind of differences in the trends you're seeing versus Q3 in terms of the end market segments and then regional dynamics? I mean, it sounds like the main one would maybe be weaker automotive, but is there anything else you'd call out on that front?

No, it's exactly as you describe. Automotive over the last few months deteriorated, and this is what we see in the fourth quarter. It's a main change.

Got it. And do you have kind of, do you have much visibility at all as to when you'd expect to see that end market starting to recover, or is it kind of, yeah, visibility very cloudy at the moment?

Well, we see the structural effects, and when talking to the customers what projects are ramping, we can say that we see in 2025 a recovery to growth, especially in our locate business.

Okay. Then maybe just two questions, I guess, for Camilla, just on the cost-saving program. I know previously you'd thought that the full effect of the cost savings would start to come through in H2 this year, but it seems to be pushed back a bit. I'm wondering just what the main cause of that delay was and whether you see any risk of further delays.

No, no, there is no delay. In fact, we are, as Stefan mentioned, we executed a bit faster than it was initially anticipated. And we expect to see savings now in Q4, reflected in the numbers. The full effect will be the first half of 2025. And the majority of the execution concluded by the end of this year. So nothing changed. We are quite confident that everything will be executed as planned.

Okay, got it. Sorry for the confusion. I thought previously you'd said that you were expecting to see the full effect coming through in H2 as well.

Yeah, we do expect in Q4, correct. We do expect some savings in Q4, the first impact in Q4, but full effect in first half of 2025.

I mean, is that a change from what you'd previously expected?

No.

Because I thought previously you'd said, OK. And then maybe just one follow up on the cost savings. I know you mentioned that you're targeting over 20 million in annual savings. Obviously, visibility is very bad at the moment across the industry. No one's 100% sure what's going to happen in terms of the recovery in 2025 and what the trajectory of growth rate is going to be. If the recovery were to progress even slower than you're expecting, what would you see as the ceiling for those cost savings? Is there a range that you could give?

Yeah, so we are monitoring the forecast as better as we can, right, and we are adjusting the cost base accordingly. So we have this first cost reduction already being implemented, as mentioned before, and we will track the numbers very close to ensure that we have the proper cost base.

Thanks very much. I'll go to the back of the queue.

As a reminder, if you wish to register for a question, you may press star and 1. Our next question comes from Johan Trias in Apus Capital. Please go ahead.

Yes, good afternoon. Maybe a question about the development of the two business units. The weakness you are seeing, is it spread over both business units or is maybe one more affected?

So if you refer to the... Okay, then communication, yeah. Yeah, yeah. No, it depends a bit on the timeframe of what we are talking about. In general, if you look on the complete year 2024, as we said earlier, the Connect part of our business is much more heavily affected by the overstocking and the general market weakness. Now, what we see right now is less a business unit specific topic. It's more a market specific topic where we see the slowdown in the automotive industry, especially at the traditional Western players, as you can read almost every day now in the news in Europe. And this by nature affects all. however our exposure to automotive is higher in our positioning business versus in the connect business but it's not a business unit specific topic it's more end market specific topic okay and next year you see locate our positioning to maybe grow faster why is a connect lacking is it

Because you have a much better market position in locate or what's the reason?

That's a bit a question of visibility. In our Locate business, due to the projects we know which are ramping next year and where we have good customer forecasts, we feel confident to make the statement that there will be a double digit growth in our Locate business. This should not imply any automatic conclusion to the Connect business. The market is still not very transparent. I just don't want to speculate on the Connect business, whereas we have clearer indications on the Locate business. That's the difference.

Okay. Nevertheless, the question, if I'm right, remember you mentioned in the half-year report, at the end of the year, you want to make another strategic review. If maybe other measures are necessary, is that still the case? Do you still see the So it's an urgency or necessary to do this?

Yes, we are on track with our plan to review the options we have for our Connect business. And by the end of the year, we will come to a conclusion on this topic.

Yeah. Okay. And let's wait to see what comes out. Thanks a lot.

Thank you. Our next question comes from Jurgen Wagner with Stifel. Please go ahead.

Yeah, good afternoon. Thank you for taking my question. Yeah, follow up on the Connect business. What was the sales level approximately Q3 and how is it in Q4? And then you took out capitalization question. Have you now stopped that completely or is that about to change? Thank you. capitalization of R&D. You had those four million expenses.

Thank you. So let me answer the first question and Camilla answer the second question about capitalization. So on the first question, we already saw that in quick q3 we performed in positioning quite good and this is what we also indicated in our guidance in august now through the through the guidance in q4 we have a market specific effect which is a deterioration in automotive which was not visible to this extent in August. And by nature, this affects our positioning business a bit more in Q4 than Connect business.

So your revenue split approximately, has that changed or is it still as it was before?

Um, it's yeah, it fluctuates quarter by quarter, but it's, uh, let me, let me, let me look at the numbers. Sorry. Uh, what, what we, what we see here on, on the, on the quarters. Uh, I mean, naturally, as I mentioned this, uh, in Q4, there will be a higher share of connect, but by and large, it remains a 70, 30 plus minus. Yeah. Okay.

Okay, then I can complement, answer another question about capitalization. So as you saw, we had a significant reduction of capitalization in Q3. And we continue work on this topic in the coming months. So you come back with more in the next report. And this is in line with what I mentioned in the previous call we had for the first half of the year.

Yeah, so you still do a bit of capitalization, but maybe a bit less going forward or drop it. Correct. Okay, understood. Thank you.

Welcome. Our next question comes from Thomas Brewery with Vivi. Please go ahead.

Yeah, good afternoon. I would like some question. Have you lost market share and specifically what is the situation with China?

Sorry, I didn't get the first part of the question. Could you just repeat it? Yes.

I wonder whether you have lost market share and especially what is the situation in China?

So, first of all, It's not possible to evaluate market share on a quarterly basis. We just don't have a database or data available for this. And also, I need to remember all of us, it's highly distorted due to the overstocking situation. So it's literally not possible to do this on a quarterly basis. What we can say is that we win a lot of automotive projects and we make this visible and we extend this with further partnerships. So you remember we had this announcement with NVIDIA, which include us in their reference design for automated driving. So we have a lot of strong signs that we will be the leading player in positioning, especially for automotive. Now looking into China, it's also very clear We are strong in automotive in China and we are proud of this because uBlocks is successful with automotive players, both with the traditional ones, but also with the upcoming new ones, be it in California or be it in China. So the innovators like to work with us also in China. The Chinese EV market especially, where the highest level of automotive driving features are included, has been pretty strong in the first half of the year compared to the rest of the world. But now there are also some, let's say, below the expected growth rates developments happening. So we are strong in China in automotive because also there we are the partner of choice for the innovators.

Okay, second question would be what is about prices? Are they under pressure?

Pricing, I would say, is back to normal in any semiconductor-related business, which means that there's always a low to mid single-digit price decline to be expected in our industries. As we are not replaceable from one day to the other, typically the price pressure comes together with awards for new business, which means if we bid for a new business, we might need to make one or the other concession on running business. And this leads to this normal price erosion in the industry.

Okay. Uh-huh. And the last question is, are electric cars more affected than combustion cars?

I mean, first of all, when you look in the markets, electric cars overall are still on a growth path. There's one effect which is important for us. the equipment with advanced driving features is higher in electric cars than in combustion engine cars on average. So indirectly, we benefit from a higher penetration of electric cars. OK.

Fine. Thank you.

Yes. Thank you.

Our last question is a follow-up from Harry Blakelock in UBS. Please go ahead.

Hi. It's just a follow-up on the pricing comment. And I wondered whether you could provide a bit more color around kind of pricing in specifically the automotive end market. It's my understanding that it's often around this time of year that the discussions around pricing with the OEMs happens. And kind of to your point earlier, given the really, really weak kind of industry dynamics that the OEMs and tier ones are experiencing at the moment, especially on the pricing front. I'm wondering whether you're seeing a little bit more pricing pressure from them in that segment.

Well, I would say... There were, let's say, two exceptional years in automotive. And in the rest, at least in my semiconductor career, the pressure from automotive players was always high. So I would say we are in a pretty back to normal mode. There were always ups and downs in the automotive industry. The pricing or the annual price discussions for next year more or less just started. So I cannot predict exactly what the outcome will be. But as I mentioned before, our products cannot be replaced within months or even quarters. It's a huge effort. So the price pressure comes from award of a new business and then that's always a deliberate decision what we do there and what we don't do there.

Thank you, Stefan. Very useful.

We have a last minute registration from the line of Reto Huber with Research Partners. Please go ahead.

Yeah, good afternoon. Thank you for taking my question. You said something before if I understood that correctly. With automotive in China, you're also now a little bit below expectations. I was wondering why. I think this is more a structural or a cyclical issue. And then maybe also in the West, I mean, besides all these cyclical challenges, how is the uptake of the level three enabling components really progressing?

So let's start with the second part of the question. So the levels, we come from a very low penetration level of level two plus even to higher levels. And even in 2030, the penetration rate for level 2 plus is predicted to be around 7%, so pretty low still. And for us, this is nevertheless a big growth market because the content growth is so big. So we can provide much more value to those cars. So for me, that's a rather positive story. Even in 2030, this is just a 7% penetration. we have a lot of further potential to increase our revenue and our value contribution to the automotive industry. Now, as usual, such a technical innovation starts slow and we see that it proceeds. So there are many pilots. If you go to China, you even see a lot of the cars already on the street. They are not officially level three plus or level three, but they are technically level three. So basically they wait for the legislation to come. So this development is going as to be expected in such an innovation. But it's very tough and I would say impossible to make exact prediction in the early phase how big the penetration in let's say in 27 will be because the numbers are really small. But it's coming and we are progressing and the car vendors are working on it and they're working on this topic with ourselves. Now, the first part of the question, I must confess, acoustically, I didn't understand your start. So maybe you can repeat once more the first part.

Yeah, what I understood before is that China is progressing, China automotive is progressing below your expectations. Correct me if I understood this wrong, but then I was wondering why is that?

Now, thanks for repeating. So automotive overall in the second half is a bit weaker and also the feedback we get from customers is also in China is that there are some concerns. It's still running better than in other regions of the world, but now we got indications that there is one or the other concern.

Okay, so it's more also potentially only a cyclical issue in China?

Yes, that's not a structural issue. That's a temporary issue what we see there. Because structurally, those applications will come. Nobody doubts this. But of course, especially the auto industry goes currently through a tougher phase.

Okay. Maybe if I may, just out of interest, Do the OEMs not have an incentive to increase the penetration rate to 100% as fast as possible in order to gather data?

That's a good question, but it's a matter of also how fast they can bring this in different car models and also how far let's say the legislation is ready to accept this. It does not help you so much if you have a level three level ready car, if the regulatory environment in a certain country is lacking. And therefore, this will be a gradual improvement. It will not be a switch on the topic. The second thing is that the OEMs also not... the OEMs also have their different strategies. Some do a lot themselves, some work with partners, and there is not a very uniform trend for all OEMs on this topic. What I can confirm is it's a major topic for all OEMs. They just go with different solutions after it.

Okay. I mean, you could actually still... collect data from the fleet even if level 3 is not really allowed by the regulators.

That's true and I assume that some of the car makers are already doing this indeed. But you don't need to have a fully fledged level three system for this to collect those data. But of course, you can assume that some of the car makers are collecting already a lot of data to train their algorithms.

Okay, yeah, maybe you could also simulate data. Okay, thank you very much.

Ladies and gentlemen, this was our last question. I would now like to turn the conference back over to Rafael Duarte for any closing remarks.

So thank you very much for the questions and for participating. If there is anything else, drop us a line. We will be going on roadshow in the main markets in the next few weeks. So if you would like a meeting, let me know and see if you can accommodate. Thank you.

Thank you.

Bye-bye. Bye.