Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE conference call regarding the results of Q2 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 hosts, Dr. Anton Mindl, CEO, and Dr. Arne Schneider, CFO.
Good morning, ladies and gentlemen. I would like to welcome you to our conference call on the results of the second quarter 2020. Our CEO, Dr. Anton Mindl, is here as well, and of course, we are both available to answer your questions and give comments following the presentation. Before I go into details, let me briefly give you an overview on the current business sentiment. The second quarter basically turned out as expected in our given guidance range. It shows, as we said, first effects of the corona pandemic. The third quarter will show very significant corona effects, but we will also see the turning point in the current third quarter. The development of incoming orders is positive, and we perceive a revival of business in the different regions, especially in Asia.
While by the end of the year we will still be far away from pre-corona sales levels, we are looking optimistically into the future. As we see it today, Q3 will be the trough of the current downturn. Because of the high volatility in the market, we are still not in a position to provide you with the guidance for the full year. Instead of a full-year guidance, I would like to guide you through a scenario calculation similar to what we did when we reported the first quarter results. This type of calculation helps us here at Elmos to see beyond short-term logistical deviations and link our sales to the underlying markets. We assume for a moment that car registrations would be down 20% in the year 2020. Market research institutes still vary quite a bit, so you might also find minus 17 or minus 24.
There are lots of research numbers offered. There's no reason to believe that such a downturn would not reach Elmos more or less proportionally as a truly automotive chip supplier, sooner or later. You can say ramp-ups help, yes. Many are delayed and less steep. Don't forget, these are projects at the start. In comparison, they run in lower volume as compared to those that have already been in the market for some time and made their way to more customers or more platforms of the same customers. If Elmos would mirror the general market development of, say, minus 20% sales, in the fiscal year 2020 would then reach EUR 219 million. With sales of roughly EUR 123 million in the first half, that was just down 5% versus the prior year's first half.
I calculate that this would leave us about EUR 96 million for the second half. Now, you can take different market assumptions and read different numbers, but our general assessment of the situation is always the same. Most of the corona effect will be processed in Q3. We are convinced that the last quarter of this year will show a decent recovery. Beyond the year 2020, we are positive for the medium and long-term development of Elmos. Our development projects are running at full speed and customer acquisition is successful. We maintain market-leading positions. You know, for example, as the global leader in ultrasonic distance measurement or as a key player for LED rear light. This leads us to numerous new customer relationships in various markets. Also in other areas, we are experiencing high interest. This holds true for our semiconductors for ambient light in vehicles.
The market-leading gesture control for intuitive operation and our highly sensitive, yet very robust sensor signal evaluation ICs. One application of these ICs is a recently developed solution that specifically addresses the pressure and temperature monitoring needs of high-performance batteries in electric vehicles. That has generated important design wins at market-leading customers. Overall, we are therefore convinced that in the medium and long term, we will participate disproportionately in the dynamic growth of semiconductors in vehicles. After these more general remarks, I would like to go into the details of the second quarter 2020. Overall, the quarter under report turned out as expected. The second quarter was the first one to show revenue effects from the corona pandemic. We recorded a sales decline of 13.2% versus the prior year quarter, resulting in sales of EUR 58.8 million.
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 at the end of Q3 2019. Since we do have rather long lead times within which the orders are more or less fixed, a good part of the second quarter still benefited from orders that didn't take into account the corona effects. The EBIT margin of 5.4% in the quarter under report is the result of two effects. On the one hand, the sales decline, coupled with the rather fixed nature of operating expenses, caused pressure on the margin, and on the other hand, the EBIT margin reflects the planned and executed expansion of development expenses. As we reported, we built up a new design center in Düsseldorf in 2019 and invested in general in our R&D capabilities.
CapEx amounted to €3.3 million, or only 5.6% of sales. This is, of course, due to the fact that we are currently, because of the weak demands, are very restrictive with respect to new investments in hardware. The adjusted free cash flow amounted to minus €10.3 million in the quarter under report. This is caused by rather high tax payments that took place in Q2, but also by other effects like an increase in inventory. Now I'm switching to the outlook on the current quarter. The running third quarter will see the worst effect from the COVID pandemic. What automotive manufacturers and tier 1 experienced earlier this year, lockdown of car dealers and plant closures, is what hits our results in the third quarter with delay.
We have tier ones that had to close down, but their electronic manufacturing services kept ordering for months without adjustments, and the result is seen in the second and third quarter. In Q3 2020, we are expecting sales of between 37 million EUR and 41 million EUR. For the EBIT, we are expecting a loss of between 13 million EUR and 10 million EUR. This will be the result of the fact that at this level of sales, most of the proportional costs have already been reduced to the maximum so that the residual costs have predominantly a fixed nature. The third quarter guidance is based on an exchange rate of 115 to the USD. As I said, we see the turning point in this current third quarter.
I would like to give you an update on the measures we are currently taking to weather the crisis and how we will continue.
As reported already, we have taken numerous preventive measures very early on, both to protect our employees and their families and to avoid being directly affected by COVID infections in our business operations. We are still very deliberate and selective on business travel. Lots of employees still work at least partially from home. We continue with social distancing measures, temperature screenings, meeting provisions and limitations, limited canteen openings, and firm rules to wear masks on site. We have seen infections at Elmos employees, due to our measures, none of them infected other employees. That, we believe, proves that they are effective and we need to keep up with them. At the same time, we have implemented operational measures to cope with the economic impact of the COVID crisis.
Our cost-cutting measures include short-time work, which is meanwhile introduced in all production areas and most of the administration departments. This will be adjusted as appropriate and needed in the future. It is worthwhile pointing out that in light of the low level of demand, we have temporarily extended short-time work even to our wafer production in Dortmund, because the reduction of orders at foundries reached a limit. The additional production load stemming from the termination of the IMS cooperation resulted also in additional wafer material, thus contributing additionally to the situation that wafers out of Dortmund for the time being are less needed. Associated with the short-time work, the management board and executives, as well as those employees not affected by short-term work, voluntarily waive part of their salary. In the future, depending on the development of the crisis, we might also consider more personnel-related measures.
No one knows how long this crisis will last, how many waves we will have to live through, or when the appropriate vaccination will be available to end the pandemic. One thing is for us clear. With gross cash of about €87 million, our crisis-proven managerial skills and our better-than-ever product portfolio, we are sure not only to weather even a very long crisis, but to come out in a stronger shape. Already 2019, we have proven to be stronger than our peers. With this, I would like to open the floor for your questions.
Yes, ladies and gentlemen. If you would like to ask a question, please press nine and star key on your telephone keypad. If you would like to withdraw your question, press nine and star again. Please press nine followed by a star to ask a question right now. The first question comes from Mr. Malte Schaumann from Warburg Research. Please go ahead.
Good morning. The first question I have is, maybe you can provide some more color on customer behavior in different regions. What are the trends between Asia, Europe, U.S., et cetera? That would be appreciated.
Well, generally, we see our customers somehow correlated with local market developments. In China, the numbers are not that bad. Today, we had relatively good China sales numbers. We generally see that car sales and confidence, particularly in China, is on a good way back. This is then reflected in orders. People asking how much one can produce. People asking that the supply chain is secure. We have very good signs, especially from this Asian region.
Maybe I can. From the European side, it depends very much on where the tier ones are focused on. You also see European tier ones that are, let's say, going back to a more optimistic assessment of the situation than has been the case a few weeks or a few months ago. In general, it's just like we said in the presentation, we think that the sentiment of the market is pointing upward. The only region that's obviously lagging a little bit behind is North America. I think this is due to the special situation they have over there in corona.
Yep. Makes sense. Okay. Secondly, on your loading in your fab in Dortmund, could you provide some other indications that you will end short-time work soon because of the uptake you expect for the fourth quarter? Maybe you can provide a number. What's the average amount of short-time work you have in your front-end fab, and if there's kind of a time frame you expect when this might end, or would you require significantly higher sales level to really reach full utilization?
What you have to do is when you do short-time work, you have to make sure that you don't do it three days and then you go back to normal operation, and then you make it a week, and then you go back to normal operation. Once you decide upon short-time work, you should keep that modus for at least a month. That's also what we are planning to do, that we do it for a longer period of time. Let's not fix it to a month, what I mentioned right now, but we want to deliberately stay at a fixed amount of time in the short-time work. If you want to go back to full speed again, we can do this immediately.
You also can see in our numbers over the course of the last months, we also deliberately built up stock and inventory, majorly for two reasons. First of all, we have been successful with this strategy in the crisis 2008, 2009, where business took up much stronger, much faster than everybody anticipated, and we were one of the few semiconductor companies that could supply to the levels required in end of 2009 and 2010. This is one experience we try to picture in. The other thing is that we don't forget we closed down Duisburg. This means first, you of course, in the ending of this period, do as much as you can to keep the operations as efficient as you can. We kind of produced a max of wafers till the end of Duisburg.
Also, we had to synchronize this with all the qualification procedures that we have to have in place when production sites change. We think that we have a good stock and a good inventory in order to also be able to make efficient use of the short-time work schedule, even in the wafer fab.
Would you say that inventory levels have broadly reached kind of a plateau, peak, whatever, or do you expect, given the sales decline ahead in the third quarter, that inventories keep rising?
As a kind of a sentiment feedback, I would say that in China we are getting slowly to the trough of the inventories built in different stages. I think if somebody watches us for a longer period of time, we anyhow have the problem or the feature, whatever you may call it, that we sell much less over distributors than other semiconductor companies do. When we talk about inventories at our customer side, we talk about inventories of the EMS, of the Tier 1s and maybe even OEs. We have the feeling that in China, this is really going to a level where we are much closer linked to the real order needs they have. Whereas maybe in other areas, it depends very much on the success of the Tier 1.
We have one specific Tier 1 that is increasing orders drastically as we speak. That has clear reasons. We have other Tier 1s that are still very hesitant to go back to the old, well, not to the old, but to the kind of levels that have been the general level when it started to be not as good. Don't forget, we are in the year 2020, where for most of our peers, 2019 was dead, wasn't it? In general, I think we see more dynamics from China, improved dynamics from the rest of the world aside North America.
Yeah. Okay. In regards to your CapEx, investments have been understandably low in the first half of the year, I think about EUR 9 million for tangible assets. Is that kind of one way you would also expect for the second half, or is there any requirement to step up investments later in the year?
Well, we don't precisely plan that, and we don't precisely forecast that. If you buy machinery in our business, then kind of the lowest number that you can get something sensible for seems to be EUR 1 million. It depends very much on whether we think that we have favorable conditions. Of course, we try to use the time we are having in the moment also with our suppliers, in a sense that we said, "Listen, gentlemen, you can have a bigger contract if the individual machine is cheaper," because we know we will need more sooner. That may depend on closing of these kind of negotiations or not closing of these kind of negotiations, but we don't give a guidance here. In general, as long as we don't see a clear signal that it goes steep up again, we will be restricted. That's healthy.
I don't say that if there are soft skills required to improve our business, we will do this. If you look in our R&D investment, we not step back one small inch or a centimeter, depending on the meter.
Yep. Okay. The last question regarding the medium-term perspective. When I listen to your introductory remarks and reading the quarter report, then I wasn't so sure if you, in the past, really talked about outgrowing the dynamic growth of the semiconductor IC market and automotive. Has anything changed for you to become more upbeat regarding mid-term perspectives that can even top the automotive IC market growth in the medium term based on your product portfolio?
I think when you look, we also usually load up a presentation with a quarterly report. When you look just to the number of number one product niches or product areas that we have, and you compare this with maybe five years ago, you definitely can see that we added to the ones we had before. We added a few. When we mentioned also deliberately in this presentation that we have a new fleet of so-called sensor signal processors, that on the one hand side are very sensitive, on the other side are very robust, and that they enter applications that are good for e-vehicles, then we obviously put a lot of hope into these extensions of our portfolio. My answer will be, I think like Arne said before, our product portfolio has never been in a better shape.
We are still having a lot of additional ideas.
Yep. Sounds good. Thanks.
The next question comes from Mr. Johannes Ries from APUS Capital. Please go ahead.
Yes, good morning. Like always, also some follow-on questions to Marius Hermann, who some I also would have asked. Maybe, please help me a little bit. I understand it maybe from the statements you made in the last minutes a little bit more. If I listen to all the other automobile-related semi companies, they have seen the trough in Q2, and they see already an improvement into Q3. Yesterday, for example, it was also a feedback from Infineon call. Is the reason that you see maybe the trough in Q3 is that you have followed another inventory strategy like you mentioned, and it's a special case in Duisburg?
I don't think that links to the inventory strategy. I think it's linked to the way we are linked to our customers. I have the impression that in some areas our customers are used to our, let's say, maybe more specific tailored IC solutions than they might be with others. If you take a standard ASSP from a standard stock and you say, "Okay, today I want to have one," and then you get it out of the stock of a distributor, maybe with one or two weeks lead time, and then you say, "Okay, now I don't want to have a new IC," and you just quit your order. This is not the case with us. Usually, we have the long lead times. We have 12, 14, 16 weeks, depending.
Usually, our contract partners, our customers, our partners, when they can, they try to cling to the contracts as we do. I can only just look from the outside in, and maybe Infineon has a specific dynamics because they are outstandingly strong, I think, in the power semiconductor area, which definitely will go up a lot because the e-vehicle dynamics goes so well in the weeks and months to come. The ID.3 is for them definitely a very important car because they have many semiconductors in there due to these electric drives. For other companies, I think it's maybe due to the fact that we always have been traditionally not good in distributors. Maybe that's one of the reasons. I can make only guesses around this. When we talk about our revenue, we don't talk about our inventory strategy.
We talk about the orders that we are processing.
Okay. For also maybe inventory topic at your customers are because you have such long lead times and different behavior. I got it now. Okay.
It's-
You are the only one who sees a trough in Q3. All the others had seen it in Q2. ST, Melexis, Texas, it's really a special case.
Yeah, it is. We know this, Mr. Ries, don't get me wrong. We also asked ourselves, but this was one of the answers we got. On the other hand, what you also have to see, I don't name the names now, but if you go down in 2019 by a significant two-digit number, maybe things get anyhow a little bit distorted because we grew by 8% in last year.
That's clear. That's a fair point. Another point is the book-to-bill. You don't publish it, but only from a direction. Sorry to mention Infineon again. They had a book-to-bill in Q2 in automobile of 0.2 and expect it to go over one during the third quarter. Do you see also such a strong recovery in the book-to-bill?
Our book-to-bill is significantly below one, but it's not 0.2.
Okay.
By the way, it's far away from 0.2. That also hints at much more volatile development of orders, which we discussed in the earlier truck discussion. If orders are more short-term, if they are cancelable, potentially some of our competitors may even have contracts with distributors where they can return material, which is something we, for instance, do not allow. You have a totally different revenue development in terms of timing, maybe not in terms of overall.
Maybe another question a little bit into looking to the next quarters. Any feedback, or maybe it is different from OEM to OEM, like you mentioned before. How are reacting the OEMs to the crisis? Are they bringing new features and maybe new products faster to the market, or they are reluctant because maybe the market is not ready because of the crisis? How you see it, in some regard, speed up of new things, of innovations, which was good for you, or is it the other way around?
They are throwing hybrid vehicles, meaning that vehicles that have an electronic drive and a kind of a range insurance on board. They throw it on the market like crazy. I think in general, the overall trend, and that has nothing to do with the corona crisis, but the overall trend that car producers are forced to obey to the CO2 limits that the European Union has accepted in the end. This drives innovation like crazy because you really have to look on every milliwatt of power consumption. You have to have a very complicated system thinking and coding solutions to that. That helps us a lot. We reported about this ASSP that serves for the purpose of having a kind of an early warning system if something in the battery goes wrong, if temperature is too high, if pressure is too high.
Well, this is a thing that is, let's say, putting much more insurance to the safety of a battery than is the status in current EV vehicles. The good news is that it's not one piece per battery pack or per the full battery, but it's rather one piece per pack.
Oh.
This can be many parts. It can be 10, it can be 20, it can even be more depending on the size of the battery. In general, innovation is, I wouldn't say it's driven by COVID, but it's driven by the fact that the powertrain has to change a lot. Of course, by all this autonomous driving. The ultrasonic things are also expanding more and more because sooner or later it will be expected that even cheap cars brake if they have somebody behind them. They brake if you exchange the braking pedal by the accelerator pedal, but you're standing in a traffic jam, which is often the case in Japan. With an ultrasonic device that's linked to your automatic emergency braking system, you can prevent this from happening.
You go in the throttle, but the car doesn't accelerate because it knows, hey, we are in a jam. Forget it.
Okay. Maybe to this battery project, which is also a little bit new. Is it one design then and could others follow because?
It depends on the customer and when goes into serious production and how big is the volume. I can't answer you. It's more than one customer, and it's of course a tier one and not OE, so we are looking forward that he will be able to spread this.
Okay. Mr. Schneider mentioned a lot of projects where you are very optimistic. It was a little bit fast. Maybe you can repeat a little bit what are the major drivers, the major projects beneath the ultrasonic and the battery things you see as the strongest growth drivers in the next two, three, four years?
The strongest growth drivers are always our high volume things, that is ultrasonic, that is HVAC, and that is LED. LED in the interior and LED in the outside. This is just an extra cream on top. Don't forget, if you talk about such a design, and this again will take at least one to two years till it starts. It starts careful because these are new plants that have to be treated carefully. We don't have 10 million of revenues in two years from now, but it will start. Once you've proven that you can do this application, you will set a kind of a benchmark. This is the reason why it's worthwhile to mention that here.
Okay. Is it a new customer or is it a customer you had before?
This is a customer we had before, but we had this customer only for other applications up to now.
Okay. Finally, sorry, coming back to the figures, but only a calculation figures. You will hit or saw a strong or a high loss in Q3 because of the idle cost now because you mentioned in Dortmund now you have reached a low point of the foundry, the reduction of the foundry orders. You will see underutilization in Dortmund. If I take your scenario playing, you're moving back in Q4 nearly, if its scenario is right, closer around the figures we saw in Q3, and you have been profitable. Is that a right assumption that maybe the idle cost will, if the scenario is right, will likely go away in Q4?
Well, if they completely go away, we don't know, and there's a lot about Q4 that we don't know. That's why we do a scenario and not a guidance, and we deliberately said it might not even be -20. It might be -15 or -25.
Yeah.
Anyhow, we think what is clear about it is that it goes up, and we don't know to what level, but we are very confident that it should go up from what we know today. This is a little bit linked to the question, when will short-time work in the fab end? When will the fab be running at full speed again? This is something we cannot tell you today. Of course, we have all an interest that it goes up as quickly as possible, in the end, we are demand linked.
Could still.
Maybe one more comment from my side. When we set this statement in our presentation and then also in the news, then of course, we don't talk about will it go up or not. It will definitely go up, and it will not be EUR 500,000 or EUR 1 billion. It will be definitely much more, but we can't precisely tell you the number. That's the truth.
You will likely, maybe if the orders coming back, most will go first to Dortmund, if possible, if qualified, to bring up the loading again.
Yeah. This is, of course, the intention. Don't forget that we, of course, use our foundries not only with our technology. We transferred the 350 nanometer technology to MagnaChip and TSMC, and there we still keep a minimum load because we want to make sure that they don't forget how to process the wafers. Also, we get wafers in their own processes, like 250 nanometer, 180 nanometer, and that is, of course, anyhow, always at the foundries.
That's clear. Super. Thanks for the comprehensive answers and good luck and stay healthy.
You, too.
Yeah.
Thank you. The next question comes from Mr. Gunther Icke from Icke Trade International, Zurich. The floor is yours.
Good morning. Thanks for the call. I have two questions. The first one is about Tesla as they build this in Brandenburg, this new factory. Have you connections with them? The second question is about the Fraunhofer Institute. Fraunhofer Institute has a very good reputation worldwide. Why did you stop the contract with them? Thank you.
Thank you for the question. The answer to the first question is yes, but not to Brandenburg, but to the center because they are the area where, let's say, product projects are getting developed and put together. We have contacts with Tesla. We can't deliberate more on this, unfortunately. We will do this at a later station time. We also regretted that the cooperation with the Duisburg foundry could not bring clean ends together. In the end, the Fraunhofer have maybe a more advanced development focus, and we have maybe a more economic focus. In the course of the years, we tried the best to keep this together, it was just not possible in the end.
Our economic projections didn't fit with the possibilities, and their centers of activities, in a sense, what do they want to put their focus on in the advanced areas, it also not exactly fit what we wanted. In the end, I think it was just a sheer consequence that the contract ended. In general, we have to say that it makes, of course, our operations leaner and much easier to manage. That is fair to say as well. In the end, I think, putting all that into mind what I just mentioned, it is positive for Elmos that this was ended as it was ended.
Yes. Okay. Thank you.
Thank you.
We have one more question coming from Mr. Hamish Edsell from Otus Capital. Please go ahead.
Hi. Good morning. Just a final question from me was on the treasury shares. It looks like it was a very value-creating move to buy back those shares in Q1. Is the intention here to cancel those shares, or will you hold them for potential acquisitions or to sell back to the market at a higher price later on? Thanks.
Well, generally, we have no plans to cancel them because we think that cancellation is such a fixed thing. They might end up being canceled. It's not impossible, but they might end up being used in M&A. Once we cancel them, we rule out the other options. We want to keep all options open, which means for the time we'll stick to them and keep our options open.
We thought it was good-
Okay
when we bought them.
Yeah. Well, hindsight's proving you correct at the moment. Thank you.
Thank you.
Thank you.
There are no further questions at the moment. Maybe just repeat shortly, ladies and gentlemen, if you still have a question or a comment, please press nine followed by a star. We have Mr. Johannes Ries from APUS Capital. Please go ahead.
Sorry, coming back with the question was not planned, but it came in my head regarding the own shares. Are you at the moment more actively looking around for possible acquisition targets, or are you focusing more on the daily business and you have so many projects in the pipe that you don't need it? You have still an interesting cash pile and all the shares, and you mentioned it, you're looking for all options. What is the strategy on the M&A side at the moment?
Well, we are actively looking what could add to our competencies, and we do that next to doing all the other things, of course. We wouldn't have ourselves restricted by a lack of time or so. No, we are looking, we are talking. As soon as something comes out that's more noticeable, we'll let you know. Yeah, we are always looking.
Okay. There are things around which would fit, yes?
Yeah.
Okay.
You still have to do a deal. This is the thing that in the past we have to agree on valuation and agree on lots of other things. M&A is not a predictable process.
Yes, that's clear. Super, thanks.
We have one more questioner, Mr. Gerhard Schaan from Schaan Investment. The floor is yours.
Thank you for taking my question. Just a little add-on concerning the supply chain. Are there any shortages? Do you have the visibility here? Finally, the prices of raw materials, are they depending on the U.S. dollar fluctuation against the Euro? Maybe you can give a little bit of insight here. Thank you.
Well, generally, we had over the last half year, some situations where there was a shortage looming, but it never reached a critical status. We had people that produced little parts in Italy, and Italy was at some point a critical country. Today, I believe we are out of the woods there.
Most countries keep producing and keep running, so I wouldn't see a big additional risk there. It's pretty controlled right now. On the dollar, of course, both on the sales and on the cost side, we have dollar exposure. It's coming down and we're getting a little bit closer to a natural hedge now and then. This will not be a determining factor for this year's profitability.
Mm-hmm. Thank you very much.
Mr. Mindl.
Thank you.
Mr. Schneider. At the moment, there seem to be no questions.
Okay. In that case, thanks for your interest and your participation in the call. I would like to remind you that we will report our third quarter results on November 4. We would be happy if you would join us for that 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 stay safe.