Good morning, ladies and gentlemen, and welcome to the Elmo Semiconductor Agave Analyst Conference Call regarding the Financial Year 2019. At this time, all participants have been placed on a listen only mode. The floor will be opened for questions following the presentation. Let me now turn the floor over to your host, Doctor. Anton Mendel, CEO and Doctor.
Anna Schneider, CFO.
Ladies and gentlemen, welcome also from my side to our conference call, Arne Schneider speaking. Particularly for those who know us less well, I have some overview slides at the beginning, then as usual financial and also as always, we are happy to take your questions in the end. Amos is now making all of our cars more intelligent with five Amos ICs per global average car. Within this group, I would expect the five ICs per car can easily go to 50 and beyond. The car is clearly becoming the next smart device.
For Amos, that journey started around thirty five years ago. The good thing is, I think, we may be almost halfway there. The other good thing is to become a really, really smart device, we have at least halfway to go. And Almos is prepared for the next part of the journey. We are present where our customers are and count 16 sites globally.
We focus on what we can do best, multiple number one products in our six business segments, Off Hat Life strategy now being extended to the back end operations and also the sale of SMI are testimony to that. We are a small player but with a global reach and we feel we're exactly in the right spot. 2019 was a busy year. Here are some of the highlights. We opened a design center in Dusseldorf and also added R and D resources elsewhere.
The successful satellite strategy now in the front end very well established, we started to extend that to the back end so to our test operations and more and more testing over time will move towards Southeast Asia. We have 1,000,000,000 ultrasonic ICs sold. That sounds a lot, but if we ever want to have autonomous cars move through a crowd of people that we feel will only be the start. And we got very positive feedback from investors and others on our transformation to European share cooperation. The SE helps us to keep the right governance for Almir and to move on as a company.
So thank you all for your positive feedback. Please also register your shares and vote for the ATM because this is what we still have to do to get that into effect. Last year, we also gave SMI into the hands of a better owner and also money changed hands, And we are quite happy with the valuation. We announced a role change concerning Doctor. Mindel and myself.
And the beautiful Audi marks our advances in rear light and is a good example of a highly innovative IC developed in close collaboration with the global car industry. Lastly, despite all our efforts, the cooperation with the Kvaunhofer Institute IMS will end mid of the year. This means 2020 will also be a year of restructuring. After that, we'll be trending towards a fifty-fifty share in house versus foundry in the mix of wafers that we use. Taking a longer term perspective, we see that Almos is present in high growth areas.
So we are not at all afraid of the future. We got some projects for the EV and hybrid space. We are already number one for ultrasonic ICs, number one for gesture control, number one for HVAC fabs, number one for ambient lighting and soon we will be number one in real life. So all of these areas show substantial growth potential. So we feel and see that we are on the right track.
Looking back at 2019, not only Elmo had an excellent year, but the share price as well. We noticed that the share price was up 47% at the year end. On the plus side, we also gained two more investors with larger stakes. So thank you for putting in the research and diligence and adding the Elmo's share to the portfolio. Coming to the financials.
We had an organic growth of 7.7%. If you look at reported numbers, we of course reported 7.7% as well as the 6.2%. The 6.2% does not include SMI in the fourth quarter. That's why it's a little bit lower. The Semiconductor segment grew 7.7%.
We also had very good design wins, which again highlights that our products are well received in the package. As most of you would have expected, the book to bill was below one at the end of the period, meaning at the 2019. Since the Q4 was an all time high in sales, this is somehow to be expected that in Q1 with the price downs happening is a little bit below that Q4, so the book to bill is, of course, a little bit below one. So all of our successful 2019 happened in rather cold and rainy weather. We had minus 5% in global car registration, minus 10% in China and most peers had a sales development that was also in such a negative range.
AMOLED had a very good ramp and a lot of good things happened at once. Growing from that new level is of course a lot harder than rebounding after a contraction as you see in our guidance. And I mean if you would start at 100 and then grow 8% and say another 2%, then the next year you will be at 110%. If the competitor also starts at 100 and shrinks 7% in the first year and then rebounds five percent in the next year, he's somewhere around 98%, so far away from the 110%. So that is a little bit also what we see happening in the market as far as we can see.
In 2019, we also had good earnings development with an EBIT margin at our midterm target level. We show you the operational EBIT here. Reported EBIT comes out at €97,000,000 so more than double of what we show you as operational. The reason, of course, being that the sale of SMI resulted in extraordinary income of €63,000,000 on the plus side and the termination of the Framos operation resulted in restructuring charges of €11,000,000 on the negative side. Overall, we show as operational half or less than half of the EBIT, we actually report €45,000,000 15.4.
On CapEx and operating cash flow, there are actually little surprises. The SMI sales brought in a lot of cash. We're not decided on the use of these funds. There might be selectively M and A, but nothing is off the table here. And we will let you know as soon as there is any news on the question of the cash used.
Our net cash position of €74,000,000 certainly gives us some flexibility there. We think we gave you a good guidance a year ago as indicated also by the green tick mark. We only changed our guidance due to the SMI transaction in September and we think that was good news. So we reached 6.2% sales growth in the mid of the range, 15.4% operational EBIT in the mid of the range. We kept this smaller than 15% CapEx guidance.
Of course, cash flow was significantly positive with the transaction. So we are happy with the guidance we achieved. Coming to 2020, the business cycle does not look too friendly. We see predictions of minus 2% car sales from December. That was before the coronavirus.
So while we are very optimistic in the long term, the year 2020 will not be a super easy one. You all read the papers so that is no news to you. We guide coming from a very high baseline for sales growth in 2020 of low single digit percentage range. We expect the EBIT margin to be between 1116%. And please keep in mind there are price downs in our industry every year and also the R and D hiring of 2019 has full year effects this year.
In addition to that, the restructuring charges we put back should be sufficient, but we still have to deal with the difficult situation and that is not completely finished. CapEx will be less than 15% of sales. The adjusted free cash flow, in spite of useful cash out, we think will be positive. So we do not have much coronavirus forecasting or estimates in that guidance. You've seen the minus 2% in China on the previous page as a baseline assumption.
We are not sure what comes out of that. So we'll basically have to see what comes out. Overall, you see that the weather is a little bit rainy and cold, but the fundamentals are all very good. And with that, I would open the floor for questions.
And we have a few questions coming in. The first question comes from Malte Schallmann from Warburg Research. The
first question is regarding on your gross margin. Mean, that's up from 49% to 45% for 48% to 45% in the fourth quarter. I think I have to go back to 2008 to see a similar decline in gross margin, which was then accompanied by quarterly sales drop due to the situation. So maybe you can add some more flavor on the margin development, especially at gross margin level throughout the year and why the margin was perceived relatively low in the last quarter.
Dennis, Arne has worked a lot in the presentation. Maybe I'll try and answer now. I mean, the fourth quarter is, I think, fair to say, stretched us in respect of revenue. So production couldn't quite keep up with the pace that was necessary from a sales perspective. So that is one of the reasons.
So we definitely had to deliver something out of the stock for that peak revenue. And we have productions ups and downs. So don't see any trend there. See it as a kind of a one off. I also don't see the '48 as a trend.
I mean '48 has been very good for the fact that you have to understand that we have a lot of ramp ups at the moment. I mean, Arne pointed that out when he mentions somebody that loses 7% in the last year in the report in 2019 and grows now by five it's still far away from the 110 that we are reaching in this two year perspective when we grow by almost eight and then, let's say, give another two as a midrange of this single percentage digits just for the sake of this calculation now. Then we are at 110,000,000 and the other one is at 98 So that's really a different perspective. And this comes from rents because in the volume side of the story, we see exactly what the market tells us. If we have a product that has no more sensors, that is just running in older models, I mean, do we see?
We see the dip in China. We see the dip in Europe. We see the dip everywhere. So you have to compensate with ramps. And this is not easy for reduction.
I mean, testing is a hassle. Many things are a hassle if you have so many ramps like we have.
Okay. Okay. Then regarding 2020, referring to your guidance in SMI, is there kind of a bit of caution factored into the guidance with respect to the shift of the production from SMI to your founding partners? I mean, there might be some hiccups in the production process.
The IMS, sorry. The IMS, you mean?
SMI. IMS, why do I do it? Sorry.
No, there's not much caution in there. We plan for a very structured and orderly ramp down of the production in Dusburg. We also plan for a high volume, not until the last day, but pretty much until the last days of that facility. We try to support that with various measures and so far everything looks good. So far we are happy, but this is a major change in our production setup that goes on.
We are very happy with the robustness of our production setup. With the foundry partners and Dortmund, there is no question of delivery. This is just a question of managing within our value chain.
Yes. Okay. And then with respect to your CapEx, you mentioned the second wave of outsourcing now affecting the back end. What's the implication CapEx then? I mean, you have pretty high capital investment ratios over the past years.
What's the implication then going into the future? So that then also leads to lower CapEx for the back end over time. How do you see that evolving?
This is a question for future, then maybe I'm the right one to answer. Just joking. I mean, this is
what we do it for.
I mean, we definitely know that this criticism is justified that we are producing too little free cash flow out of a company that's running at very good speed, would say, especially when it comes to product definition. I think we did again a great year last year with respect to the acquisition of the projects that we had in plan. And it was really a very good year. We never give numbers, but we give a kind of refinement to it. So it was a very good year.
But what I think is justified, we should make more cash out of this model and we definitely invest too much in testing and there will be multiple approaches to reduce that. But please understand that we don't give any cash guidance for free cash flow because now we let you know and we are sure about the evolvement of our of the effect of the measures that we are obtaining. But I mean, it's fair to say also that if you look in the Invest tables that we have, let's say, set up and executed in the last years, you have a hard time in finding anything that looks like a front end equipment. So there is only a few reasons why the back end would not be so extremely successful. But definitely, can do much better than we do it actually.
The next question comes from Mr. Johannes Reif from Apus Capital.
Maybe some follow on question for Mr. Schormann. You mentioned the ramps. Even as the lower growth rate in this year, it also depends that you have less ramps compared to the last year where maybe this is more outbalanced weak market?
No. But what we see is and please try to follow me again at the calculation that Arne started and maybe I might reiterate. I put it now for a customer and I take a little bit more extreme numbers that we have seen from competitors as well, let's assume just for the sake of the calculation that our revenue will be €200,000,000 and one of our customers will be just delaying that being passive in the market. And let's go two years back then. And this customer is 50% of our revenue.
So he contributes €100,000,000 So for those being tested in the market, the market came down by 15%. So this customer who has presented us last year for 2019 with a revenue of 85,000,000 when we start from the 100 So now he says, I will recover this year and make 10% plus. 10% plus on the basis of €85,000,000 is around 8,000,000 So 8,000,000 to the 85,000,000 you're at 93 We, on the other side of our customers' perspective, increased the €100,000,000,000 And again, I think for the sake of the calculation, I think 2% for this year. We are at 110%. So where the side that went down and then recovered by 10% is at 93%, the other side has to be at 110%.
So in a two years perspective, that means you have to compensate for 17%. I tell you, mister, is that requires a lot of ramp ups. Otherwise, you cannot complete it for these missing volumes. And even if you look on the one year perspective, the calculation stays the same. You have 57% less than the 100%, and then you have to add 2%
on top. So that's 9%.
If a big part of your products are just doing this kind of slumping, you have to have ramps that compensate for this, And that's the story. So we still have in real lighting and agent lighting, we see dramatic increases. I mean, that this is more like a jump in volumes than a normal growth perspective. And you have to have this. Otherwise, you end up over.
But anyways, there is less dynamics this year or maybe some product gaps you mentioned product areas, you mentioned Lighting is very strong, is jumping in sales. Others will be getting slower as well as ultrasonic weaker than the year before or is others maybe
Ultrasonic is also developing nicely. If Ultrasonic, as an example, I mean this is maybe the candidate for this point to be discussed. If you're in Ultrasonic with one type of project out in the volume market and let's say the take rate is at a firm percentage, then you would expect that this project and this volume follows exactly the market dynamics. So these projects will they are already at a lower basis. They have been last year, and they will not fully recover from the basis they found last year.
So they will not contribute to something that is above this 100,000,000 if I stay in my example from before.
The other
side I'm confusing you and do you understand what I mean?
Partly confusing, partly I understand. The question is why it happened last year so much better and losing so much steam this year. So there's not I'm not the only one maybe is out. Is it that the customers are cautious? There's maybe a destocking order?
Is it maybe that's a reason?
No, this is not the reason. I mean, it's a pretty strong percentage. We paid where the others lost. So if you assume market sizes, then the percentages to gain further on top of this are more difficult to get in. That's simple.
I mean, our level, if you compare us to somebody that lost 10% last year and we grew by 8%, our level is 18% higher. So on top of this, it's much more complicated than to grow on a basis that has been demolished more or less.
It's very simple mathematics, but I understood so far that you are growing faster because you are winning products which are new, which was therefore the others who are losing at the old products with no structural growth. This
is not correct, Mr. Rice. I told also in the last conferences that we had products that followed the market dynamics. I mean, it was you maybe had the question. Does it mean if we wouldn't have this effect, you grew by much more?
And we said, yes, we would have grown much more if we had, let's say, this sluggish market dynamics in the products that just follow the volume.
But that means that these other things which are maybe helping to quantify are weaker this year. That's the only the only conclusion. All all this well, following the market is even more severe than last year. There must be something different to last year without the base effect.
There there is something different to last year. That's definitely true. And and one is the the base effect, and the other one is the the economics around it and the market around it, definitely. Yeah.
Yeah. Well, maybe from a regional view, what you have here what is your basis in the Asia? You mentioned China was weak. Has you also been a little bit more cautious on Asia, especially because without corona, even you mentioned that especially the Chinese car market was very weak because the subsidies on EUV, for example, have been partly cut. Therefore, is it also that you have a strong position in Asia that also we have just seen a little bit CCS development at a background that Asia maybe stays weak in this year.
Asia is definitely contributing to that. I mean, if you look on the last numbers that have been issued by the VBA, they said January was down minus 20%. We all knew that from July. They kind of canceled more or less all the BEV, the battery electric vehicle subsidies because they made new conclusions about the environmental conflict. So yes, we see this.
I mean as we are in some of the DCDC converters, we can tell that there are, let's say, market problems with gas vehicles in China right now. I mean Asia is definitely not adding any steam to the market dynamics. That's clear.
That's clear. And pricing in the end, do you see a stronger pressure on prices given that the whole value chain automotive is under pressure? Or is it the same in your calculation, in your guidance the same as every year? The price would
be Yes. Still more or less the same assumptions as every year. I mean this question has now followed
me for
fifteen years. That's clear. It's the order for And I think we have also yes, I wouldn't say that this year will get an exception. We will have similar prices. But of course, we have price downs.
So we always expect price downs depending on the age of the product in the range of 3% to 7%. That's always been like this, and that will continue to stay like this. I mean, you do our best if you provide a function to the market that's new and that everybody else has, then the prices in the beginning are better, but sooner or later, it gets suspended. I mean, that's one of the success stories of the car industry that somebody develops something and makes the system better and more cost effective. It is also clear that you don't get this for a long time granted exclusive.
So no special effect, I would say.
No special effect. And this only a clarification question. Mr. Schneider mentioned that there is some still some burden from from the of Pavanover move from Pavanover to Foundry on on the margin in this year.
Is that right? Is it No.
No. No. We we think we covered all we expect in our restructuring charges, but the process isn't finished. I mean, this is mid of the year and even a little bit going beyond that. So the restructuring charges reflect our expectation and today we still think they are very correct.
But we've got some months ahead of us. So some of you may wonder why is there a wider range of EBIT. So that is one of the reasons we are a little bit less secure than in other years. If you ask us today, we expect zero to come out of
it in terms of
EBIT impact this year. Of course, there will be a cash impact this year, but this is clear. I mean, out is later than restructuring effect. Generally,
this goes back also to Mr. Schallmann's question, reasons for good gross margins and maybe less good gross margins. I mean, to run a production just at the same level through the whole year is a much easier job plan to change from the one to the others. But you know there are also chances as well. So I mean, our foundry partners are looking forward to the new wafers to get.
And we have, as Arne said, a very well structured process and prepared everything. So we think we handle and finish this in a very professional manner.
Like I said before, it's no margin impact longer term, Arthur. Have got the same margin of the Photography business like you got
it out of Fronghold. Let put differently. When it comes to the question, what is the complexity of the organizations when we have tested everything that has to do with the change, I would say the organization is much simpler later. So let's see.
Okay. Thanks a lot, man. That's all good. Thank you.
Yes. And we have another question from Mr. Christian Zantier from Hauk and Alphosa. Mr. Zantier, your line is open.
Yes. Hi,
it's Christian from Hauk. Could you
just please
outline bit more on the R and D expense and what to expect there going forward? I didn't quite catch that earlier.
Well, we built up Dusseldorf Design Center last year, starting at the beginning of the year, but then also adding resources throughout the year. And we also added throughout the year resources R and D resources at other sites. And as always, if you do a change throughout the year, say you hire someone in May, then in the first year, you get the salary from May to December. And in the next year, most likely you will want a salary from January to December. So it kind of gets more expensive if you only look at years.
Of course, every month it doesn't matter, but in years it gets more expensive in the second year. So that is one effect why R and D is rising despite the fact that we hire a little less people these days.
Okay. So what do you expect this effect to continue?
We as a tendency, we still in fact see R and D rising and not falling, yes.
Thanks.
Dear hosts, there are no further questions in the queue.
There are no further questions. So gentlemen, I
have Hello. No
Actually, I'm sorry. We have one more question coming from Mr. Johannes Reit.
Please
go ahead. Yes. Only no, the question I want to ask, maybe to wait for to ask it from others. Any indication Yes? Can you hear me?
Hello? That's
a joke. It's only a joke. Maybe
only the logical question. Any ideas of when you maybe could tell us more what you could do with intend to do with Ditesh? Is there any timetable when we maybe get more?
No. We don't have any timetable. But as Arne said, we have full options open. Definitely, we think that we are a company with a great future. So there are definitely IP interests outside that I come across that might be payable.
And we discussed it from now to then in the quarterly conferences. And usually, Arne and myself have not been very successful in M and A transactions. I mean, we have been very successful now with selling SMI. With buying, it's more about R and D centers that we bought because we always saw the guys that we wanted to buy were too expensive. But I think we always take took the right conclusion.
We we have always a long list. We have a short list. I can't tell you whether we will be successful or not. When we know, we'll let you know. You can be assured.
But there of are no course.
So IGS definitely to strengthen the business maybe on the m and a way.
Is one of the options that are on the table, but we will make sure that you don't need too much.
Yeah. That's also in our interest. Thanks a lot.
Yes. This
is what I assume, Mr.
Ruiz. Okay?
Thank you. There are no further questions. Thank you.
Ladies and gentlemen, I'd like to give you as most probably I will have still a few telephone conferences, but more and more the activity is going to go over to ARENH, as you all know, as I'm resigning January year. But I'd like to give a little bit of a summary for the year that just went over. I think it was a very important year for Elmos. Being able to get this digital office, I think, was a good start for the year because I'd like to remember you, we didn't hire them from the scratch. They were a group with very talented guys.
I think many of them are just the talents we have been missing. They are very fundamental already now in the projects that we work on. So that was a good start into the year. We have very qualified guys on board and we have very good ideas from our business lines. That brings me to the second point I want to stress.
We again have a year behind ourselves to prove that our business line structure in constant words because we are successful. I mean, as highlighted or let's say, the Audi projects for the realized where and we have more of them. The only problem is we can't disclose them at this point in time because they are still, let's say, in the big development boxes of the core guys. So it shows that our PL guys are having the right concepts, being able to acquire new projects. We sold SMI, I think, a major contribution to being able to focus more on our core business, and we did it for good reasons and for a very good price.
And it will definitely contribute a lot to lowering the complexity of the company. Duisburg, the IMS, I mean, it's a clarification at least. Have been not very happy when the last prolongation was just for a short period of time. And we had it. That was clear and we disclosed it on the press note as well.
We had it for prolongation, but we were also as prepared for the situation that we have now. And definitely, as I mentioned in the question to Mr. Ruiz before, as a consequence of this, when the whole process is over, we have a simpler structure and a simpler organization. So again, focus is supported. Also at least, Headlights Phase two, very important thing.
We have to be better in the free cash flow midterm and I definitely see that we have some potential. There are competitors that are still ahead of us there. And I mean, it's always good to have benchmarks. So with that, I'm through with my comments on the last year. I think it was difficult in a difficult environment.
But in the end, many structural changes that contributes to our performance in the future. With that, give you over
to Arne again. From my side, thank you all for your questions. And I just want do one short thing, remind you of the next events. We will have final results in March. We will publish quarterly results Q1 planned for May 6.
And we have the AGM in Dortmund. Please register your shares. Vote for us. Vote for the SE May 13. And we hope to see many of you there again.
So goodbye for now and have a nice day.