Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor AG conference call regarding the third quarter results of 2019. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Mr. Dr. Anton Mindl, CEO.
Hi. Good morning, ladies and gentlemen, also from my side. Welcome to our conference call on the results of the third quarter of 2019. As always, I host the call together with our CFO, Dr. Arne Schneider. Before coming to a more detailed discussion of the figures, a few general remarks on the highlights of the last quarter, as well as our position in the current market environment. As you all know, we have sold our subsidiary, SMI, to TE Connectivity Ltd. on the 30th of September 2019 for a quite attractive valuation of a net debt-free enterprise value of EUR 95 million, corresponding to a multiple of 3.4 on external revenue or around 21 times on the EBIT based on the 2018 SMI numbers. With the sale of SMI, the subsidiary is no longer included in the consolidated group of companies after September 30th, 2019.
The assets and the liabilities of SMI are therefore no longer accounted for in the consolidated balance sheet. The micromechanics segment will be discontinued as of the fourth quarter, as it fully represents SMI and will only be presented in the context of past observations for comparative periods. We adjusted our guidance on the 30th of September 2019 only to reflect those aforementioned transactional effects, while our operational numbers remain unchanged. Today, we confirm the guidance given on this 30th of September 2019. For the full year, we are expecting 4%-8% sales growth. The operational EBIT margin will be between 13% and 17%. Regarding our capital expenditures, we are expecting a rate of less than 15% of sales. Due to the cash inflow from the SMI transaction, we will have a significantly positive adjusted free cash flow for 2019.
The assumptions for the underlying exchange rate of $1.15 to the euro has not changed. Moving on to the market environment, we still see low level of auto sales globally with quite a difference between the three big markets, China, U.S., and Europe. All markets are challenged by trade conflicts, special effects like the Brexit, and many more crises around the globe that affect trust in global trade and economic performance in general, but particularly also car sales. Summing up the picture for the first nine months overall, Europe's and U.S. car sales are still negative, but much less than China, which was and is especially hurt by the downturn. Despite all these disturbances, we can be quite pleased with our performance in the third quarter and the first nine months of the year.
We were able to surpass these prevailing negative trends and outperform our peers' operational performance. This is due to our strong product portfolio with quite a few worldwide number one products and many ramp-ups in all three business lines. Having said this, let me now comment on the current figures. In Q3 2019, sales have increased by 8.1%, EUR 75 million, compared to the EUR 69.4 million in Q3 2018. Over the course of nine months, we have even grown by 8.5%, from EUR 202 million in 2018 to EUR 219.1 million in this year, which means we have outperformed the general market trends and were able to increase market share. Obviously, our customers consider us as the innovative partner of choice due to the fact that our ICs are often the differentiating factor for their systems. This is even more important in difficult market environments.
Comparing revenues of the nine months 2019 to nine months 2018 from a regional perspective, revenue in Europe increased by 7.5%, from EUR 94.9 million to around EUR 102 million. The revenue share stayed roughly stable at around 47% of sales. The revenue in the U.S. grew by around 28% to EUR 8.8 million, corresponding to around 4% of total sales. Other countries have increased by around 27% to around EUR 23 million, which equals around 10% of sales. Finally, Asia rose slightly by 3.9% to EUR 85.5 million, which equals around 39% of sales. As more or less always, there is not much to read from these fluctuations in regional distributions, especially on a quarterly basis. They usually correspond to changes in delivery addresses or somewhat arbitrary changes in delivery volumes.
For the nine months period of 2019 under report now, it is worthwhile to mention that we were still able to grow by almost 4% in Asia, while car sales still were strongly depressed, especially in China, which is around at -12% for the moment. All in all, we delivered a strong quarter in the given environment. Coming to the top-line development of our two segments, semiconductors and micromechanics, we can say both contributed positively in Q3 2019 as well as in the first nine months of this year. The semiconductor segment grew by 8.8%, from EUR 62.3 million Q3 2018 to EUR 67.8 million in Q3 2019. The MEMS segment increased by 2.2%, from EUR 7 million to EUR 7.2. On a nine-month basis, revenue in the semiconductor segment increased from EUR 184 million to EUR 197.7 million, which corresponds to a plus of 7.4%.
The MEMS segment achieved EUR 21.4 million in the first nine months of 2019, compared to around EUR 18 million in the same period of 2018, corresponding to an increase of 19.3%. The ongoing positive development of our semiconductor segment also in Q3 2019 is due, as we think, to our innovative products matching the automotive megatrends and serving our customers well. The MEMS segment contributed on a lower level in Q3, but even outperformed the semiconductor segment on a nine-month basis. Please note as an effect, as I've already said, the deconsolidation, that this was the last time to report current figures of the MEMS segment. Coming now to profitability. Gross profit came out quite strong in the third quarter 2019, amounting to EUR 36.2 million or a gross margin of 48.3%, compared to the EUR 32.6 million or 47% in Q3 2018.
This positive development is mainly due to our strong underlying operational performance, our favorable product mix, as well as a few seasonal effects. Other operating income is significantly higher compared to last year, especially because of the effect from the disposal of SMI, which contributed EUR 61.9 million and therefore led to a total other operating income of EUR 62.7 million in the quarter. The total reported EBIT includes, of course, this effect and comes to EUR 72.9 million for the group in Q3 2019, which is around 97% in relation to sales. Our operational EBIT related to the normal course of the business decreased by 21.7% or EUR 3 million, from EUR 40 million in Q3 2018 to EUR 11 million in Q3 2019, corresponding to an operational EBIT margin of 14.7% versus 20.2% in Q3 2018.
The decreases in our operational EBIT margin is due mainly to the planned increase in R&D spending, a somewhat lower capitalization in this quarter, and the one-time external administrative expenses related to the sale of SMI. As it is difficult and in the end, not very useful to differentiate tax effects related to the income channels, operative versus transactional, we report our net income only on a consolidated basis. After taxes and minorities, the consolidated net income amounted to €67.4 million for Q3 2019. This equals basic earnings per share of EUR 3.43, versus EUR 50 in the respective prior year period. Capital expenditures, excluding capitalized development expenses, amounted to EUR 7.4 million or 9.9% of sales in Q3, and EUR 32.7 million or 14.9% in the first nine months of the year.
Considering all of the above, our adjusted free cash flow, including now also the proceeds from the disposal of SMI, came to EUR 88.3 million for Q3 2019. Net cash increased to EUR 70.3 million as of September 30th, 2019, compared to a net debt position of EUR 24.4 million three months ago. Overall, we can be quite satisfied, or very satisfied with the course of the year to date. Obviously, we cannot fully rate the market trend, but beyond short-term and mid-term fluctuations, we are working on the right topics to address the further improvement of our top-line development as well as our operational efficiency. We will continuously invest in R&D and customer relationships to target the right products, and we will continue to extend our reach in Asia.
Regarding operational efficiency, our Fab Lite strategy for the front-end wafer fabrication is a wonderful and working role model to be extended to our back-end activities in the coming periods. Okay. With that, gentlemen, I'm done with my presentation. Further information, as always, can be found in our quarterly statements and on our website. With that, I would like to open the floor for your questions.
Ladies and gentlemen, if you have a question, please press the keys nine and star on your telephone keypad. If you want to cancel your question, press nine and star once again. Please press nine and star now to state your question. The first question comes from Johannes Ries.
Yes. Hello. In a good tradition, yes. Some short questions, starting with one of the prominent every time. ASSPs, in the new presentation, you have a figure of 50%. I think that's related to sales, not to order intake.
If you give this number, that's always related to sales.
Yeah. I have something in my head. In design wins, it's much higher. It was a figure in the 80s. Is that right?
This is correct, we do not necessarily report that every quarter. Please keep in mind, my comment that I give several times here remains. We don't have a paradigm. It was very important for the company to learn how to create the ASSP and deliver those that really go to the market and to the customers. Now, we really differentiate by the business case. If an ASIC has a fantastic business case, there is nothing bad about an ASIC. In a tendency, ASICs are much fewer in number, but they tend to be bigger in volume. We are quite satisfied in getting a lot of ASSP designs done. There is no paradigm in reaching specific ratios between ASSPs and ASICs anymore. We've now really reached a very good skill set developing ASSPs that the market needs.
Okay. Second question, during the call in September, you said, without maybe the inventory correction at your customer side, you have even show higher growth and maybe inventory correction could come to an end maybe for some foreseeable future. You said even at some products you see it already, you said it came to an end. In other you expect it. How much maybe is your the growth figures have been negatively impacted and how much maybe the inventory correction is finalized at your customer side?
I would say we are still in phases where the future is quite unsecure. We can see this from the behavior of our customers. Many things tend to be short-term orientated.
I would say yes, at least the rate at which the deceleration happened has definitely not increased. I think in some areas we have found a kind of a floor. I really can't predict when this, let's say, quite pessimistic or maybe passive behavior will be ending. What is definitely clear, if, let's say, the whole economy would not have had this setback, our growth figures would have been much better. That's clear. I think still as I said, we are quite happy with how we performed. In a market that, if you look at the peers, at best at zero, at worst, showing minus 15% in the growth figures, delivering 8% plus is not too bad. I'd not like to fantasize about what would have been the case if the market would have been great.
Don't get me wrong, I don't criticize you to growing so slow.
Yeah.
We are very happy. Maybe a question on also surprising good figures from U.S. You mentioned in the past you have new teams there, but part you couldn't see because maybe the orders are booked in Europe or so, but now you're reporting a strong growth there. What is it-
I hate to disappoint you.
Yeah.
I hate to disappoint you, Meister, unfortunately.
Yeah. Okay.
This is a kind of accumulated effect from a transaction.
Okay
in the delivery address that has been more or less undertaken after the first half year of last year, now it's showing more and more the full year effect.
Oh, okay.
If you would account for that in the right region, we should rather show it in Asia.
Okay. It's difficult.
The thing that you said before are okay. There is no criticism on our sales activities in the U.S. on that. We just have to live with the fact that usually the things are not produced where they are sold. That's just a fact.
So far the team does a very good job now after you have been disappointed with the figures before, yeah?
We are definitely satisfied with them. If any comment on the regions is justified, then it was the one I made in the presentation on China or on Asia.
Still, of course, a big part of the footprint is in Asia, and as the market is really still a little bit depressed there, which is more than just minus one or minus 2%, and still growing at almost 4% for us, that is an achievement, definitely.
Okay. Definitely, you give no guidance for 2020, but I think you have an idea maybe about new ramps of products design, which you had some years ago. How is your general feeling a little bit if you look at your own maybe situation? Are you also optimistic for 2020 to maybe make a general statement?
To support me in giving mine or how should I understand this? I'd like to start with what I've said before, that we see still a very cautious behavior at our customers, right? In fact, if we would compare behavior, let's say 12 months ago and now, it's really changed quite a lot. Maybe even a little bit more than 12 months ago, where in those days it was more about the question, what do you have to do in ordering to get the parts and therefore increasing than the volumes that have been put into the order sequences. We see now the opposite.
I think the belief at the customer side is anyhow, as capacities are not used in the market, I can be very aggressive with my assumptions in lead times because even if I come out with my needs after eight weeks or with a lead time of eight weeks, I have a fair chance that the semiconductor guys support me. Definitely for a company like us, this is a very difficult challenge. We've talked about that in the quarters before that due to the ASSP strategy, we tend to go more into stocks in order to be prepared in some cases for this kind of short-term order behavior. In general, we need definitely more time to produce our products.
Coming, let's say, back to the original question, it was rare in the times I've been now under the helm that visibility has been, let's say, this burdened by economic threats and beliefs that it's still not over. I won't give you any heads up for 2020. However, I still think that due to our product portfolio, we have a chance to be better out than the rest.
Okay
we always talked also about the acquisition success that we had in the years, and we can say that 2019 is also one of the years that is going very well with respect to the orders we are taking in. You always remember that this takes 2-3 years.
Yeah
coming to effect in the revenues. When I look back to the other years, 2016, 2017, 2018, all of them have been strong on the order intake on the acquisitions we have been successful on. I think we should have a better prerequisite when it comes to the normal economic circumstances for 2020 than others might have.
Very good questions. That's more than enough. On HALIOS® also, a question I repeat every time. When I look to the presentation, it sounds quite positive. Now BMW is starting, other OEMs are following, so far it's still a high-growth business, yes.
Well, the thing is very simple. If you want something that works, is from a system cost perspective, really low cost-
Yeah
Satisfies the customers, it's a good choice to take HALIOS and not other products.
Okay. Okay. A long time before it starts to fly.
Seriously, when we look back, I'm always astonished about how long we invested in it, but it was good to do it, and it will pay off much more. We will see many more launches. It's still in the application. It takes a little bit of time and advice, and we help. Now that the Golf 8 is launched and we see that again, VW is very convinced about our system, it will come on the broad line of the Golf 8 and all the other derivatives. This is a, let's say, a kind of a stage 2 of HALIOS market introduction, it will give us definitely also more momentum to talk to other customers.
Sounds good. Finally, you have a lot of cash on the balance sheet. It was already a discussion in September. Any add-ons to your comments you have given there what to do with the money?
No add-ons. Money doesn't hurt. I don't feel any pain. I don't know whether Arne feels any pain, but I don't think so.
Yeah
All the options are considered, discussed in the board, discussed with the supervisory boards, and let's say if anything is more substantiated, we will let you know.
Okay, thanks a lot.
The next question comes from Malte Schaumann.
Yep. Hello. My first question is on your recent comment that you expect to perform better than the rest, probably next year, due to the strong product portfolio you have. Just that compares then to the overall automotive IC market. You would expect broadly that Elmos achieves higher growth, if we see growth next year, than the automotive IC business overall. Would that be then the right conclusion?
It would be a quite good conclusion. The problem still being, this is Schaumann, that it depends very much on which analyst you go for when you look on the overall market and how they tend to be correct in the market then, because when we will give our prognosis, which will be most likely in the first quarter of next year, then we maybe see a little bit more what the market really does, because everything that is forecast is a thought about the future, and as we all know, the future is the thing to be the hardest to predict it. Let's see how predictions in the short term change.
Yeah, that's right.
Yeah
flat automotive production, some content growth, then we are at plus three, four, five something for the overall market.
Yeah, it's a content growth. How can you explain in a market, China, -12%? Asia in whole, 2-digit down. We grow by 4%. Overall, we grow by 8% where the complete market has only one sign, and that's minus. You have to have products that get a broader footprint in the less car sales that are done, otherwise you wouldn't grow.
Yeah, sure. Okay. On the gross margin, you had a pretty strong, actually, gross margin in the third quarter with 48%, despite the fact that you had a reduction in inventories, and this is typically diluting the margin a bit to a certain extent. Coming from these margin levels, is there kind of any one-off component in that that makes this level not sustainable then going forward? We always know we have the price thing then coming first quarter, et cetera. This margin level seems to be quite better than, structurally better than what you had in the past quarters. We probably benefited from a rise of inventory levels. What might be different or what might be considered then going forward?
We have one-offs in this quarter, as I told you and that's typically for a Q3. If you look to 2018, that's also a question of being operatively strong and having typically the people going on vacancies and then releasing the provisions, the associated ones. That is one of the reason why Q3 in attendance is always quite strong. In general, I would say what we see is that our operations here, and that is of course due to the Fab Lite model, it's always fully loaded. As time goes by, we more and more learn how to operate this even better as time goes by. Also, I would say the fact that we have two foundry partners that serve us helps us also in getting a decent cost control. There are quite a few contributions that support this high gross margin.
On the other hand, we shouldn't forget that every quarter is a new game when it comes to raw wafer pricing, when it comes to the pricings with the customers. Everything is a new game. Maybe one additional comment on the stock level. Stock went therefore down because in the balance numbers, the sale is already present. The stock is already reduced by the deconsolidation of SMI. That is the major reason that the WIP went down. If you take this into account and look just on the inventory level of the IC business, then inventory slightly went up even in this quarter. We do this intentionally because, as I mentioned before, to support ASP growth opportunities, we have to work on our lead times. The only way you can do this is to put a little bit more into the WIP.
Yeah, that makes then fully sense. I got that potentially wrong. Do you expect inventory levels to further increase then over the coming quarters, especially owing to those short lead times your customers are expecting? Or do you feel quite comfortable with the level you have then achieved right now?
Let's say that the biggest increase is definitely for the moment behind us. It of course always has to relate a little bit to the revenue level we are at. As we've increased revenue, we've also increased. We will see still a little bit of marginal increases, but next steps we are only looking forward to if we see substantial additional growth opportunities as well. A forecast on that is also difficult to say because what we definitely will do is we optimize our production efficiency and that means that a thing that is less in the optimization focus and perspective of the management is WIP. That's also clear because money is very cheap in the moment. Anyhow, as we've just been hinted to, we have a little bit on the watches. WIP is not the first focus of optimization.
Yeah, sure. On the M&A side, anything in the pipeline that might materialize somewhere in the future? Are there opportunities or is everything too pricey to really make sense to discuss?
No, I wouldn't say everything is too pricey, but it's the same answer like always. We have a long list and a short list. We only let you know if there is anything that really substantiates. Actually, as we speak now, there is nothing to report about.
Have the market conditions changed over the past few quarters?
We don't know. There have been a few sales on the market in the last weeks that were still extraordinarily high in the multiples. I don't know, maybe in a tendency that's on the rim to change. Let's see. We don't know. It depends very much on the individual opportunities. Sometimes unicorns are in one week a unicorn, in the next they are dead or bankrupt or whatever.
Okay, thanks.
Looking for chances and with more intensity than ever.
There are no further questions so far. Just as a reminder, if you have a question, please press nine and star on your telephone keypad. One question comes from Gunther Eaker.
Yes, good morning. Thanks to have you. I have two questions. One is about the share buyback. I see it on page 17. Are you using these shares for, say, for M&A, or are they out of the balance sheet? Second question, is Mr. Luckner still on your board? Thanks.
Thank you for the questions. I start with the first one first. I started my presentation in saying that our CFO is in the line as well. His name is Dr. Arne Schneider. Nikolaus has supported the company for a long time and very successfully. We are grateful to him. He's no longer on the board, has no official function, no advisor, nothing. We still appreciate him a lot. We will see him next time on different celebration. The shares that we have bought are there for all purposes that we have been, let's say, included in this decision that we made on the general shareholder meeting. One of them could also be to be included in M&A transaction. There is no specific plan to do so for the moment.
I would say that considering the amount of shares that we have, it might anyhow be only a very small part of contribution to any M&A one could think of.
Thanks.
Thank you.
The next question comes from Stefan Uri.
Yes, hello. Good morning. Yes, I have one question about the sales guidance that you give. Basically, you kept the 4%-8% guidance while you were at 8% for the first nine months. Why aren't you a bit more precise for your guidance? Is there any reason to expect that the growth could slow down suddenly in Q4 and go to the low end of your full-year guidance? Thank you.
Yeah, thanks for the question. We are frequently asked why we don't reduce the precision. Let me give two answers on that. First of all, we never changed the midpoint of the guidance. We all have in mind that the 30th of September new guidance just was accounting for the sale of SMI. When, let's say, we look onto Q4 and try to anticipate what the guidance figures will look like in a percentage basis, you of course, have to take into account that the Q4 will be the first quarter where we don't have any revenue from SMI. If that quarter is compared to the Q4 2018, of course the growth to be expected is smaller than the ones being given on the forefront between six and 10 or between four and eight.
When we give the guidance, we give it for the full year and not for the quarter. We are just missing out in the range of something like between EUR 5 million and EUR 7 million of SMI revenue. This will meet when we compare Q4 2018 to Q4 2019. On the precision, one more comment. What we typically see by the end of the year, and no year has been an exception, and this can go both ways. We always have cut-off date effects. The question, when a big customer decides on the 30th of December not to take the goods on the ramp or to take them, can easily be EUR 2 million to EUR 3 million of revenue. Which means that the revenue level for the year we are at, this is easily 1% in or 1% out.
That is one of the reasons why we tend not to be more precisely, even when we go to the end of the year. We keep the midpoint. Maybe one additional comment on that. As you all know, we had 6%-10% by the beginning of the year, and then it was 4%-8%. Again, you can look into that both ways. If you would have no SMI business in 2018 and no business in 2019, there wouldn't have been any reason to change the 6%-10%. Have that in mind. The 4%-8% was only the consequence that in Q4, no SMI revenue will be present in 2019.
Okay. I understand that. Just if you could help us in giving us the figure of what would have been Q3 organic growth, without SMI, just to have a sense of the rest of the business.
I think I read the figure in my presentation.
Oh.
I think it was. Let me give you precisely to you. It was 8.8.
8.8?
Well, due to the fact also that SMI was quite weak on a quarter-over-quarter basis. On a quarter-over-quarter basis, SMI delivered only 2.2%. On a nine-month basis, SMI delivered almost 20%. They even, let's say, outgrew on a nine-month basis the IC segment. The IC segment, if I remember right, was for the nine months at seven-point-something. 7.4%.
Okay. That's very clear. Thank you very much.
Thank you.
One more question comes from Johannes Ries.
Yeah. Only two very brief follow-up questions. First, the administrative one-off costs, how high they have been, only to have maybe because it's a one-off to have a clear idea, a clean margin for the quarter?
A small one-digit million number. I mean, look at the.
One digit, it was EUR two or three million, or what it was?
Maybe that's on the high end. In that range.
Okay. Do I have a feeling? Finally, after the sale now, is there anything left outside the automotive space or are you now a pure play?
How do you mean this? A pure play automotive?
Yeah.
Oh, no, we have also ICs.
How much is left? Yeah.
I can't give you a precise number right now. We have to do that by the end of the year. One thing is true, SMI had less automotive percentage than our semiconductor IC business. The ratio for automotive content will increase. Maybe it will be at 90% or something like that.
There are still businesses outside, and they are growing, yes?
Sorry?
The businesses outside automotive are also growing, yes?
We don't guide the different markets.
Okay.
Sorry for that. Our, let's say, ambition and empathy goes with the automotive market. I still think that it's a fantastic market. With the turmoil that we have at the moment, this is, again, much more changes than anything else.
When we do something that is non-automotive, and this is very much in the range, where we kind of opportunistically step into contracts that, let's say, either we have a long relationship to or that comes across and where a product of ours fits very good. In general, I think we will continue to do so. Again, percentage wise, there is no paradigm, no religion. When it's, again, at 85 to 15, it's 85 to 15. We don't care. We decide businesses according to, is it a reasonable or a good business case for the company or not.
Okay. Super, thanks.
Thank you.
There are no more questions in the queue.
Okay. Obviously it's now the end of our presentation. Thanks a lot for your interest and the engaged discussion. Like always, let me remind you of the upcoming events that we have in the next weeks to come. The next one is the German Equity Forum, Deutsches Eigenkapitalforum. That's on the 25th and 26th of November, which is really a few weeks only. Hope to see you there again. We will issue the preliminary full year results in combination with the analyst conference call on February the 18th of 2020. That's quite far away. We hope to see you at both opportunities again, and for now, we say goodbye and have a nice day. Thank you for participation.