Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor AG conference call regarding the ad hoc release concerning the signed agreement to sell SMI. At this time, all participants have been placed on a listen only mode. The floor will be open for questions following the introduction. Let me now turn the floor over to your host, Dr. Anton Mindl, CEO.
Hey, good morning, ladies and gentlemen, also from my side. As already announced, it's about our ad hoc news that we issued after market close on Friday about the signing of the agreement to sell SMI. Dr. Schneider and myself, we host the call together. If I would have to put a headline over it, I would say maybe a long journey comes to a good end. Might fit not too bad. SMI has been acquired in 2001. The strategic idea was to create additional value for Elmos IC solutions. An Elmos IC plus a MEMS device from SMI should be more value to our customers and should create more opportunities to grow.
The marketing name in those years was ASIC Plus. In the course of the years, quite a few successful projects made it to the market, like tire pressure monitoring systems, pressure sensing for side airbags, integrated pressure sensors for gearboxes, fuel vapor, oil pressure, just to name a few of them. Despite big personal and monetary investments from Elmos and SMI, despite these projects related design successes I've just mentioned, SMI could never really deliver on the big ticket promise, as I might call it, in automotive and industrial markets. The 10% mark in relation to the group's complete revenue was really never left behind. Especially the synergies with Elmos product offerings were rare events. The reason was not lying in the products.
SMI's products in the last years developed market leading positions in low pressure, high accuracy, and stability, or in rough environments, withstanding record burst pressures. Neither were the Elmos ICs the reason. Each company developed nicely due to their attractive state-of-the-art products in many applications. Still, the combination SMI device plus an Elmos chip was only in very few cases the desired combination. The reason in the end being quite simple. In a majority of project opportunities, our customers wanted to do the integration and value add that happens when you combine a MEMS device with an IC themselves. For many of the market participants, we were, due to the fact that we offered both components, rather viewed as a competitor than as a supplier. Because we could deliver the sensing element and the evaluation IC, we sold neither one of those in the end.
Sounds like a contradiction, but was rather the rule. Still, for itself, we could develop SMI, especially in the last years, quite successfully. The revenue from 2017 to 2018 grew around 16%. I'm counting the external revenues from $24.1 million-$28 million, and I'm talking about US dollar. The EBIT grew reasonably to $4.4 million. Also the first half of 2019 as compared to the first half of 2018 is no exception. In the moment, we are at around $16.7 million, representing over 20% growth in comparison to the year before. EBIT had the same favorable development, being over $3 million at the moment and over 70% plus. Overall, these numbers speak for themselves. Aside these successes, it is one product especially that puts SMI into a new perspective. That's Introsense.
Introsense is the smallest in vivo sensor for many medical applications, be it in diagnosis or in therapy. Application range from diagnosis of inner organs like heart or bladder, to therapeutic enhancements in cancer treatments. The additional specialty of Introsense is that it is not only the record small die, but also the first automatically contacted one. If you think that the sample of the IC is only 0.2 millimeters by 0.7, and the thickness is even smaller, though, it's 0.01 millimeter thick. We supply connecting wires and a connector to the macroscopic world. That's a real record achievement in technology. Sample orders have developed exceedingly well, and SMI gets more and more medical market awareness. SMI became a player not only in the industry and automotive, but now also in the medical.
Anticipating that situation, the Elmos board and the supervisory board decided to extend the scope of the periodical strategic review with a question to clarify whether Elmos is still the best owner for the asset. In the end, the question is, can we or a new owner develop the company faster and more beneficial for shareholders as well as employees? For that purpose, it was decided to run a competitive offering process and determine at the end whether selling or keeping would be the more promising strategy for Elmos and SMI. Well, since Friday, it was clear that with selling the asset, we could create a lot of added value for our shareholders, more or less in the course of the year.
Whereas developing it on our own would have been much more time-consuming and, of course, less secure, especially with the options in the medical market, which is more or less new to us, and so far, not a strategic field for Elmos. The Introsense products have now reached a phase in which a financially strong partner with a broader market presence. As the buyer, TE can implement success faster and put it on strong footing. Last not least, with a EUR 95 million selling price, which is based on the revenue we made 2018, a multiple of 3.4. If you go for the EBIT, it's even a multiple of more than 21. We could achieve the price. That gives a clear signal that TE values the achievement and capabilities of SMI highly, so that it can also be assumed that they will do their best to continue the success story.
With that, I'm done with my presentation, and I would like to open the floor for questions.
Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. In case you wish to withdraw your question, please press nine and star again. Please press nine and star to state your questions. The first question comes from Johannes Ries, Apus Capital. Please go ahead with your question.
Yes. Good morning. Maybe it's a logical question, I think maybe too early. Your liquidity will increase heavily now. Any idea what to do with the proceeds? I see opportunities to invest them in your core business in automotive or industrial. Maybe it's an opportunity to give a part back to the shareholders.
First of all, we like to stay conservative and say, let's do the closure first. Let's hunt the bear down before we distribute the fur, and all options are open, in fact. We will continue what we always did. We have always long lists. We have short lists, but we also have a firm belief that we should buy assets only if they fit ideally to us, and if the price is okay. I can't foresee whether this will happen in the next months to come, but definitely, we will have a lot of strategic discussions, what to do with the additional cash, and we will let you know accordingly if there is any kind of conclusions. Anything is possible. Giving it back or giving some of it back to shareholders is a potential thing as well.
Investing it for our growing business, in parts at least, is also an option. Let's see. It's too early. We have signed now. Let's wait for the closing, and then let's see what we do. What I can tell you, we will not be nervous about having too much cash in our bank accounts, because we don't want to be hunted into assets that we later on regret having bought.
On the other side, what are the hurdles you have to take maybe to finalize this deal now? Any antitrust things? I don't think so, no.
We do not believe that antitrust items might appear, but of course, it's in the course of the normal process that all the, let's say.
Government bodies.
government bodies have to be involved, and they have to do the conclusion with us. When we look onto the portfolio of Tyco Electronics, we think that there is very little competition between SMI and Tyco.
Finally, does this deal mean that the focus is definitely the future on the core market, automotive, and a little bit industrial, but no medical also?
We don't exclude it. If there are opportunistic inroads, we will use them, but it's never been our strategy, and in fact, the major medical part always came from SMI. Elmos was really never good in medical.
Okay.
We stay opportunistic open. I think one of the benefits of selling this asset is also that we can concentrate more on the business we are doing. We think we should concentrate on things we do best. If you compare the growth we introduced into our company with lights, as an example, which wasn't present five years ago, or with gesture recognition, we just see that if we do things which we are good at, the growth opportunities are bigger than the ones we could use with SMI. That's just a clear fact.
Some mentioned visit on the healthcare trade fair some half year ago, it was on SMI, no? As SMI total.
It was on SMI.
Okay, thanks.
Okay. The next question comes from Malte Schaumann, Baader Research. Please go ahead with your question.
Yeah, good morning. I think the transaction is a sensible move. Not that many questions about that one beyond the use of cash question that was raised by Johannes. Besides that, could you provide maybe in quarter update on current trading, what you're seeing in your automotive customer chain? Any specific trends that emerged, something you'd like to share?
Oh, interesting question. As you all know, automotive is still a little bit dull. Overall, I think the whole area is in a kind of a redefinition phase. What we can say that our business is going along visibly, I would say as planned. We would use this opportunity to really report anything, especially if there will be something, but we don't have very to tell you something about it. It's not easier, but we've stressed that already in the last quarterly conference. I think in the moment, with our product portfolio, we are in an attractive place. I don't think that with all the things going on in the public, that tomorrow there will be no more car stocks.
I think it will be maybe a little bit lower in the growth perspective, but as long as a company is able to define for itself new areas to go into and elaborate on them, I think we still have wonderful growth chances. No. In the end, nothing special to share.
Yeah. For this running year, we can only reiterate our guidance, of course, excluding the effects from the recent transaction. We can only know what the effect on the guidance is when we know when closing exactly is. That is why we cannot change that guidance now. We think it is good to just have the guidance on the underlying business for this moment in time and not including the transaction.
Yeah, sure. Closing probably pretty late this year, rather December than earlier, or?
We don't know. Could also be early, but it's a lot of complex things that the lawyers now have to figure out. We think it will be this year. It could be quick, it could be a little longer. In the end, we feel it doesn't matter.
Yeah. Sure. In the end, your guidance should be broad enough anyway. Okay, thanks.
The next question comes from Tristan Zander, Hauck & Aufhäuser. Please go ahead with your question.
Hi. Basically, everything has been answered. Maybe just a quick one. Since you have a lot of cash now, probably looking maybe a little more intensively into buying also with automotive exposure. Have you been seeing multiples for potential takeover targets coming down recently, especially with companies with a very high automotive exposure?
Franchise speaking, we don't watch them so intensely. We watch more the multiple we could achieve.
Is a multiple we liked. Maybe it depends very much. If we would find an asset where we think it fits us ideally as obviously SMI fits to TE Connectivity, maybe we would be willing to pay the same multiples. Up to now we have been a bit shy on this. First of all, we have to precisely find out when we look for new assets, how good do they fit to us? We determine the price and the multiples. We have no market perspective that the multiples are really going down in the moment. If the market continues like this, you could think about it, whether this could be a trend or not, but I can't tell you.
All right. Thank you.
Thanks.
At the moment, there seem to be no further questions. If you would like to ask a question, please press nine and star on your telephone keypad. We have a question coming up from Stephane Houri. Please go ahead with your question.
Yes. Hello, everyone. Yes, I have a quick question about the profit structure of the division that you are selling. Basically, I would like to know if it changes the proportion in the gross margin and in the OPEX. Meaning, is it a higher gross margin business or lower gross margin business? Is it very intensive or was it very intensive in terms of R&D? How should we look at your business going forward in terms of gross margin and R&D intensity? Thank you.
Generally speaking, we always talk about 10% of the revenue only. When we go for the EBIT numbers, whether it's 10% or 20%, it's again from 10%, 10%. This is now we are at the level of 100 of the company level. We always commented that SMI in all the quarters was a quite volatile animal. Sometimes we were very good at and sometimes we were lacking behind. I think in general, we don't see too much of a change, not in R&D, not in the gross margin. The size of the company was just too small to really influence the big animal.
Okay. Thank you very much.
Thank you.
We have a follow-up question coming from Johannes Ries of Apus Capital. Please go ahead.
Yes, only a follow-on to this small discussion about the automotive market. In the general semiconductor market, we have seen that there have been a breakdown of inventories. It looks like you have not seen in your customer set there have been an inventory correction. If you have seen it, has it come to an end or was it not a topic in your special markets?
We saw it a little bit as well. I think we commented in this way, but we didn't see it to the extent the others saw.
Okay.
If we wouldn't have that in quotation marks, prices, our growth guidance for this year would have been dramatically higher. We saw that some of our customers didn't order in the way they originally promised. Still, we have a lot of customers that are hungry for our products.
Have you seen that maybe this inventory correction is now worked through, it's done, and some customers coming back to normal ordering, or is it up to date?
We see some of them that are in this phase like you describe it, but we also see customers that are still on a pile of products. That's all, and everything is figured in and what we have out in the market. I wouldn't go so far that I would say we see that the market is taking up already now.
Okay.
Definitely not. If somebody doesn't load the inventories any longer and still has a little bit of revenue, of course, inventory levels go down. I wouldn't go as far as to say there is a trend change.
Thanks for the update.
Okay.
For any further questions, please press nine and star on your telephone keypad. We have one question coming from, please go ahead with your question.
Yes. Hi. A question may be how the process started. Did they approach you for the deal? Maybe a follow-up, how much medical revenues does the company have, and how many approvals from FDA are still outstanding for their sensor business? Is there something in the pipeline which could be a similar success to the product, what you have right now in this business?
Well, on the first question, they did not approach us. We ran a competitive auction-like process. We approached, among quite some others, also the current buyer, and we found out that the buyer is the buyer last Friday. On the medical market, we do not disclose the individual segment shares, but medical is far more substantial at SMI than it is with us. The new products have a great future. There are a lot of customers to come, there are a lot of applications to come. Among these things, there are also a lot of regulatory, like FDA and the same thing in other jurisdictions, are still outstanding and to come. You must understand that the Introsense product family is now in sample phase, so there is no serious revenue, which describes the status of this chance.
Okay. The background of the question was, I think they acquired also another, or they made offer for another German sensor company. I have the impression that a lot of investments are moving into the medical sensor business right now as well. It's interesting why you are currently disconnecting this activity.
This is wrong, Mr. Eichel. We are not disconnecting to the sensing business. This is completely wrong. We will be happy to supply millions or trillions of ICs operating together with the main sensors. Thank you for the question. Maybe there could be a misunderstanding in the whole group.
No, to the medical sensor business. A lot of the companies are now investing a lot in the medical sensor business, and that was your best company, so to say, or your best activities, and you're selling this business. It was just from timing perspective interesting why you are doing that right now.
Let me elaborate a little bit on this. First of all, we have three business lines at Elmos. One, justifiably, is called sensors. This is, by the way, the biggest business line. When this business line works with sensing elements, the main devices are sensing elements. This can be temperature sensing, water vapor, all kinds of physical parameters that you can measure, you need a sensing element. Our ICs stay and will stay a preferred solution to read out the sensing elements. Whether these sensing elements happen to be in the medical arena, might, in some cases, even not be disclosed to us when we deliver to the big sensor companies. Just to make sure, we will continue to deliver ICs serving sensor elements to the market, and that will be all markets, depending just on the companies that are our customers.
We serve the biggest sensing companies in the world. By the way, Tyco is one of them. This will stay as it is. What we de-invested was the sensing element. Because we realized, as I explained it in the beginning, we realized that to really take the best out of the Introsense chance in the moment, we really have to go and buy a big ticket because it's about regulatory things, it's about a long time that you have to invest into and bring it to the market, and it's about market knowledge and about the footprint that you have in the market. There, I think we are a company that is not big enough to make the best and the fastest use of the things we have.
As we see, the price shows that obviously our buyer projects himself in a position where he can make use of this opportunity, but also the others. As I said before, SMI has a great portfolio of industrial and automotive sensors as well. I just want to make clear, Elmos is not going out of sensing.
Great. Thank you very much. It was really very helpful. Thanks.
We have another question coming from Johannes Ries, Apus Capital. Please go ahead.
Sorry, a very brief update clarification question. You mentioned the amount of EUR 95 million net debt-free. Question, had there been any debt in this company, or do you overtake debt, or is it the net cash you will receive after the deal?
There's a couple of million EUR intercompany debt between Elmos and SMI. SMI owes us a couple of million EUR.
Okay.
It's a smallish portion, but still.
Okay. You will receive the EUR 95 million in the end?
Subject to the usual adjustments, yes.
Yeah
a little less for the equity, and then there's the repayment of the intercompany loan, which, of course, the buyer also has to do.
Okay. I got it. Thanks.
At the moment, there seem to be no further questions. If you would like to ask a question, please press star nine and star. There are no further questions from the audience.
Okay. Thanks, ladies and gentlemen, for the lively discussions. As a closing remark, I would like to remind you on the upcoming events, or maybe on the next upcoming event. Our results of the third quarter will be published on November 6, 2019. Of course, like always, we would like to invite you already now to join us for this conference call at this occasion. For now, thanks for participating. Goodbye, and have a nice day.