Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor AG Conference Call regarding the Second Quarter Results for 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, Doctor. Anton Minze, CEO.
Hello, ladies and gentlemen. Also a warm welcome from my side. We will have a meeting on our results of the second quarter. Doctor. Arnes Malde, as you are used to, and I, we will host the call together.
We are reporting quite decent results today, and that is especially true considering the market environment that we have currently. Having said this, let me directly jump into the financial effects. Sales increased by 8.6% year over year, coming to €75,000,000 with a solid development across the entire portfolio. I will tell you a little bit more about that later on. Truth be told, almost 2% of this year on year comparison in the growth came from the U.
S. Dollar to euro exchange rate, But Truth also detailed from Q1 to Q2, only 0.3 of that came from the U. S. Dollar. So I think still a good development.
And we, of course, when you look on the exchange rates that we had anticipated last year and this year, we kind of anticipated this development and this support by the dollar when we did our budgeting process. Turning now to the regional distribution of our revenue. Europe increased roughly proportional to sales to EUR 35,500,000.0, accounting for roughly 47% of our total sales volume, and that was almost precisely the same number in percentage like 2018. The U. S.
Stood at €2,900,000 other countries at €7,400,000 and Asia came out at €29,300,000 or 39% of sales. As always, we recommend not to overinterpret the individual developments in the region since this is still more point of delivery logic than a market logic. Nevertheless, the weakness in Asia, again, we see when we go to specific projects in China, minus 15% to even minus 20% and sometimes even more percent development going down, revenue going down for specific purely car volume related products with some Chinese customers. But obviously, when we do the averaging for Asia, more ramp ups and new projects help to overcompensate this effect. In the end, Asia still grew on a quarterly as well as on a half year basis, but not with the big numbers we have been used to in the past, but only by around 3%.
Well, it's still not bad in the situation driven. Looking to our two segments, Semiconductor and Micromechanics, they both enjoyed positive momentum. The Semiconductor segment had a sales of €67,700,000 7.8% plus and an EBIT margin of 73%, equals €11,700,000 The MEMS segment had a very strong first half year, and Q2 was no exception with sales amounting to €7,300,000 16.6% up and an EBIT margin of 18.3% in the quarter on the report. The latest development has been really positive for our MEMS segment, especially driven by the success in the Medical area. May also come to that a little bit more in detail later on.
Turning now to profitability. Gross profit is developing well, amounting to EUR 34,600,000.0 or a gross margin of 46.2% in the second quarter twenty nineteen, reflecting our good operating performance. Operating expenses are more or less stable compared to the previous quarter, but compared to last year's Q2, we noticed an increase of around 14%. This increase is mainly driven by the extension of our R and D capabilities at the beginning of the year. We have been reporting that during our Q1 conference call, and this is a very important step for us to prepare the company for even more growth in the future.
Thus, EBIT came to €13,000,000 corresponding to an EBIT margin of 17.4%. After taxes and minorities, the consolidated net income amounted to €9,100,000 or 12.1% of sales compared to €8,000,000 or 11.6% in the 2018. This equals basic earnings per share of €0.46 versus €0.4 in the respective prior year period, nominally an increase of 15%. If you go to the figures, much behind the comma, then it's only 14.2%, but still very good. The operating cash flow of the 2019 reached €9,700,000,000 Capital expenditures, excluding capitalized development expenses, amounted to €9,100,000 or 12.2 percent of sales.
The expansion of our fixed capacity made good progress and is slowing down now. Nevertheless, driven by both the cash expanding and an increase in working capital, the adjusted free cash flow is still slightly negative with minus €1,700,000 compared to the minus €1,100,000 in 2018, but it shows a significant improvement compared to the previous quarter where we were at minus €10,400,000 At the end of the quarter, we had a net debt position of €24,400,000 And let me remind you here, I mean, we already commented that last time, but again, a reminder here. This main driver for the change from a net cash to a net debt position is the application of the new IFRS 16 standard, where more or less leases in terms of debt, and this affected roughly €17,000,000 in our case. Furthermore, the CapEx spending, the dividend payment of more than €10,000,000 in our current share buyback program, accounting also for around €3,000,000 from December 2018 through the end of the second quarter. They are all, of course, reflected in the balance of the net debt to net cash.
Further information and figures for the second quarter twenty nineteen can be found in our quarterly statement available at our homepage. Let me now come to our guidance, which we confirm for 2019, we expect sales to grow by 6% to 10% compared to 2018. EBIT margin is expected to be between 1317% of sales. Capital expenditures, including capitalized development costs, are expected to be below 15% of sales. The adjusted free cash flow will be positive.
The guidance is based on an average exchange rate of USD 1.15 to the euro. I think you can conclude from our figures of the unchanged confidence that our outlook continues to develop reasonably well in the unfriendly market environment of 2019. Even under these circumstances, we are able to grow and improve earnings. Our products are well received on the market, and we gained market share across a remarkable broad product portfolio with products such as high yield for gesture control, LED drivers for interior and realized motor controls for a variety of applications and ultrasonic parking, just to name the most important ones. We recognize that the growth of integrated circuit contents per car is fully intact for us and for our attractive and innovative products.
So many program starts and ramp ups are compensating for disappointing market volume developments. And this is not only true for China but across our worldwide customer base. The structural trend towards more autonomous driving, more electric vehicles, more safety and comfort is obviously the trend we are serving and shaping with our innovations. We have no doubt that individual mobility is the right place to be. Furthermore, we made very good progress in the medical field with our MedMEMS segment with XMI in The U.
S. With our innovation in IntraSense, the world's smallest patient sensor with globally unique micro meter scale automatic wire attach technology is already now a very remarkable success. Sample orders alone account already for a high six digit dollar number of revenue since product launch in 2018. And additionally, SMI was awarded the Innovative Product of the Year prize for interest during the test of Sensors Expo Awards in San Jose, California in June. This Sensors Expo conference where this happened is North America's premium event for Sensors connectivity and IoT.
So we obviously enjoy more and more visibility for our company and for this product by this effect, you can imagine. All in all, we can state that our innovative products do not only shift to the market trends, but in certain areas even to structure them. We will continue to work on trailblazing products and innovations, which lay the ground for a superior market performance. Okay. Ladies and gentlemen, with this through my presentation, I would like to open the floor for questions now.
The first question is from Johannes Fries of Apus Capital.
We can really say congratulations this time because you definitely outperformed as a sector in the semi space. Therefore, you can explain a little bit more. I just came out of the evening call. So I see the same trends here in China weak. The commodity traditional business coming out by new products as a drivers of growth in the automotive space.
It seems that maybe you have a stronger impact and you also benefit from an effect that you have maybe fully loaded tap, then you can confirm this as Infineon definitely in the automotive space has to reduce this utilization of the tap. Also maybe you can give us some ideas what are the products which has been the biggest drivers in the quarter and in the first half. Was it again, let's say, LED business was it in is the ultrasonic ultrasonic. Sorry about that. Ultrasonic and also was it the RADA business with Halios, the big drivers next to the sensors in in micro mechanics?
Yeah. Mister Hies. You for the question and for the confidence. We we we still don't do RADAR just to to mention this because when you when you said you when you formulate integration about value six eight RADAR, ALIOS is not based on RADAR. It's based on
RADAR. RADAR. Okay. Because in TIMEN has an RADAR solution in proper smartphones,
is Okay. Let me first answer the simple one. Yes, our head is completely loaded. And I think gPlo and ours know this, and I think you know it as well. Because since we have kind of elaborated on our stabilized strategy and we're using for a high percentage better material that is not coming from our side, we are able that even if prospects do not develop like we anticipate, we can keep our fab completely full because we modulate the needs via our foundry partners, and that works out very well.
So they get enough material. So don't worry, they are used to modulate the fab. On the product side, I just can repeat what I said before because we never have been more specific on this. We sell in every area, sell more. We sell more Helios.
We sell more Ultrasonic, Poking Assist, ICs, we sell more LEDs. But also, motor drivers are taking up a lot because the applications for motor drives seem to really broaden as we speak. And as all of them nowadays are electronically commutated, rationally motors, they need quite complex driving ICs, which helps, I think, all IC companies. So all those things were contributing. I mean, strongly growing, of course, areas where we have never been present.
I mean, if you would have listened to conference calls ours two years ago, and maybe we had the first mentioning that we do developments in the rare light area, but we definitely had no revenue in those days. And now revenue is climbing up strongly. But this is one of many. So in all business lines, have sensor business line, ultra and price business line, comfort and safety, we have more need for our products. That's nice.
Oh, no. It's nearly fully answered. Maybe I told the other question to Mr. Schneider. Free cash flow will be definitely positive in the second half.
And how much maybe is a chance that we can come back to maybe a positive net liquidity because the dividend effect is definitely maybe in fact, which hits more the first half and then not comes again in the second. And maybe also the IFRS 16 effect is only a onetime effect. So is there a chance to come back into net liquidity in this year or maybe soon next year?
Mr. Rice, yes, we estimate that we will be free cash flow positive this year. On the net debt, we believe we will still have net debt at the end of the year.
Okay. But to a lower amount, I think.
Be careful. This is a lot. We are at 24% as we just reported. So we I mean, we have we know why we do not guide free cash flow more precisely when we do. So if you're not and even if you try to force us, we will not give you a more detailed number there.
I mean it will be positive for free cash flow, but it will not be sufficient to lift us to the other side of the sign again. And have in mind, I mean it's for me, this is the kind of a balance method. I mean, we have been long years. We have been cash positive. And just by changing the balance sheet, I think
Now liquidity, of course, have a lot of cash. I mean, we are very liquid.
Maybe another topic, inventory topic is definitely the topic in the in the semi space, which is discussed most at the moment. Yeah. Going also back to the opinion call again, they said, if they've seen the automotive space still maybe five to six weeks in the commodity business
and
the traditional maybe more volume related semi space for five to six weeks more than what is normal and say expect another two week process to work it down. Is it also maybe something you would confirm? And could it mean if this is done, maybe even your growth rate could be higher because this is in the moment. It's it's something which is maybe working against the growth you get from the new product at the moment? Because like you mentioned, also the additional ones are under pressure because we are volume related also on top of the inventory impact there.
I mean, if you have plans for a high volume product, then it's, let's say, coming out at a rate which is not 100% but 80%. I mean, you're prepared in your production line. And we have a production cycle that's almost half a year long. So we cannot react immediately. But on the other hand, that's something we also have been reporting constantly.
As we are entering more and more the ASSP regime of the business, We have been aware of and we had to increase our inventories in order to capture especially in the Asia markets business changes which you only can grab if you're able to react faster than we usually have been able to do. So yes, we have also more inventory. We have quite a lot of inventory, but we don't feel bad at all about this because we first of all, we know that we can get it sold. And second, this is a part of the strategic preparation of being more flexible in the ASP So when the market picks up, we are ready to supply it. So we do a lot of drastic change now.
I mean, in general, we, of course, went a little bit on the brake because when the revenue doesn't run-in a way that you kind of expected it to be, then it's wiser to go a little bit from the cash pedal. But in general, to have a decent amount of inventory was a kind of a strategic plan. Yes. In the case that customers tend to order on a time schedule that if you start hand producing, if you will meet the the change to silver.
But the question was more on the inventory at the customer side, in the general the direct the direct customers and distributors.
I mean, definitely, inventories, yes. I mean, those was reporting about specific Chinese customers that experience minus 20% or sometimes even more decrease of their specific market. Definitely, have inventories full. But I mean, superaligned service will have an end as well. So I mean, generally, when we look into what is making us grow, then it is not these volume related products.
So it's clear. It's those that have been ramping, that are ramping. I mean, most of them is really the ones that we had ramps maybe already a few months ago, and and they are now spreading out. So just to name an example, and I don't say that this is an example, but just to make it clear, if if the BMW starts with a new electronic feature, let's say, in a five Series or in a seven Series, and then it goes to the five and to the three and to the X models, then this is really giving the boost to the ramp. And these are the things that help us overcompensate the volume related effects.
Next question is from Stephane Houri from ODDO BHF.
Yes. Good morning. So my question is about your remark that basically the underlying market is not good at the moment. As Mr. Rice just said during the call I think Finian confirmed that, yes, the legacy business, I would say, is not good.
It's not doing good, and the visibility around an improvement is really weak. So and you said that you were compensating with new contracts, new design wins, new products in the market. So my question is how long can you compensate this weakness? If the weakness continues going forward, what is your visibility on products that are ramping as we speak, but maybe also in the second half? And second question is about the margin guidance for the year.
You are clearly more in the high end of the guidance. You're targeting 13% to 17% now for the first half. You are at 16%. So clearly, in high end of the guidance. So what prevents you from upgrading upgrading, sorry, or shrinking the whites of this guidance on the upworld,
of course? Thank you. Okay. Thanks for the question. I think this is a good question.
I mean, general, I won't give you a guidance now for 2020. We have a guidance there for 2019, and this is positive. And so I don't see any related problems with the item you just raised for this year. Also, as just discussed numerous times now, we agree that, let's say, volume dependent things are still running as has been anticipated by many of our peers or competitors. How this develops in 2020 is hard to be seen.
But in general, we have a very full design pipeline. So without giving any guidance for 2020 in the moment, we think the business develops nicely and we have many reasons to believe why with innovative products you can maybe grab a better edge of the whole situation. When it comes to profitability, why don't we increase guidance? I mean, we've first of all, last year's fourth quarter was a very strong one. So we have to get up against this also in this year.
And always we have been advised that it's also always been a little bit blamed for conservative guidance. But the benefit, I would say, with us is that usually if we do guide, we don't have to correct it aside the market completely collapses. So think that now is no one situation where we should change anything in the guidance, narrow anything. We did, don't forget this in February. So I think it was not unbrave to do this.
But on the other hand, we don't want to be overoptimistic now and make the funnel more narrow that is necessary. So we think, yes, we are in a good way, but there is no need to say anything tighter now. Okay. Thank you very much. The
next question is from Lukas Svang of Unice. The floor is yours.
Yes. Good morning. Two of my questions were already asked, so I have only one left. Concerning the order intake or order backlog and to revenue, you wrote a quarter ratio Do you see here maybe a downturn in the development?
Or what's your opinion on this ratio?
I mean, during the whole year, we saw, of course, again, we will repeat it now. In volume related products, we saw that, let's say, order intakes were not on the speed and on the pace we have been used to. But of course, you see in this book to bill also the ramp. So everything contributes. It's building the average.
Where we are, in general, one is for us, let's say, not a bad sign, especially in the market environment, yes. But on the other hand, we also learned now over many, many quarters and many, many years that book to bill ratios, Also, they seem to be fantastically logic. They shouldn't be over interpreted because customers usually do what they want. And even if they book something, if they wake up the next morning and say, okay, I don't drive the I don't pull this order then. And they, first of all, they don't do it.
So you have to have time to persuade them to still do it. On the other hand, they experience the other cases as well. They they it's like, no. We don't need any more parts. And then they wake up in the next day and they say, oh, you know what I wanted to say, we forgot something.
So you have to deliver 30% more. So I mean, it's at least not a bad business indication. It's a fair business indication for the area we are in.
Next question is from Michael Scharmann of Warburg Research.
I have two questions from my side. The first one, I want to come back to the inventory discussion. You had a pretty strong ramp up of inventories in the first half of the year. Did you expect kind of a similar trend for the remainder of the year? Or do you think that the inventory additions will slow
down? It will slow down.
Okay. And from the inventories you have added, how much maybe a rough number, how much came from your production? And did you also take inventory from third party suppliers?
We we don't disclose this. I mean, I even wouldn't know. I mean, of course, when we when we go on the brake pedal, we first go on the brake pedal from the from the foundry side. So that's you know? And I think it's not necessary to disclose this.
I wouldn't know why we shouldn't understand anything on this story. No. I can't tell it.
Okay. But you but you. Yes, okay. I'll leave it there. That's fine.
Then on the men's business, usually in the past years, it had been a bit back end loaded. Do you expect similar developments this year? Or is the difference in the quarterly pattern? Q2 was often much stronger than H1.
Yes. But I don't know whether we really had a pattern. If you look for more years, I had a hard time in identifying patterns, I must say. I think in general, we say that they are quite volatile and this is just the case because if you say, the overall revenue in a quarter is only €7,000,000,000 and there are products and projects in it that alone can decide about €1,000,000,000 or 2,000,000,000 then volatility is a kind of a given subject in itself. What we see this time, and this is the reason why I even lifted it up to the presentation, we have a decent development of the baseline, which is coming from this IntraSense product because IntraSense is really a small revolution, I would call it, in the medical arena because you can do it through measurements for all kinds of purposes.
Maybe I'm the man astonished most about all the different applications that we seem to serve. There are even applications in the oncology area where when you can precisely determine where the high pressure is, the tumor, you can be much more precise in the dosage of your pharmaceuticals. So the efficiency of fighting cancer seems to be dependent on how clever are you in mobilizing the tumor, and our patient center seems to do to really contribute to that. So we have exciting times in this area, and this is one of the reasons why we have so many simple ordering. And believe me, if you don't make the samples cheap, so getting a loan from ordering for almost €1,000,000 in much less than a year is amazing.
So we are far away from any serious production up to now, but still Intragen is contributing, and we foresee that this should really be an interesting product to develop. It's too early to really say how far this goes, but it's a very nice product.
Okay. So and it might take some time, but maybe in a couple of years, it could really be
contribution. Maybe we see already in maybe not in a couple of years, maybe it will start a little bit next year. How much influence this has on the revenue of SMI, I can still tell you because in all these projects, also the physicians tend to be not as precise as the physicists like to be or really a literary engineer like to be. But the chances are exciting. Appreciate it.
Good. And then to the ramp ups, generally, are these broadly, very broadly evenly split over the years? Or are they kind of skewed to the H1 or H2?
I mean, it comes back to how fantastic is the visibility even for our customers. We just had a few days ago exactly that we checked that somebody woke up in the morning and realized that we should go to order parts. So I we I I don't see any loading. The only thing I see is that we have across really a quite broad product portfolio. We have new business chances.
And we don't get how a rent goes into the various models of a core customer, we don't get this disclosed. So I mean, when I look through the periodicity of the core producers, I would say, typically, events should happen in the beginning of the year and in the end of the year. But they, of course, need a preloading time as well. So we can't tell. I mean, we only know that we are in quite a few ramp ups.
Okay. But you have an indication that it's kind of a strange pattern or something?
It's also I mean, no pattern is strange for us. If you went through the patterns of interior lighting, then no pattern is strange
for us. Okay. Then a question for Arne. Shaila, the G and A number got up by 1,000,000 in the second quarter. What's behind that?
And is that kind of a lasting effect? So should we expect a similar level during the next quarters?
I would say these are pretty normal fluctuations. I would if you look for a run rate, I would average out some quarters because we always have fluctuations with onetime effects, one and the other directions. So run rates are better average over some quarters.
Have you kind of a one off effect, extraordinary write down or something?
No. I mean, if so many small ones. So there's nothing worth commenting. Yes. But still things fluctuate.
They are trade fairs now and then. These are costly. They are up a little bit. And we analyze that actually month by month and have a very detailed look such that we do not miss anything. But with all the single items, if they are small and they just fall into different quarters and they accumulate a little bit more in the one quarter and then in the next quarter for whatever reason the trade fair may be in April instead of March, then there are effects that for us need no further explanation because they are just normal volatility.
Yes. Okay. Good. Last question is on the design wins. Maybe a quick comment on how satisfied you are with the diamond development so far this year?
We have a decent development. There are no that our targets will be made by the end of the year.
Next question is from Johannes Rees of Oppenheimer Capital.
There's only one short follow on question. The ASSPs, which are now at sales around a percentage of 50%. If I remember in prior presentations, in the order intake, it was maybe in the 70s or 80s. Is that still the case for ASSPs to grow further going forward?
I mean, frankly speaking, I don't have a more precise number right now. What we see is that in our design wins, we have many, many, many ASSPs. So if you would just count the number of projects, they are maybe at 97% or so, then ASIC appears and boom, this is such big that you can collect 100 ISSPs and they will and as always, we don't have a paradigm. So whenever the business good and we can fulfill the needs of the customer, we do it. So there is no objection against big ASICs.
If the business case is good for us, then the customer is obviously willing to buy it from us and develop it with us. But I don't have a more precise number in the moment. I look through the list as we regularly get them from a pure count basis. PSSP is by far, far, far dominant. But now and then, the ASCs come in, and they correct again then for the ratio when it comes to the revenue piece.
So I would say it's still in the same range, 70% ASSP revenue, 30% ASIC. But we will make the new statistics by the end of the year.
Super. Harry, two quick follow ons. On MEMS, did you say if the growth going on, especially in health care, there's a good chance that the profitability stays above the semiconductor space even in the future? And secondly, what is going on in The U. S?
Maybe when we could see stronger growth? You mentioned this new team, which had maybe a great start. I know from design wins to revenue, it's a long way. But as a design wins, I see your further progress in The U. Business, it could be a growth driver going forward.
Let me first answer the second question. I mean, the team has already contributed to a lot of design ins, but the problem will stay the same. In very rare cases only, we will see the revenue in The U. S. Because
Oh, yeah.
Is not more successful than he is now. Still, USA is not the area where ICs are assembled in ECUs. So our team is working from an really good, and we have quite a few design wins that have been originating from our North American team and have been supported by them. But again, it will all appear in The U. S.
So Major. I'm sorry to say that we are forced to do this regional distribution, but it's a point of delivery. It has nothing to do with the business. Yes.
Very clear.
Coming to SMI, we don't give selective guidances for the two segments. The only thing I think you can take with you from the comments I made on SMI, I think with these new IntraSense products, we are really entering in a new phase with SMI. How far this features we will see? I mean, still, have to take into account that if you look to the revenue, then SMI is only still 10% of what the whole company So even if we would now add another 10% of growth to the already impressive growth, I would say, they have been showing, then this will again on the basis of our complete campus in peak only 1%. So I mean they have to do a lot in order to be remarkable on the group level.
But nevertheless, profitability in Medical Areas is definitely a chance for the good.
The next question is from Christian Vanthier of Hauppenauferre.
Hello, good morning. I would have two, please. So first of all, what can we expect from the gross margin for the second half? I mean it's really improved quite nicely compared to last.
Is that something you can take as a
run rate for the second half and also for 2020? Or whether some special effects that helped you in the second quarter? And then the second one would be on the wafer prices. What kind of development have you really been seeing and what would you be expecting to see in the near future?
On the question for guidance for gross margins for individual quarters or half or next year, we do not give that. We give the guidance on our key parameters on our four key parameters and this unfortunately has to suffice. Wafer pricing, we see that the aggressive behavior of wafer suppliers is turning towards the more customer focused behavior. People are interested in loading again. So given where we are now, we certainly have seen the peak in wafer prices in the back mirror.
So that concern slowly goes away. We of course have also some commitments over longer term agreements. We have some shorter term arrangements. So I would say we will not face further headwind in that area. Would you be first?
Just to get back on the gross margin. Were there any special effects that positively impacted the gross margin in Q2?
No. There's a range of operational things that fluctuate. So in one quarter you try to explain a little fluctuation up and the other little fluctuation down. The truth is there are a lot of things that overlay and that just lead to a little bit of fluctuation. It's not good to read too much into it.
Okay. All right. Thank you.
There are currently no questions in the queue.
Okay. Ladies and gentlemen, thanks a lot for your big interest and the many questions. As a closing remark, like always, I would like to remind you on the upcoming events. Our results of the first quarter will be published on the 11/06/2019. We would like to invite you already today to join us for the conference call at this occasion.
So for now, thanks a lot again for your participation. Goodbye, and have a nice day.