Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE 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, Dr. Anton Mindl, CEO.
Hello, ladies and gentlemen. Warm welcome from my side. We will have a meeting on our results of the second quarter. Dr. Arne Schneider, 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 facts. Sales increased by 8.6% year-over-year, coming to EUR 75 million 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 US dollar to euro exchange rate. Truth also be told from Q1 to Q2, only 0.3% of that came from the US dollar. I think still a good development.
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 U.S. dollar when we did our budgeting process. Coming now to the regional distribution of our revenue. Europe increased roughly proportional to sales to EUR 35.5 million, accounting for roughly 47% of our total sales volume. That was almost precisely the same number in percentage, like 2018. The U.S. stood at EUR 2.9 million, other countries at EUR 7.4 million. Asia came out at EUR 29.3 million or 39% of sales. As always, we recommend not to over-interpret the individual developments in the region, since this is still more a point of delivery logic than a market logic. Nevertheless, the weakness in Asia can be seen.
We see when we go to specific projects in China, -15% to even -20% and sometimes even more % developments are going down, revenue going down for specific purely car volume-related products with some Chinese customers. 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. Not with the big numbers we have been used to in the past, only by around 3%. Still not bad in the situation given. Coming to our two segments, semiconductor and micro mechanics, they both enjoyed positive momentum. The semiconductor segment came to sales of €67.7 million, +7.8%, and an EBIT margin of 73%, equals EUR 11.7 million.
The MEMS segment had a very strong first half year, and Q2 was no exception, with sales amounting to EUR 7.3 million, 16.6% up, and an EBIT margin of 18.3% in the quarter under report. The latest development has been really positive for our MEMS segment, especially driven by the success in the medical area. I also come to that a little bit more in detail later on. Coming now to profitability. Gross profit is developing well, amounting to EUR 34.6 million or a gross margin of 46.2% in the second quarter 2019, reflecting our good operating performance. Operating expenses are more or less stable compared to the previous quarter, compared to last year's Q2, we notice an increase of around 14%. This increase is mainly driven by the extension of our R&D capabilities since 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 EUR 13 million, corresponding to an EBIT margin of 17.4%. After taxes and minorities, the consolidated net income amounted to EUR 9.1 million or 12.1% of sales, compared to EUR 8 million or 11.6% in the second quarter of 2018. This equals basic earnings per share of EUR 0.46 versus EUR 0.40 in the respective prior year period. Nominally, an increase of 15%. If you go to the figures, very much behind the comma, then it's only 14.2%, but still very good. The operating cash flow of the second quarter of 2019 reached EUR 9.7 million. Capital expenditures, excluding capitalized development expenses, amounted to EUR 9.1 million or 12.2% of sales.
The expansion of our chip capacity made good progress and is slowing down now. Nevertheless, driven by both the CapEx expanding and an increase in working capital, the adjusted free cash flow is still slightly negative with minus EUR 1.7 million compared to the minus EUR 1.1 million in Q2 2018. It shows a significant improvement compared to the previous quarter, where we were at minus EUR 10.4 million. At the end of the quarter, we had a net debt position of EUR 24.4 million. Let me remind you here, 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 have turned to debt, and this affected roughly EUR 17 million in our case.
Furthermore, the CapEx expanding the dividend payment of more than EUR 10 million in our current share buyback program, accounting also for around EUR 3 million from December 2018 to the end of the second quarter. They are all, of course, reflected in the balance of the net debt/net cash. Other information and figures for the second quarter 2019 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%-10% compared to 2018. EBIT margin is expected to be between 13% and 17% of sales. CapEx 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 $1.15 to the euro.
I think you can conclude from our figures and the unchanged confidence that our outlook at Elmos 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 gain market share across a remarkable broad product portfolio with products such as HALIOS for gesture control, LED drivers for interior and rear lights, 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 content per car is fully in effect for us and for our attractive and innovative products. Many programs start and ramp up to help compensating for disappointing market volume developments. 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 doubts that individual mobility is the right place to be. Furthermore, we make very good progress in the medical field with our med segment, SMI in the U.S. With our innovation, IntraSense, the world's smallest pressure sensor with globally unique micrometer 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 end of 2018. Additionally, SMI was awarded the Innovative Product of the Year prize on December during the Best of Sensors Awards in San Jose, California in June this year. This Sensors Expo & Conference where this happened is a North American premium event for sensors, connectivity, and IoT.
We obviously enjoy more and 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 fit 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, and with this, I'm through my presentation. I would like to open the floor for questions now.
Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone pad. If you would like to withdraw your question, press nine and star again. The first question is from Johannes Ries, Apus Capital.
Yes. Hello, good morning. We can really say congratulations this time because you definitely outperformed as a sector in the semi space. If you can explain a little bit more, just came out of the Infineon call, I see the same trends. China weak, the commodity traditional business coming down, new products are the drivers, of course, in the automotive space. It seems that maybe you have a stronger impact and you also benefit from an effect that you have maybe a fully loaded cap. Maybe you can confirm this as Infineon Technologies in the automotive space has reduced this utilization of such caps. 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 LED business? Was it again the ultrasonic, sorry about it.
Ultrasonic, and also was it the radar business with HALIOS, the big drivers next to the sensors in Micromechanics?
Hello, Mr. Ries. Thank you for the question and for the compliments. We still don't do radar, just to mention this, because when you formulated the question about HALIOS, you said radar. HALIOS is not based on radar, it's based on optics.
Not based on radar, okay. Infineon has a radar solution in top of smartphones.
Don't worry.
Yeah. Okay.
Let me first answer the simple one. Yes, our CapEx is completely loaded.
Okay.
People who know us. You know this, and I think you know it as well.
Yes.
Since we have kind of elaborated on our fab-lite strategy.
Thank you.
are using for a high percentage wafer material that is not coming from our fab, we are able, that even if prospects do not develop like we anticipate, we can keep our fab completely full because we modulate the need via our foundry partners, and that works out very well. They get enough material. 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. In every area, we sell more. We sell more ADAS, we sell more ultrasonic, parking assists, ICs, we sell more LEDs. Also motor drivers are taking up a lot because the applications for motor drives seem to really broaden as we speak.
As all of them nowadays are electronically commutated brushless motors, they need quite complex driving ICs, which helps, I think, all us companies. All those things were contributing. Strongly growing, of course, the areas where we have never been present. If you would have listened to conference calls of ours two years ago, and maybe we had the first mentioning that we do developments in the rear light area, but we definitely had no revenue in those days. Now revenue is climbing up strongly. This is one of many.
In all business lines we have, sensor business line, power and drives business line, comfort and safety, we have more needs for our products. That's nice.
Hans, very well.
All applications.
Oh, no, it's nearly fully answered. Maybe I pose the other question also, 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 an effect which hits more the first half and then not comes again in the second. Maybe also the IFRS 16 effect is only a one-time effect. Is there a chance to come back into net liquidity in this year or maybe soon next year?
Hello, Mr. Ries. 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. To a lower amount, I think.
Be careful. This is a lot. We are at 24%, as we just reported.
Okay.
We know why we do not guide free cash flow more precisely than we do. Even if you would try to force us, we will not give you a more detailed number there. 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. Have in mind, for me, this is a kind of a balance method. We have been long years, we have been cash positive, and just by changing the balance sheets, I think nothing changed in our liquidity. Of course, we have a lot of cash. We are very liquid.
Maybe another topic, the inventory topic is definitely the topic in the semi space, which is discussed most at the moment.
Yeah.
Going also back to the Infineon call, again, they said, as I seen the automotive space still may be five to six weeks in the multi business, in the traditional maybe more volume-related semi space for five to six weeks more than what is normal, and they expect another two-week process to work it down. Is it also maybe something you would confirm? Could it mean if this is done, maybe even your growth rate could be higher because this is something which is maybe working against the growth you get from the new products at the moment? Like you mentioned, also the traditional ones are under pressure because for the volume-related also, and on top, maybe you have the inventory impact there.
Maybe. If you have planned for a high volume product that then is, let's say, coming out at a rate which is not 100% but 80%, you prepared in your production line. We have a production cycle that's almost half a year long. We cannot react immediately. On the other hand, remember that 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 chances which you only can grab if you're able to react faster than we usually have been able to do. Yes, we have also more inventory.
We have quite a lot of inventory, but we don't feel bad at all about this because, 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 ASSP arena. When the market picks up, we are ready to supply it. We do not have drastic change now. In general, we, of course, wait a little bit on the break 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 gas pedal. In general, to have a decent amount of inventory was a kind of a strategic plan.
Yes.
Because we have many ASSPs that customers tend to order on a time schedule that, if you start producing, usually will meet the change to Silva.
The question was more on the inventory at the customer side, in the general, the direct customers and distributors.
Definitely there is inventories. I was reporting about specific Chinese customers that experience minus 20% or sometimes even more decrease of their specific market. Definitely, they have the inventories full. Sooner or later, this will have an end as well. Generally, when we look into what is making us grow, then it is not these volume related products. That's clear. It's those that are testing ramping, that are ramping. Most of them is really the ones that had ramps maybe already a few months ago, and they are now spreading out. Just to name an example, and I don't say that this is the example, but just to make it clear.
If BMW starts with a new electronic feature, let's say in a 5 Series or in a 7 Series, and then it goes to the 5 into the 3 and to the X models, then this is really giving the boost to the ramp. These are the things that help us overcompensate the volume related effects.
All right. Yeah. Thanks a lot, Matt.
Okay.
The next question is from Stéphane Houri from ODDO BHF.
Yes. Good morning. My question is about your remark that basically, the underlying market is not good at the moment as Mr. Ries just said during the call of Infineon. Infineon confirmed that the legacy business, I would say, is not doing good, and the visibility around an improvement is really weak. You said that you were compensating with new contracts, new design wins, new products in the market. My question is, how long can you compensate this weakness if the weakness continues going forward? What is your visibility on the products that are ramping as we speak, but maybe also in the second half? Second question is about the margin guidance for the year. You are clearly more in the high end of the guidance. You are targeting 13%-17%.
For the first half, you are at 16, clearly in the high end of the guidance. What prevents you from upgrading or shrinking the width of this guidance on the upward, of course? Thank you.
Okay. Thanks for the question. I think this is a good question. In general, I won't give you a guidance now for 2020. We have a guidance there for 2019, and this is positive. 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. In general, we have a very full design pipeline. 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?
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. Always we have been guides that have also always been a little bit blamed for conservative guidance. The benefit, I would say, with us is that usually if we do guides, we don't have to correct it, aside the market completely collapses. We think that now is no situation where we should change anything in the guidance there or anything. We did, don't forget this, in February. I think it was not unbrave to do this. On the other hand, we don't want to be over-optimistic now and make the funnel more narrow than is necessary. We think, yes, we are on a good way. There is no need to set anything tight now.
Okay. Thank you very much.
Thank you.
The next question is from Lukas Spang of Junolyst. 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 about a ratio of one. Do you see here maybe a downturn in the development, or what's your opinion on the ratio?
During the whole year, we saw, of course, again, numerous repeated 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. Of course, you see in this book-to-bill also a ramp, everything contributes. It's pending the average. That we are in general at one is for us, let's say, not a bad sign, especially in the market environment we are in. On the other hand, we also learned now over many, many quarters and many, many years that book-to-bill ratios, although they seem to be fantastically logic, they shouldn't be over-interpreted because customers usually do what they want. Even if they book something, if they wake up the next morning and say, "Okay, I don't pull this order then." They first of all, they don't do it.
You have to have time to persuade them to still do it. On the other hand, we experience the other cases as well. They say, "No, we don't need any more parts," and then they wake up in the next day and they say, "Oh, sh." You know what I wanted to say. We forgot something. You have to deliver 30% more. It's at least not a bad business indication. It's a fair business indication for the area we are in.
Okay. Good. Thank you.
Thank you.
Next question is from Malte Schaumann of Warburg Research.
Two questions from my side. The first one, I wanted to come back to the inventory discussion. You had a pretty strong ramp-up of inventories in the first half of the year. Do you expect a kind of a similar trend for the remainder of the year, or do you think that the inventory additions will slow down?
The additions will slow down.
Okay. From the inventories you have added, how much, maybe a rough number, how much came from your own production? Did you also take inventory from third-party suppliers?
We don't discuss this. I even wouldn't know. Of course, when we go on the brake pedal, we first go on the brake pedal from the foundry side. I think it's not necessary to discuss this. I wouldn't know where we should understand anything on this story. I can't tell it.
Okay. You Yeah, okay, I leave it there. That's fine. On the MEMS business, usually in the past years, it had been a bit back-end loaded. Do you expect a similar development this year, or is the difference in the quarterly pattern? It actually was often much stronger than H1.
Yeah, 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. In general, we say that they are quite volatile, and this is just the case because if their overall revenue in a quarter is only EUR 7 million, and there are products and projects in it that alone can decide about EUR 1 million or EUR 2, then volatility is a kind of a given subject 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. IntraSense is really a small revolution, I would call it, in the medical arena, because you can do in vitro measurements for all kinds of purposes.
We end up the men 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, a tumor, you can be much more precise in the dosage of your pharmaceuticals. The efficiency of fighting cancer seems to be dependent on how clever are you in localizing the tumor, and our pressure sensor seems to really contribute to that. We have exciting times in this area, and this is one of the reasons why we have so many sample ordering. Believe me, we don't make the samples cheap. Getting alone sample ordering for almost EUR 1 million in much less than a year is amazing.
We are far away from any serious production up to now, but still IntraSense 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. It might take some time, but maybe in a couple of years, it could really be a very large revenue contributor.
Maybe we see already, 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't tell you because in all these projects, also the physicians tend to be not as precise as we physicists like to be or we electro engineers like to be. The chances are exciting, for sure.
Okay, good. Into the ramp-ups, generally, are these broadly, very broadly, evenly split over the years or are they 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 effect, that somebody woke up in the morning and realized that we forgot to order parts. 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. We don't get how a ramp goes into the various models of a core customer. We don't get this disclosed. When I look to the periodicity of the core producers, I would say typically ramps should happen in the beginning of the year, then the end of the year. They of course need the pre-loading time as well. We can't tell. We only know that we are in quite a few ramp-ups.
Okay. Don't you have the indication that it's a strange pattern or something?
I mean, no pattern is strange for us.
Yeah.
If you went through the patterns of interior lighting, then no pattern is strange for us.
A question for Arne. Sorry, the D&A number got up by EUR 1 million in the second quarter. What's behind that and is that a lasting effect, or should we expect a similar level during the next quarters?
I would say these are pretty normal fluctuations. If you look for a run rate, I would average out some quarters. We always have fluctuations with one-time effects, one and the other directions. Run rates are better averaged over some quarters.
Okay. Had any kind of a one-off effect, extraordinary write-down or something?
No. I mean, if so, many small ones.
Yeah.
There's nothing worth commenting. Still things fluctuate. There are trade fairs now and then, these are costly, then it goes up a little bit. We analyze that actually month by month, and have a very detailed look, such that we do not miss anything. With all the single items, if they are small and they just fall into different quarters and they accumulate a little bit more into 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.
Okay, good. My last question is on the design wins, maybe a quick comment on how satisfied you are with the design win development so far this year.
We have a pleasant development up to now, so no doubt that our targets will be met by the end of the year.
Okay, thanks.
Thank you.
If you would like to ask a question, please press nine and star on your telephone keypad. The next question is from Johannes Ries of Apus Capital.
There's only one short follow-on question. ASSPs, which I know stays around a percentage of 50%. If I remember in prior presentations, in the order intake it was maybe into 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 ASSPs. If you would just count the number of projects, we are maybe at 97% or so. An ASIC appears and boom, this is such big that you can collect 100 ASSPs in level. As always told, we don't have a paradigm. Whenever the business is good and we can fulfill the needs of the customer, we do it. There is no objection against big ASICs. If the business case is good for us, and the customer is obviously willing to buy it from us and develop it with us. I don't have a more precise number in the moment.
If I look through a list, as we regularly get them from a pure count basis, ASSPs by far are dominant. Now and then, big ASICs come in and they correct again. For the ratio, when it comes to the revenue piece, I would say it's still in the same range, 70% ASSP revenue, 30% ASIC. We will make the new statistics by the end of the year.
Super. All right, two quick maybe follow-ons. On MEMS. Would you say, if the growth going on, especially in healthcare, there's a good chance that there's a probability space above the semiconductor space, even in the future? 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.
Yeah.
Every design win right to your first progress in U.S. business is quite good key and growth driver going forward.
Let me first answer the second question. The team has already contributed to a lot of design wins. The problem will stay the same. In very rare cases only, we will see the revenue in the U.S.
Oh, yeah.
if Mr. Trump is not more successful than he is now, still U.S. is not the area where ICs are assembled in ECUs. Our team is making-
Very clear. Mm-hmm.
progress really good. We have quite a few design wins that have been originating from our North American team and have been supported by them. Again, it will not appear in the U.S.
Asia.
I'm sorry to say that we are forced to do the regional distribution, but it's a point of delivery. It has nothing to do with the business.
Yeah. 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 it features, we will see. Still, you have to take into account that if you look to the revenue, then SMI is only still 10% of what the whole company is.
Yeah.
Even if they would now add another 10% of growth to the already impressive growth, I would say they have been showing, then this would again, on the basis of our complete company, be only 1%. They have to do a lot in order to be remarkable on the group level. Nevertheless, the profitability in medical areas is definitely a chance for the good.
Okay. Thanks a lot.
Thank you.
The next question is from Christian Sante of Hauck & Aufhäuser.
Hello, good morning. I would have two, please. First of all, what can we expect from the gross margin for the second half? It's really improved quite nicely compared to last. Is that something we can take as a run rate for the second half and also for 2020? Were there some special effects that helped you in the second quarter? 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 a guidance for gross margins for individual quarters or half or next year, we do not give that. We give a guidance 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 a more customer-focused behavior. People are interested in loading again. Given where we are now, we certainly have seen the peak in wafer prices in the back mirror. That concern slowly goes away. We, of course, have also some commitments over longer-term agreements. We have some shorter-term arrangements. I would say we will not face a further headwind in that area. Would you agree, Fritz?
Just to get back on the first one. Thank you for that. Were there any special effects that positively impacted the gross margin in Q2?
There's a range of operational things that fluctuate. In one quarter, you try to explain a little fluctuation up, in the other, a 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 the big interest and the many questions. As a closing remark, like always, I would like to remind you of the upcoming events. Our results of the first quarter will be published on the 6th of November 2019. We would like to invite you already today to join us for the conference call at this occasion. For now, thanks a lot again for your participation. Goodbye and have a nice day.