Good morning!
Good afternoon, ladies and gentlemen. Good morning, and welcome to the LEM Holding SA half-year results 2023/2024 conference call. 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, Frank Rehfeld, CEO of LEM.
Good morning, ladies and gentlemen. Thank you for joining us here on the webcast or the telephone call. Today, we would like to introduce LEM's half-year results of our financial year 2023-2024. My name is Frank Rehfeld, I'm the CEO of LEM, and I'm here together with Andrea Borla, our CFO. For those who are not yet familiar with LEM, LEM is providing sensors for measuring electrical parameters, namely current, voltage, and energy, and with those, help our customers and society to transition to a sustainable future. Here you see the agenda for today's presentation. After my opening remarks, I will give you more detail on the business performance of LEM. Andrea Borla, our CFO, will then introduce the financial results, and I'm going to outline what we expect in the future afterwards.
After a pleasing first six months, we can report almost 13% top line growth in Swiss francs that are equivalent to 22% growth at constant currencies. Supply chain shortages are over, and we can fully satisfy customer demands. In order to put the numbers into perspective, it is important to notice that the base in 2022/2023, with which we compare, has been impacted by the COVID lockdowns in China, in particular in Shanghai, in April and May 2022. Deliveries that could not be made in the previous financial year due to component shortages helped to grow in track, renewable energy and energy distribution. The business situation in China was challenging during the first six months and is going to remain like that also in the second semester.
Important, stocks were built during the shortage times that are now getting reduced, while investments are done cautiously. In the other Asian markets around China, however, there was strong growth, and the same applies to EMEA and to a bit lesser extent, also to the Americas. We managed to maintain a strong EBIT level at 23.1% and see the bookings further normalizing. We operate at the moment in a rather challenging economic environment. Geopolitical tensions and fragmentation, inflation, energy crisis, wars. Nevertheless, we believe that all those short and midterm challenges are not questioning the mega trend of sustainability, the ultimate goal to move to a carbon neutral world in between 2040 and 2050. Therefore, we continue investing in R&D and drive forward innovation.
We opened in the beginning of the financial year a new R&D center in Sofia that will allow us to enlarge our software development skills and also have signed a cooperation agreement with TDK on next generation measurement technology. Both steps are well aligned with the market developments and our strategy to strategy to increase functionality in our products, as well as the miniaturization and integration in power electronics. That goes along with higher switching frequencies and therefore requires different measurement technologies. Also, our footprint extension makes good progress. Our plant in Penang, Malaysia, has been finished ahead of time. The first production line has arrived and a highly motivated Malaysian team is hungry to ramp up the new facility. Exports will start latest in the beginning of 2024.
To reiterate the reasoning why we've been deciding to set up this plant in Penang, it was first, in order to give LEM sufficient space for the next growth steps. Second, to balance our manufacturing footprint in the world. And third, to tap basically the talent pool of Penang with respect to semiconductor competencies, in particular for back-end processes. With that, now let's move to the business performance in a bit more detail. Following our business structure, you see here the development of the five businesses in comparison to the same period in 2022/2023. Important to mention is that all businesses have been growing at constant currencies and have been differently impacted by the strong negative currency impact, depending on their exposure to the different geographies.
The growth rates are also impacted by backlog, backlog effects in comparison to the first six months of the previous financial year, in particular in the long cyclical businesses like track and a part of our high precision business. The distribution of our businesses relative to each other, you see on this page. In comparison to the full year picture 2022, 2023, there have been some changes in the business sizes relative to each other. Since the automation business grew slower than other businesses, mainly impacted by cautious investments in uncertain times and strongly impacted by negative exchange effects, its share in the total business reduced from 33% for full year 2022, 2023 to now 30%. Automotive lost one percentage point, whereas renewable and track were gaining two percentage points.
These were the two businesses that were particularly strongly impacted by supply chain shortages in the last year. Now, let's go through the businesses one by one and start with our biggest business, automation, that represents 30% of our global business. You see here the turnover plotted for the last 5 years. Our automation business grew 7% in constant currencies, however, in CHF, due to the already mentioned currency effects. Exports from China have been shrinking globally and also LEM has been affected. This has been overcompensated by a very strong performance, in particular, in Europe.
Our automotive business was nicely growing by more than 17% in constant currencies. However, in particular, the weakening RMB has had a strong impact on the growth rate in Swiss franc. While the trend in the European market and rest of Asia is positive, we've been losing momentum in China.
The supply chain constraints and aggressive competition led to a decline in turnover in a still growing market. Our Chinese team is fully committed to gain back market share. We are investing both in front-end capacity as well as R&D competency to respond to the situation, while short-term winning back market share through price initiatives. Renewable energy, now 18% of our business, is including the solar and wind power generation market. The business was growing by more than 34% in constant currencies or 22.2% in CHF. The strong demand from our non-Chinese markets was overcompensating the slowdown in China. Chinese export declined as a result of the geopolitical tensions, impacting the global position of the traditionally strong Chinese inverter manufacturers.
Nevertheless, we see the market for renewable energy generation continuing to grow, and this also applies for the local renewable energy market in China. Energy distribution and high precision, continuing to represent 15% of our global business, contains our high precision business with smart grid solutions and UPS uninterruptible power supplies, as well as DC meter for fast charging stations. This was the third fastest growing business after renewable and track, with 23.5% in constant currencies. The main growth drivers were the strong demand for our DC meter, as well as also the pickup in the high precision business. The charging infrastructure as a key enabler of the battery electric vehicle growth is going to get further rolled out while our customers work on innovation and increasingly cost-efficient solutions across the world.
Consequently, we work with them on next generation products that take this into account. Our smallest business track contains all solutions LEM has to offer for trains, metros and trams, for both rolling stock as well as track side. It grew to a 13% share of our global business and had an exceptional growth rate with 63% in constant currencies or more than 54% in CHF. We eventually could deliver outstanding orders from the previous reporting period and profited from the update in our energy meters in locomotives, as well as from a strong demand in China. These very strong growth rates have to be understood in comparison to a rather low base in the first semester in 2022-2023. Projecting this business now from a regional perspective, we see important changes in comparison to the full year 2022-2023.
What is most apparent is that EMEA and China changed their positions. For a long time, China has been dominating our business geography with shares of around 40% and has now become second after EMEA, that moved up from 31% of full year 2022-2023 to 38% in these halfway results. The drop of the Chinese share from 39% at full year to now 31% is the result of multiple factors. On the one hand, the strong depreciation of the Chinese currency, the sluggish economic growth, including also the negative export development, but also the loss of market share in e-mobility. As already indicated, the situation has been analyzed and understood, and our regional head, John McCluskey, works day and night on the remedy.
Nevertheless, the markets outside China developed nicely, as already said, in particular in rest of Asia, as well as in EMEA. The Americas showed a solid performance in the light of the appreciation of the Swiss franc, and we have decided to further invest into the team to accelerate growth there. With this, I would like to hand over to Andrea, who will introduce the financial results in greater detail.
As the group CFO, I'm pleased to present attractive financial results for the first six months of the year. Let me summarize the financial highlights in three points. First of all, sales continue to grow, to grow nicely. At constant currencies, we experienced a 22% growth compared to previous year. This sales growth was the main driver for the profitability improvements. Second, LEM holds a continuous strong balance sheet, reflected in a healthy equity level, and this despite a record high dividends payout per July 2023. And third highlight, the operating cash flow ended slightly higher than last year's level. The only negative point is the low order intake, which is the consequence of changing ordering patterns by our customers and slow markets, especially in China.
The gross margin in absolute value increased by CHF 11 million, from 93.8 to 104.7. In respect of the gross margin in percentage, we have reduced by 0.5 percentage points. What are the main causes for this development? We experienced high material costs, especially for electronic components, whereas sales price increases have become more limited. However, in Q2, gross margin increased to 47.7% due to a favorable mix impact. Our two low-cost locations, situated in China and Bulgaria, cover 80% of all sensors produced by LEM. The construction of our Malaysian site is now completed, and we will start production before year-end 2023. The percentage of our low-cost location is therefore expected to increase in the coming years.
The SG&As increased by CHF 3.7 million, which are mainly related to ongoing investments in digitalization projects and built up costs for our new production facility in Malaysia. The personal costs remained basically at the same level as last year. We are working on several automation and process improvements initiatives, which will allow LEM to grow the SG&As under proportionally during the coming years. The R&D expenses increased by CHF 1.3 million, confirming the willingness of not jeopardizing LEM's future growth by optimizing its short-term profits through R&D cuts. Those cost increases are due to increased hirings of R&D engineers. We focus not only on renewing our current product portfolio, but as well on developing new product families, addressing new markets and applications in the future. Going forward, R&D expenses are expected to remain in the 8%-10% corridor.
During the first six months of the year, LEM suffered mainly from the Swiss franc appreciation against major currencies, which resulted in a CHF 1.9 million exchange loss. The gains from hedges compensated only marginally those losses. In respect of the financial expenses, the main elements relate to interest expenses due to the increased interest rates, levels, and expenses on lease liabilities. Income taxes. So the first half year, effective tax rate is at 10.6% only, and this is mainly due to a one-off event, which is due to the increase in deferred tax assets as a result of the tax rate increase in the Canton Geneva from first of January 2024 onwards. Excluding this one-off effect and one-off event, the tax rate would be at 15.6%.
We as well continue to benefit from the HNT tax status in China, which results in a reduced tax rate in China of 15% instead of 25%. Here you find the full P&L for both the half year 2023, 2024, which is on the-- seen in the left side of the table, and the Q2 on the right side of this table. In Q2, LEM achieved quarterly sales of CHF 111 million, which represents a growth of 3% compared with last year's Q2 sales. During Q2 as well, both EBIT at CHF 25 million, 25.5, and net profit at CHF 23 million, reached very good levels, reflecting the very good momentum experienced during the recent summer months. Moving on to the balance sheet, what are the key points per September 30, 2023?
The equity ratio, first of all, the equity ratio dropped by 9 percentage points, from 53% to 44%, and this is a consequence of the dividends payout in July. Second point I want to underline is the net working capital, which increased by CHF 9 million, in line with the business activity increase. And third point, for end of September 2023, the net debt of CHF 64 million consists of CHF 25 million cash and CHF 89 million current financial liabilities. And LEM plans to reduce a large part of those net debt before end of March 2024, thanks to the free cash flow to be generated during the second half of the year. Talking about free cash flow, here you find the cash flow statement.
The cash flow from operating activities increased slightly, whereas the free cash flow dropped due to net working capital increase and higher investment expenses-investments in our factory in Malaysia. In summary, we are pleased with LEM's first half-year performance, reflected in continuous sales, profitability, balance sheet, and cash flow improvements. There has been one disappointing element, which is the drop of the order intake experience in the first six months. You may now wonder what the future will bring to LEM. For that, I'm very happy to hand back to Frank.
Thank you very much, Andrea. Now let me elaborate about the outlook for our business. For those who attended our Capital Market Day one year ago, this slide might look familiar. However, I want to share with you again how important the business transformation is that we are driving, and that is yielding results. You see here the share of the two business types that we call heritage business, and also what it comprises, automation, traction, HEV and EV, and megatrend business, and how this is developing relative to each other. The shift towards more and more megatrend business gets driven by substantial R&D investments we are doing, while upgrading our processes and also working on our corporate culture. Alongside with that, we see that the megatrend markets are growing faster than the heritage markets.
Now, what do we expect for the whole financial year after a strong first semester? I'm sure when you hear the global news and read the forecast, the number of bullish news is rather limited. Also, we have a rather cautious view of the second half of the year, since this is also traditionally weaker than the first half. This leads us to a forecast of sales in between CHF 420 million-CHF 440 million, and an EBIT margin of above 20%.
We continue to invest into R&D, as well as also increasing our manufacturing capacity, since we are confident that the mega trend of sustainability is going to further drive our growth. With this, I would like to close, and thank you very much for your attention. All right, today, I would like to invite you to join our full year review on May 28, 2024. Now I would like to open the floor for questions.
Perfect. Thank you very much. Dear ladies and gentlemen, for this session, you can submit your questions within the conference call and within the webcast interface. First, we will address the questions in the conference call, and afterwards, the questions submitted in writing will be answered. So if you would like to ask a question using your telephone, please press nine followed by the star key on your keypad. If you wish to cancel your question, please press nine followed by the star key again. Please press nine star now to state your question. The first question comes from Arben Hasanaj, from Vontobel.
Yes, good afternoon. I would have two questions. The first one would be around if you could explain a bit the trends that you see in the subsegments and especially also where this the weakest or where this weakness in demand is coming from, especially, but in general, what trends do you see in the subsegments? And then my second question would be around this partnership that you announced with TDK. I was just wondering what does this bring to you that you were maybe not or that was not accessible to you before? So I'm trying to see what what you will get out of this. If you could elaborate a bit. Thank you.
Yeah, thank you very much for the question. Maybe I start to answer and Andrea will then fill in accordingly. Now, in the different businesses we see overall, let's say, minimum and long-term positive trends. There is no doubt this is the reason why we are investing in all those areas. What we see probably in the automation business, I've been probably alluding to that, is that here, at the moment, there is a bit of cautious investment, in particular also in China. And this is basically radiating through the whole world. And therefore, we don't really see here a sharp growth momentum, but rather sort of a stable situation. We see automotive with focus to the better electrical vehicles, and without any doubt further growing.
But further growing means for sure also, power electronics get miniaturized, power electronics get, more compact, and, this leads to a lower value per component that is going to, materialize step by step, further and further. So that means, to measure current in an automotive application needs to get cheaper and cheaper in order to be able to have basically a, bill of material of an electric vehicle in comparison to a combustion engine vehicle. Renewable energy, we clearly expect, also here, further growth. At the moment, also there, we see the local Chinese market, developing, and we see also the, markets around China, developing, probably a little bit slower than, what was, the case, before, where we saw, let's say 50%-60% increases.
This probably will get a bit more tamed down, but, besides this, we see here nice developments. And, talking about probably, the energy distribution and high precision market, also here, for us, this is mainly, infrastructure business, both in the AC area with Rogowski coils and in the, DC metering area with our DC meter. Also here we expect, midterm growth. But, also here, the growth might, have impacts, that supply chains are changing, so the cost pressure also here for charging infrastructure leads to the fact that, charging stations get, increasingly manufactured in China. And, this will eventually also drive a change in the way we are delivering, our products. They will then get, exported from China to, basically the world.
Frank, Frank is all in all, not a fast-growing business when you look at the overall infrastructure here. Therefore, I've been explaining this is a bit a special situation that we have because of backlogs, because of also functional changes that are happening with the metering. But also here we expect quite some growth also in the future. The second part of your question was referring to TDK. Now, what do we see in the overall current sensing and measuring environment? At the moment, most of our sensors are based on Hall effect. So we basically measure the magnetic field of the current, and that is typically going through our product. This all has a lot of advantages. It's very cost competitive.
It's proven over 30, 40 years, but has limits in terms of switching frequencies. When you see the future, in particular, driven by this market by automotive, and I've been mentioning miniaturization, miniaturization goes along with higher switching frequencies, and there the Hall sensors will not be sufficient anymore, so we need a new technology. TDK is the unrivaled market leader in producing TMR sensors since basically hard disks were invented because this is basically the fundamental technology. So for us, the partnership with the market leader in this area was an important step to basically get this technology accessible for us, for our applications, and win together. Hopefully, I was not getting too technical, but to explain a bit the strategic reasoning also.
Absolutely. Thank you.
Pleasure.
Thank you. The next question comes from Torbjørn Færøvik of Kepler Cheuvreux.
Yeah. Hello, good afternoon, everyone. Thank you for taking my questions. I would actually have a few of them. And starting on the order book, I was wondering, like, what's the status of the order book right now? And what percentage of sales it covers for the next year, and if you have seen, like, a decrease in the lead times? And then also, if you could comment a little bit more on the end markets. I mean, especially probably or particularly in the automotive and renewable energy. In the automotive side, what is actually driving, or what has changed in the competitive environment in China? And is the increasing competition basically coming from local Chinese players, and how are you dealing with that? And then on the renewable energy, I mean, we've heard recently all these profit warnings coming from the solar inverters.
I was wondering, like, how do you see this split in between wind and solar, or in the demand, at least in the short term? Then my last one would be on the TV key, TVK, sorry, development agreement that you signed, and it was more like on the growth prospects that we could expect in terms of sales and proportion of sales, and if the margins of these products are gonna be brought in line with what you are reporting now. Thank you very much.
Right. Maybe I start with the order book. So, I think it's important to see the development of the order book over time. Before supply chain crisis and COVID, we basically had typically a visibility in our order book from 3-6 months. COVID and shorter and the supply chain crisis were extending our order book, not in the height, but in the length. So, just imagine an order book based on the months on which the order should be delivered, and sum this up over time. The length was extending to 12, even up to 18 months, and this is now with supply chain crisis over, normalizing and like in harmonica, basically getting squeezed together to the pre-COVID levels.
And this is a not surprising development that we also expected, so therefore, we don't see yet at the moment really concerning signals. Second question was on end markets. Now, let's start with automotive. I've been this year, four times, in China, and when you are in China, different from what you see in Europe, you see basically, in particular on the east of China, almost every second or every third vehicle being an electric vehicle. So the capacities that have been built up in the OEMs and also in the basically supply chains, are huge, are huge overcapacities and the competition is a cutthroat competition.
So basically everybody tries to now increase their volume, and this obviously has effects throughout all supply chains, because obviously the cost pressure is ended. We clearly saw that in the last 2-3 years, where we could probably less well travel, that competition has been getting more fierce, that capacities were built up that now needs to also get filled. So we see basically here a rather harsh cost competition. Is this a situation that is concerning us? Yes, very clear. Is it a situation that makes us desperate?
Clearly no, because there are further developments ongoing in this market and we are building up capacity, we are ramping up competencies in order to be sure that in the next design in slots we will be present. So therefore, we see here for sure a short-term dip for ourselves, but are very confident that we have everything in the pipe to compensate that. You talked about renewable energy, and when I understood your question correctly, the question was gearing towards how do we see wind versus solar? Now, wind always has been traditionally a bit the weaker part or smaller part, the weaker part, but the smaller part in our business. And this remains valid.
I think, the stronger and more important part is the solar part, and we, basically see this continuing. I can only agree that for sure, the overall commercial situations that our customers don't make us confident that, there will now be offshore developments, in the wind markets that will change this, situation quickly. Whereas the solar business has been scaling very, very nicely in the past, with very dominant, Chinese, inverter suppliers that are our direct customers. Nine out of ten of those inverter suppliers come from, China, and they are basically very successful on the way, despite the fact that also they see some, let's say, resistance, because of the geopolitical tensions at the moment with their exports. Last question was on TDK. TDK is not a short-term, let's say, effect.
So we talk here basically about this, new measurement principles. We don't see the effects, let's say, before 2026, 2027, really, impacting, let's say, in volumes our, business. But again, it's an important, step, that is, yeah, mission critical for the future to be, at the technology edge and at the technology front, to basically be ready to satisfy future demands. Hope that, was answering all the questions you had.
Perhaps I just add one point on the order book. Order book is a figure we do not present, but it's important to note that today, per end of September, let's say our duration is still substantially above the 3-6 months. So this means, in other words, that we expect, our hypothesis is that we will find again, one day, the 3-6 months average, order age. And it means that over the next coming quarters, we still will see weak order intake.
Mm-hmm.
Okay, perfect. Thank you. May I have one follow-up question on the automotive side? Is the Chinese competition actually because you mentioned in the capital markets there that the LEM was above average in terms of accuracy and reliability? So I was wondering if the Chinese players have they been able to get to your level, or they are still below in terms of accuracy, reliability, and maturity on technology capacities?
Yeah. This business in automotive is, to a large extent, also an innovation business. We came from times where typically the product life cycle of a design in which lasting eight years, sometimes even longer, when the product was then carried over into the next platform. We see this substantially shrinking towards 3-4 years, because again, the costs need to go down, and then the costs need to go down to a level or at a level, at a rate that you cannot do with annual price decreases. We see for sure, at the moment, that solutions we've been introducing a couple of years ago now getting scaled and basically done in a very similar way now at the moment.
But again, we foresee already new measurement technologies, new principles, in particular for state of health, but also for the inverter business. We intensively work on the onboard chargers. There you see new requirements because this is safety critical. So there are a lot of important developments, and in particular, the fact that the Chinese automotive industry is gearing towards export to Europe, with rather stringent safety requirements, we are very much convinced that we have here extraordinary future trends. But again, it needs stamina, it needs R&D investment, it needs also further improvement on the front end side. So we have been triggering this, and short term, we do work with basically price incentives, but this is not sustainable. For sure, we want to remain at, let's say, a decent sort of margin business.
Okay. Perfect. Thank you very much.
Pleasure. Thank you.
Thanks a lot. As there are no further questions, I'm turning the floor over to the host to answer the questions submitted in writing.
There is one question from Ronald Wildmann from Serafin Asset Management , who's asking: Which effect is more predominant with the weak order intake, the shorter lead times or the weakening demand situation?
Yeah, of course, this is more based on anecdotal evidence and our judgment, because, of course, we don't have on each order intake the reason. But I would say there is a majority is to the shortening lead times, a slight majority, and this is the, let's say, the major cause of this, short, substantial order intake drop.
Thank you. There are no more questions from the web call. Operator, do you have more questions in the telephone conference?
Actually, last minute, a question from Daniel Koenig from Mirabaud Securities appeared. Mr. Koenig, I would ask you to press nine star again to submit your question one more time. Perfect, your line is now open.
Yes, hello. Can you hear me?
Yes, we can hear you.
Yes, I have a question on automation. I'm a little bit puzzled by this development, the wonderful development in EMEA, while in China is not so great. I'm wondering, when have you seen this that EMEA is suddenly a trend towards sustainable and customer-oriented solutions? Because when I look at all the sub-segments, they are all somewhat affected by the industrial downtrend and sluggish growth. So I'm a little bit puzzled that EMEA is running very well. And then I had a follow-up. I was also wondering, in Europe, at least in Switzerland, there is a boom in heat pumps. I was wondering, have you seen anything which would point to a revival of heat pumps in EMEA? That's it. Thanks.
Thank you, Mr. Koenig. So automation, we've been talking about negative developments in Chinese exports, and we see that basically quite some equipment that we report under automation has been slowing down as exports from China. And that's again an interpretation, we assume that here rather European solutions have been taken, rather than the solutions from China. So we interpret this as probably an mindset change from these US Chinese sort of tensions, that basically more and more buyers rather go for solutions from Europe than from China. The second question on heat pumps. Yeah, yes, heat pumps is an interesting business also for us. However, one needs to be a bit careful.
The numbers are not in the multi-millions, so we talk about 200-400 thousand heat pumps that are getting built and probably leading to a demand of sort of 1.5-2 million current sensors. So that's probably not a game changer. But for sure, the heat pump business, by the way, more an Asian business than a European business, is something that we expect to grow in the future with basically the regulations coming.
Okay, thanks a lot.
Pleasure. Thank you.
Thank you. So now there are no more questions submitted, and I'm handing the floor over to the host again.
There are also no more questions on the webcast. So t hen I would like to thank you very much for your attention again. Please bear with us for our full year results in May next year. And until then, wish you all the best and hope to see everybody back then. Thank you very much. Bye-bye.
Bye-bye.
The conference is no longer being recorded.