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Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor AG conference call regarding Q3 results 2018. [Operator Instructions].Let me now turn the floor over to your host, CEO, Dr. Anton Mindl.
Good morning, ladies and gentlemen, also from my side. Welcome to our conference call on the results of the third quarter. Today, I host the call together with CFO -- with our CFO, Dr. Arne Schneider. You know that already. Before coming to a more detailed discussion of the figures, a few general remarks from my side up front. As you all know, we issued in our stock announcement on the 16th of October, revising the EBIT margin upwards from originally 13% to 17%, to 17% to 19% of sales. All other guided figures are assumed to stay in the range given before.We did [indiscernible] reacted on our positive Q3 and positive expectations for the rest of the year.So far, so good. 3 weeks have passed since then, and in the meantime, there has been quite a few diverse voices out in the market. It was about demand slowing down, too much stock in the logistic chain, slow [ sale ] start to the next year and other negative market signals like that.Of course, this is all based on less optimistic numbers concerning car sales of quite a few big OEMs. In Tier 1, there's a consequence of the WLTP process is Worldwide Light Vehicle Test Procedure (sic) [ Worldwide Harmonised Light Vehicle Test Procedure ] that is concerning with the exhaust limits. It's also based on the discussions on the tax wars that are going on between countries and maybe regions and many other political and economic crises. Also, it is clear that Elmos could do nothing about the real downturn in the business cycle, we still have to state that we currently don't see a slowdown with our products nor -- or even much less even, do we see any ramps of new products being shifted or flattened. So in a nutshell, despite the somewhat volatile market sentiment, we still see a positive development ahead for Elmos.Our conviction about the company's good position is that our product portfolio, obviously, draws a lot of market attraction on itself. We have several #1 products and quite a few new product launching currently or shortly.Our end parts seem to be doing continuously well and even the volume around us don't stand far behind. This, for Elmos, quite vibrant market situation is served from a more and more leverage headlight production footprint. Last year, about every fourth wafer was from a external foundry partner. This year, it will be almost every third wafer that has been not produced in Elmos premises.This setup will also be applied statistic, but is planned in a somewhat staggered approach as a kind of second wave. So rising demand meets an organization that has been preparing and is preparing itself for this situation.All in all, we see Elmos currently from a market perspective as well as from the executional setup in a structurally good position.Having said this, let me now come to the current figures. Sales increased by 12.6% year-over-year, leading to EUR 69.4 million, underlined by both solid volumes for existing products as well as dynamic ramp-ups. The exchange rates for the U.S. dollar to euro had almost no impact on the sales development year-over-year for this specific quarter.From a regional perspective, existing trends remain unchanged for us. Asia is still growing disproportionally strong, plus 17% to EUR 28.5 million, which equals roughly 41% of total sales, driven by self-generated Asian business as well as the change as changes in shipping addresses from Europe and U.S. to Asia, reflecting global supply chains or the trend in global supply chains. West Europe came to EUR 29.7 million or 47% of sales. The U.S. came to EUR 3.1 million, and other regions to EUR 8 million.The development of our 2 segments, Semiconductor and Micromechanics is both satisfying. The Semiconductor segment came to sales of EUR 62.3 million, plus 9.1%, and an EBIT margin of 20.1%. The MEMS segment accounted for sales of EUR 7.1 million, that's a plus of over 50% and an EBIT margin of 21.2%. Also the MEMS segment had another, I would say, even very good quarter. There is still volatility ahead with smaller absolute size. All the argumentation we have explained to you in the other quarter are still valid.But we see the success of our fully renewed product portfolio on the market, and we are especially looking forward to further promising developments for our IntraSense product line, which goes through the medical market. Coming now to profitability. Gross profit came out quite strong in the third quarter 2018, amounting to EUR 32.6 million or a gross margin of 47%. Operating expenses are slightly higher in absolute terms compared to last year Q3, coming to EUR 18.9 million or 27.3% of sales. Q3 2017, to remind you, was EUR 7.2 million or 27.9%. This is driven by a first expansion of our resources. We will further invest into our development capacities. This is crucial to constantly deliver new products and mix generation of existing ICs to the market so we can secure our future innovation quality feedbacks that's the core of the company. As you know, we have the slogan, Innovation Matters, and we firmly believe in that.The effect of capitalization of the development expenses and the accompanying depreciation was almost constant on a quarterly basis over the course of the year. The R&D ratio for the third quarter 2018, adjusted for these effects, would have been about 16% of sales, to be more precise, it would have been 16.8%, and that would lie in the normal range between 15% and 19% of sales that we usually aim for.As a result of all these positions, EBIT came to EUR 14 million, corresponding to an EBIT margin of 20.2%. After taxes and minorities, the consolidated net income amounted to EUR 9.8 million or 14.2% of sales, compared to EUR 7.1 million or 11.6% in the third quarter 2017. So quite an improvement.We see gross basic earnings per share of EUR 0.50 versus EUR 0.36 in the respective prior year period, an increase of more than 1/3. For the first 9 months of 2018, we see a development from EUR 0.73 to EUR 1.18, which corresponds to an increase of more than 60%.The operating cash flow of the third quarter of 2018 reached EUR 21.5 million compared to EUR 12.1 million in the prior year period. Capital expenditures, excluding capitalized development expenses, amounted to EUR 9.3 million or 13.5% of sales, reflecting the expansion of our test capacity. Despite the high investment, there will be adjusted free cash flow came to EUR 9.1 million. Thus, net cash is strengthened, amounting to EUR 25.4 million as of September 30, 2018. End of June, to remind you, it was at EUR 16.6 million.Last at least, let me shortly come to our guidance for '18. We expect sales growth between 8% and 12% compared to 17%. EBIT margin is now expected to be between 17% to 19% of sales. Previously, it's 13% to 17%. Capital expenditures, excluding capitalized development costs, are expected to be below 15% of sales, resulting into a negative adjusted free cash flow. The focus is based on an average exchange rate of 1.10 -- 1.20 U.S. dollar to the euro.Further information and figures for the third quarter and 9 months of 2018 can be found in our quarterly statement available at our homepage. And now, I would like to open the floor for questions. Thank you.
[Operator Instructions] And the first question comes from Mr. Robin Brass from Hauck & Aufhäuser.
One question regarding the free cash flow guidance. I mean, now with the strong free cash flow, especially in Q3, at least, it looks like you might also be positive this year. So my question may be why you still keep the negative free cash flow guidance for the full year? And secondly, your sales distribution also shifted further towards more revenues in Asia, which is basically a longer-term trend, I would say, in general. But could you also say like where is, especially the strong growth here is coming from? Is it also due in China? Or is it also in other APAC countries? Or where's the strong growth you're coming from?
The first question, we don't change the cash guidance because the intention is still and will be to invest heavily in the test area. It's not a specific purpose of our business activities in the moment to be super precise on the cash side. We have the fortunate situation as Elmos has in [ all areas ] prepared for growth. And so we are able now to find [ a solid growth ]. I think that's the best investment we can do. It's, yes, maybe a good sign that -- also we're investing quite heavily in Q3. The cash flow was still -- our free cash flow was still positive. But still we want to do what is required on the investment side. Therefore, we don't change the cash guidance. When it comes to Asia, it's like I've said it in the presentation, it comes from both sides. On the one hand side, we are winning business directly with our Asian sales representatives and our Asian customer base. And that's not only China. And it's China as well, but it is as well Japan. It is also the Southeast Asia region and there are transfers. And of course, in transfers, that's the thing you can't interference at all. If a big Tier 1 decides to go from maquiladora in Mexico to China, then he does it. And if you're informed about that and then the delivery average changes. So in general, our growth mechanics stay the same. Asia is A very fruitful area for us, but also we have our good stakes with our international customers. I mean, as we always told you, we are reporting those figures where we sell to. But the question of who is the customer that you sell to is not answered by these distributions.
The next question comes from Mr. [ Johannes Reece ] Aspect Capital.
Normally, I don't say in every call, but congratulations for the great success, especially in the margin side. We are waiting -- we expecting for long time, now it's here.
We usually don't say thank you in these telephone conferences, but now we do.
Anyway, so a bit at first on the margin improvement. What is a little bit behind the margin improvement? Is it a full utilization? Is it the shift to Fablite? Is this ASSP? Is this a ramp of new products at better margins? What are some main drivers?
Any other reasons? You didn't name a reason for the good margins as well. I mean, we have a good product mix. Of course, headlight is contributing to that. We have always a seasonal effects. And so I mean, overall, we are growing and usually the cost side doesn't grow with the same pace. I mean, we do the very best, especially in the engineering side, to cope with that. But I mean, we still have to be selective and let's say, "a little bit careful". And I think that's part of the reasoning that margin is quite nice.
And maybe on the product, you have still a book-to-bill over 1? You have written in your press release -- no, in the report -- in the Q3 report. What are the drivers? What are the applications which are maybe gives you more orders? And which are orders are safe drivers? Is it HALIOS? Is it LED lighting? It -- What are the big things, maybe Ultrasonic and so on?
All of them. I mean, the favorable thing you share, the number one position is that you have a -- maybe a little bit of data over few of what is happening in the market and may be followers. So we try always to be first in, let's say, defining the success of our products or defining the products that adds new functionality for this number one positions. And therefore, we have quite a few ramp-ups going on. And don't forget, I think we talked about this in, at least, last 2 calls. We have the #1 position in this ambient light stuff. We are leaders in the ultrasonic area in the chest recognition, but what we are now entering is the daylight. The arena and this one is also developing quite nicely. I think we have some really unique offerings there and are, yes, excited about how this goes forward. So of course, the growth and the dynamic is driven by ramp-ups and by new products, but also by existing products that are about to be succeeded by another product, which is expected to run also very high volumes and to the delight of our customers and ourselves.
Sounds good. HALIOS is also a big driver.
Constantly growing. Constantly growing. Slower than you all hope for. As you know, I'm a big fan of HALIOS, but it's growing.
It's growing. Maybe given your investment plans, because you have the Fablite strategy, you invested primarily in testing capabilities, is it right? So if investing in testing capabilities is a sign you're expecting further growth, very simple?
It could be interpreted in this way. Usually, when we spend the money, the machine's not on the door. So that takes another 2 months maybe or maybe sometimes even more. And then you have to arrange the other things and so on and so on and installation.
And Fablite, wasn't it that your intent to go in the midterm toward around 40%, also is that right?
I don't say that's wrong. If there are mysteries, we do what seems natural and logical. I mean, of course, the target always has always been in our Fablite strategy to get as much result of the facilities we have here, and that's what we are doing. And it's always astonishing how much you can increase output if you do real fine tuning in the end. So that's a driver when we continuously do that. But everything that comes on top will go to foundry, but there is no certain target or limit or whatever. So we do whatever it takes to make sure that we have a secure supply base.
Okay. On the supply, there is discussions about wafer prices, which was a negative impact at the cost side in the past. Do you see an easing at this side? Or do expect further increase in your wafer prices?
We have been careful and safeguarding for quite a period of time, prices and deliveries. So even if the prices will come down drastically in the next months to come, maybe we would not participate completely. But we still think that the strategy was correct, and we wanted to be on the safe side. We are not entering the road where being #1 because we have the cheapest tool basis supply. The most important thing is we get the Leica's. I mean, they have to be cheap, of course. I don't know who's listening now. But yes, we have many sources qualified so we -- I think we did a good job there.
Okay. Finally to my most -- last topic, ASSPs. We are now at 45% since [indiscernible] go forward will increase further, looking at your order intake, as the percentage is much higher there?
Yes and no. The funny thing is when you have good ASSPs, customers come around and say, this is a nice ASSP, but this is not precisely what we want. And the reward for you will be, this is a real big contract then. And then I guess not top-notch. So we don't test paradigms. The only paradigm is let's make the best money out of the investment we put into the company. That's the only program we have.
And will you finally find [indiscernible] line free, maybe some colleagues are waiting, because they're happy. In other call with a semi company start, before starting at 10, maybe it's a 1 hour as standard is the call now. But if I -- maybe there is a big conclusion on the euro re politics, maybe my eyes giving all the concerns on the semi market, especially the auto semi market, much more importance. And maybe some short-term pressure on the volumes of number of cars, it's a content. The content is increasing heavily because of a lot of developments which increased as the content of semiconductors in cars. And it's a big struggle for you and all the guys in the sector, hmm?
This is via another slogan of us is, the next smart device is the car and no other product. There is no product that is so heavily loaded with ICs, with software, with electronics like the car. And this will be a trend that has nothing to do with the question, do we sell a 1% or 2% more cars in the world or maybe 1% or 2% or even 5% less. This is not the important question. The important question is, how many electronics go into the car? And all the trends we have and all the trends that are a must in the market, they will force many, many more ICs, preferably from Elmos, into the car.
The next question comes from Mr. Malte Schaumann, Warburg Research.
The first one is regarding, I mean, could you elaborate when -- what do you mean, you cited where you intensify measures to strengthen the organization, et cetera, et cetera. So could you may be more specific on what does that mean?
If you grow, then growth is something that can be correlated with pain. Sometimes, I feel a little bit like that, so we try to do the right investments, the right, let's say -- not only investments, also we need to adopt in the areas that ASSP -- when you go from ASIC to ASSPs, you don't believe how many things are changing. It changes really a whole organization. We talked about this for the last 3 years, I would say, or 4. And in the beginning, it was always about the sales channels. How -- in the product attractiveness. I think most of those problems have been solved. But when you go further into the process you have in the company, then you realize that there are many more processes that you have to reorganize and fine tune and adopt to the new proceedings. And I think we're making good progress there, but it means we have to invest in people and we have to invest in material, and that is what we do. And this is the preparation for future growth to come.
Okay, okay. Good.
We are not sitting in the chair, leaning back and idling. This is something we told you we are really working.
Okay. And from an end market perspective of -- from your pipelines, do you see some unusual patterns in your, I guess, aside from the typical Asian customers, in your order pipeline backlog? Any other patterns that might set to other comments in the market, or is everything more or less in place as you would have expected earlier in the year?
Arne and myself, we discuss that in the morning and say it would be much more confident for me to say, here, we see that as well. Some were -- a piece -- maybe some people want to get rid of the stock, different order behavior. I mean, I'm here to tell you the truth. No, we don't see it. I mean, we are doing our very best to fulfill the needs of our customers. And as we all know, we came out of an area where shortage was the item and nothing else. It may be that is one of the reasons why our customers are specifically and particularly, hesitant to reduce any of the numbers, but we can't sing with the chorus. Yes, destocking and things like that are obvious for us. They are not obvious when I look into our plannings. Then I would say, the visibility and everything is like we're used to that.
Yes. Okay. Sounds good. And then maybe a comment on design win activity. I mean, now we have 9 months in the year. So maybe it's good time to provide a first view on how satisfied you are?
Maybe it's still already at the end of the year, but Malte, people tell me it will happen.
Okay. And do you tend to believe them?
We have ambitious targets. You want to really grow, so we have ambitious targets. I mean, often I would say, it's okay. But it's not meeting the ambitious targets we have. So they promised me a year-end rally. And let's see, will they succeed in that.
At the moment, there seems to be no further questions. [Operator Instructions] And we have a follow-up question from Mr. [ Johannes Reece ].
Maybe a follow-on question. Only on the pricing there. Any changes in the pricing environment that may be always there is some assumption on -- for a lot of people as if the car OEMs got more problems, the whole value chain is hit by increased price pressure? Any comments on this topic from your side?
No. I mean, we -- it's never been a walk in the park, and it's neither one to be expected for next year or for the end of this year. But we think we are prepared for that. I mean, we are in a very competitive environment. We think it's a value of its own to be competitive. We train ourselves to be competitive. We don't see any additional special effects, but we accept that. And I think it's part of the success of the electronics story. Wouldn't be we able, by new designs, by new process technologies and by new functional thinking to make the functions that we offer to the car affordable to the end customer, then it wouldn't be such a success story. So it's part of the game.
Okay. But not -- no structural changes at the moment because -- okay, super.
There are no further questions left.
Okay. That is time for me. Thank you very much. So thank you, ladies and gentlemen, for the interest and your participation on the call. As a closing remark, I would like to remind you on our upcoming events. We hope to see you at the Eigenkapitalforum on the 26 and 27 of November in Frankfurt. Hope many of you will be there, and we will have preliminary full year results in combination with our analyst conference call that is scheduled for the February 14, 2019. We hope to see you there again. Okay, and if you don't see us in the Eigenkapitalforum, then enjoy the rest of the year. Have a happy Christmas, and see you, hopefully, soon again. Thank you very much.