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Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE conference call regarding the results of Q3 2020. [Operator Instructions] Let me now turn the floor to your host, Dr. Anton Mindl, CEO; and Dr. Arne Schneider, CFO.
Thank you, and good morning, ladies and gentlemen. I would like to welcome you to our conference call on the results of the third quarter 2020. Our CEO, Dr. Anton Mindl, is here as well. And of course, we are both available to answer your questions and give comments following the presentation. To start, I will briefly give you an overview on the current business sentiment. The third quarter turned out as expected within our given guidance range. It marks the trough in our business development and is significantly hit by the corona pandemic effects. As we pointed out already in our last earnings call, the order situation is showing a more positive development, indicating a revival of the business. This continued, and over the course of the last week, Q4 orders again rose significantly. Thus, we are seeing a strong sequential sales growth for the fourth quarter 2020. The recovery is widespread, however, the strongest impetus is coming from Asia. So far, we have seen no effects from the recent lockdowns, but we would also not expect that to show so quickly in our orders. With this, I will go into detail on the third quarter results. As mentioned, the results turned out as expected. The quarter was affected significantly by the crisis. What automotive manufacturers, Tier 1s and most of our competitors experienced a little earlier this year, driven by lockdowns of car dealers and plant closures, is what hit our results in the third quarter with delay due to the rather long lead times. We recorded a sales decline in comparison to the respective prior year quarter of almost 40%, resulting in sales of EUR 40.9 million. Just for the sake of clarity, we compare our results against the continuing operations in order to account for the sale of our subsidiary, SMI, which took place as of the end of Q3 2019. Because the sales level of Q3 2020 is way below the volume needed for a profitable production and below the level that we are able to compensate with the Fablite strategy and corresponding outsourcing share, we recorded a significant loss. On an EBIT level, we lost EUR 10.5 million in the quarter under report. Because of the fixed cost, the gross margin was under pressure and came out at 29.1%, reflecting the underutilization in production. The fact that we did short-time work in production throughout the third quarter helped to reduce the cost, but of course, not as much as sales declined. At this level of sales, most of the proportional costs have already been reduced to the maximum so that the residual costs have a predominantly -- a fixed nature and operating expenses are, of course, mostly fixed as well. Furthermore, other operating expenses for restructuring purposes are included in the EBIT. CapEx continued to be on a rather low level, amounting to EUR 3.7 million or 9.1% of sales. This is due to the fact that we are currently still very restrictive with respect to new investments in hardware. The adjusted free cash flow was almost balanced in the third quarter. We have implemented operational measures to cope with the economic impact of the corona crisis. Our cost-cutting measures include short-time work, which throughout the third quarter has been practiced in all production areas and most of the administration departments. Just recently, as of the beginning of this week, we suspended short-term work due to the current upswing in orders for the time being. These measures will be adjusted as appropriate and as needed in the future. Another measure taken is the selective reduction of personnel using a voluntary lever scheme and not prolonging fixed-term employment contracts. No one knows how many more waves will come or when the vaccination is available, but there is one thing we are quite sure of. We can rely on a very strong financial basis to weather quite a long and intensive storm. We have at our disposal gross cash of more than EUR 85 million, and we are using the crisis to improve our internal setup as well as to enhance our product portfolio, which brings us in a position to come out of the crisis in good shape. Now I will come to the guidance. Based on the status of the order book and the customer feedback, we expect total sales for the full year 2020 to be within the range of EUR 227 million to EUR 233 million. This implies sales for the fourth quarter of between roughly EUR 63 million to EUR 69 million. And this means that sales will be approximately on the level or even a bit higher than sales of the first quarter 2020, which is noteworthy insofar as the first quarter's top line was completely unaffected by the corona crisis. With respect to the bottom line, we are expecting an EBIT of between EUR 6 million and EUR 9 million for the full year. This translates into EBIT margin expectations for the fourth quarter of between roughly 10% and 13%. And we based the guidance on an exchange rate of EUR 1.15 to the dollar. So despite the fact that right now, the normal life and the business is, of course, dominated to a great extent by the coronavirus, we would like to stress that we are positive with respect to the medium- and long-term future of Elmos. We are working intensively on numerous new projects. We are well on track to achieve another very good year for design wins, even in this challenging month that we currently experience. Our existing strong product portfolio also makes us confident when it comes to our success at customers. Our market-leading positions in selected applications, such as, for example, ultrasonic distance measurement, motor control, sensor ICs or LED lighting, help us to also win completely new customers. So overall, we are therefore convinced that in the medium and long term we will participate disproportionately in the dynamic growth of semiconductors and vehicles. With this, I would like to open the floor for your questions.
[Operator Instructions] And the first question comes from Mr. Stephane Houri.
Yes. So my first question was about the visibility that you may have on 2021 because your level of sales in Q4 is back, more or less to the level in Q1. I was saying to myself, maybe if you multiply the level of Q4 by 4, then you go back to EUR 260 million next year, which would mean a double-digit growth. So obviously, I assume you don't have a number to give us, but would you say that 2021 can be a good year of double-digit growth according to the visibility that you have? And if you -- second question is, if you could tell a little bit more about the design win activity, from which customers, which regions -- you have started to say about which application, but if you can give examples, that would be helpful. And the last question is about the margins in Q4. So we -- given the guidance that you gave, it looks like your back to double-digit EBIT margin in Q4. Is it because the gross margin is coming back to a more normal level? Or is there a lag in the gross margin improvement? And what about the OpEx in the fourth quarter? And sorry for asking 3 questions at the same time.
Stephane, perfect. And thank you for your 3 questions. It's good to ask 3 or even more, but we also take less questions from a one-on-one. So first question, 2021 visibility. Of course, we can't give a guidance and visibility is not great. But if it's true, what all the prognosis institutes like IHS and Strategy Analytics tell us that the number of cars is going to go up in a nice way, we would also expect that Elmos has a recovery that extends into the next year. So currently, we're not negative, but it is very early to kind of speculate about it. We have, of course, some developing orders for next year. For now, everything is good. The current lockdowns will not show, cannot show so quickly, but we look we look positive into the next year. Second question, the design win activity, actually pretty widespread. I believe there is no reason that is not present. There is no business line that is not present. So there is no kind of leaning towards the one or the other. As mentioned, we have a very good status given the time of the year, so we are on track for a very good design win year. On the Q4 margin, your third question, we still have some short-time work in Q4, which tends to weigh a little bit on the gross margin. OpEx is really predominantly fixed nature with some effects fluctuating around. I mean, something like vacation provisions always leads to fluctuations, some other effect in OpEx as well. But we see that, given the sales growth, it is a very reasonable guidance that we're giving there.
Okay. So reasonable means potentially not easy to beat. But you think you can do better, right?
We think we'll turn out within the range, as we do most times.
There are no more questions for now. There's another question from Malte Schaumann.
The first one is on free cash flow. You had a slightly positive free cash flow number after 9 months. I was wondering if you're in a position to already provide kind of a -- any guidance that potentially range. Did you think the balance free cash flow in the full year would be appropriate? Do you think that, in the fourth quarter, free cash flow would be positive? I understand that there are many moving parts, especially involving COVID, but maybe some more color on that will be appreciated.
Well, usually, we say whether free cash flow will be positive or negative. Now we are at around about the 0 mark. We can't give you guidance on Q4. There are a lot of moving parts. I mean, we had little revenue, I mean, compared to normal times in Q3, which is certainly not helping cash. Because there's just -- given the times when the cash flow is in after the revenue recognition, there's less inflow than normal in Q4. This is certainly something to keep in mind, but we can't give you a guidance.
Okay. Any soft indication in which direction it should move? Or is it -- even that, too difficult to assess at the current point of time?
I mean we tend to not -- it's me now, Anton Mindl speaking for a second. We tend to not give you a guidance, as Arne said. But we also -- aside the fact that you already pointed out, you have to have in mind the fact that have less inflow from the reduced revenue activities. If let's say, things look as positive as we highlight them for the moment being, then we also said in our Q reporting that the investment up to now was very low. So whether we can keep this level of investment is not clear for the time being. So if business takes up much more and consistently, then we have to react as the necessity appears. And this is also contributing to the many parts moving, determining what the free cash flow would look like in the fourth quarter. So I think it would not be a good advice to give you any hint in which direction it would be going.
Okay. Fair enough. The investment would be my next topic. I mean, obviously, CapEx is down strongly this year, understandably. But growth could be quite strong then going into 2021 and then thereafter, so what's your take on required investments to then support the growth? I mean, usually, one would then expect a strong pickup again next year in investments, especially in the back end area.
I mean, let me jump in there as well because I have to -- we entered the route of investment. I mean, we don't do this at this point of the year, and you won't get any number from Arne or me now in the discussion that we are taking up with you, but maybe also a little bit more explaining around the surroundings that move us. On the one hand side, we definitely have our system for the front end. It's called headlights, now I would say, really under good control. So if it goes around investments, then everybody is used to, and that is also true for the next year, used to that. We won't do anything in the front line if that's in the front-end difference. On the testing, we also, since quite a few months, are working very much on programs that should help us to invest a little bit less than we did in the past years. So our hopes are that, when it comes to the guidance next year, in the first quarter that even, let's say, if business should continue in a positive way, which -- by the way, which is not absolutely clear at the moment. I mean, Stephane Houri pointed out justifiedly that Q4 looks like completely -- or the prognosis for Q4 looks like a completely undisturbed one. And what about taking it 4x for the next year?But I mean, we all know that we have big effects at the moment in the economic environment that could disturb the times 4 quite a lot. I mean, maybe you have a lot of momentum still in Q1, but nobody knows anything about Q2, Q3 and Q4 of next year. We have the elections in the U.S.A., which are, I think, very important for economy. And we don't know what the coronavirus will develop to. I mean, in the moment, we have the highest infection rates, more or less, in all countries. So I think visibility for a full year is absolutely not given at the moment. So it would be hazardous to give any guidance for the full year for the moment. And coming back to the investment, my hopes are that the company is better prepared than it was in the past to make increasing revenues with less investment. But as I said, no guidance for the moment. We are doing the very best to be as invest-efficient as we possibly can. And we have plans to improve that. But it will also very much depend on what the product portfolio and what the momentum looks like in the next year.
Yes. Okay. And then on the -- maybe on the visibility, again, on the stability of your pipeline. I mean, it's maybe not that stable, but maybe a bit more color on the trends you saw over the recent weeks. I mean, it appears that things -- order intake potentially accelerated, especially during the past few weeks. So maybe -- can you elaborate on the trends you see across different regions and from a timing perspective?
So we see that -- as we wrote, it is a widespread recovery. We also did some analysis on the continent, and Asia features very prominently. So this is, I would say, in line with the general assessment of the world economy. China will be back quickest. Generally, Asia will be back quickest and have not that a big effect from the coronavirus maybe for the time to come from now. We have to be careful, however, because all the recent surge and infections and the recent lockdowns, for all we know, none of that and none of the follow-on effects is included in what we see in our orders today. Order development will, of course, reflect what is happening in the general economy and with the cars sold, but this is not instantaneous. It takes weeks and weeks, sometimes months, for the effect to really feed through. So what we're seeing in our orders right now and -- which will, of course, translate into revenue in Q4 is a situation that we had in summer this year and maybe early autumn. So it's not that easy to interpret. If you only look at the numbers, you say, well, there's a stable and nice trend. But if you look at the general world, you maybe have to modify that assumption.
And the next question comes from Mr. Stephane Houri again.
Yes, I'm back for maybe a more long-term question, because I understand, there is a lack of visibility in the market right now for the reasons you mentioned. So I was asking myself, what your is your view, did you learn during this crisis? Did you make some important savings that you think you can continue in the long term? And the question behind is, should we expect a change in the margin because sales growth, you don't control. You control a bit with the market share gains, but the cost structure and the way you manufacture, should we expect an improvement into the long-term margins of the group? And if you can maybe precise what you have in mind for the target long term?
Well, generally, we are, first, to do some savings. The organization always learns something new, but it will not be drastic or dramatic. So I think it's not the time to change our guidance on what we can achieve in terms of EBIT now or anything of that sort. I mean, what was a drastic change this year is that we ended the cooperation with the Fraunhofer Institute and could not reach another prolongation concerning the reduced work site. So that changed. And when volume picks up again, we will come to be an even more cap-light company. This is a change in the wafer production setup that took place this year. We also have a voluntary lever scheme. However, this will not totally change the profitability. It is still the right thing to do. It helps the company. We often also have people that are towards the end of their employment life and maybe a few years are left, and they may not be comfortable with the shift system and everything. So quite often, it's also good for the people involved. So these are things we do now in these times of crisis, but I wouldn't say this necessarily translates into a better margin profile in the mid or long term.
There are no more questions. [Operator Instructions] There's another question from Malte Schaumann.
Yes. It's me again. A quick one. It appears -- at the R&D level, it appears that the capitalization effects -- I mean, in the past years, partially pretty strong capitalization effects from which you benefited. It appears that this is more or less balanced now. So should we expect kind of a more balanced with rising D&A, amortizations and debt capitalizations, kind of a more balanced effect in the future, so that is more or less negligible?
Well, we had quite a lot of projects this year that were new projects that we just started, so no capitalization for them. This may change from year to year. I mean, we are relatively small. There are not hundreds of projects that you could say the law of big numbers dictates. This is all very stable. There are big projects that we do and that kind of drive it up and down a little. So I would foresee that over the years there will be fluctuations. But you're right, this year is more or less -- comes out to plus/minus 0 because there's actually a very large share of early stage projects.
Okay. So that's not necessarily -- so it will depend...
I cannot give a guide for the future. This will guide...
Yes. Sure, but maybe with the high difference we saw in the past, it's probably less likely because amortizations have obviously increased?
Amortization goes up. And then this, of course, as a tendency, reduces that overall effect, but it will fluctuate. There is just no -- I mean, this is a project-by-project thing. It's an intricate process and then something comes out. So in a way, it's also hard to have a prognosis or an estimate on that. We do not know exactly what projects we will start, and we do not know exactly what project, for instance, next year, will contribute or will reach milestones or won't reach milestones. And these are -- so you, in a way, have to add it up and then interpret the result and say, "Oh, it's low because, yes, we see all these early stage projects. This makes sense." But to know that a year in advance is really hard. This would mean you know all milestones on new projects. We are way too dynamic for that.
And the next question comes from Mr. Robert Sanders.
It's Rob Sanders here, Deutsche Bank. I just have -- my first question was just in reference to one of your competitors, Melexis. They were saying that distributors have been restocking, but OEMs and Tier 1s have actually been reluctant to build inventory because a lot of them are in kind of cash flow preservation mode. Have you seen that difference in your business? That will be my first question.Second question relating to that would be, given the OEMs and Tier 1s are kind of in restructuring mode, have they come back for any more request for price-downs? Or are they leaving you guys alone? Just because, obviously, a lot of these companies are under a lot of pressure.And the last one would be, given this whole design -- given the whole strength seems to be coming out of China at the moment, how levered are you to the China recovery, particularly in regard to your design win pipeline? I remember you talking about things like rear lighting. Are there other applications that are very geared to which China recovery that we should be aware of?
Thank you for your questions. Firstly, we couldn't make out any specific trends towards distribution stocks versus Tier 1 or OEM stocks. Most of that is also data that is unavailable to us. We can, of course, ask a single person at a single point in time, but this is hard to get a general statistic to really make these statements. So we think, from what we see, it's pretty widespread. It distributes that orders, but it's also Tier 1. And yes, it's a lot of Asia, but it's not only Asia.On the price-downs, it's a yearly exercise. And the exercise is always painful and it's always hard. And we cannot really say that we see a structural difference this year versus the other years. We always don't want to give, and they always are hard on negotiating that they need. I do think that the procurement in the auto industry is quite professional, but I wouldn't see a big trend in the professionalism or in the negotiation strategy over the years. This has always been hard and good negotiations, but they happen every year. So there's no real big change there.You asked on Asia. We do have a pretty good Asia exposure, I would say, also rising over the years, which is due to both things: people producing in Asia; as well as exposure to the local Asian car markets. Asia is, of course, not only China. It's also Japan and Korea and a little bit the rest of Asia, but the 3 big things are China, Japan and Korea. So we're happy with the Asian exposure. Currently, the Asian share in revenue goes up. We also have a good order intake share from Asia. So that is, for us, in line with the general economic expectation, and it works out fine for us.
Maybe one more hint because you mentioned the rear lights, and obviously, dependent in your success in rear lights, majorly from one region like China. I think Arne alluded already that Asia is not just China. It's Japan, Korea and China. We're happy about this, let's say, independency in a more detailed look and more precise look on the regions there. And what we also have to take into account is that when we talk about the shares for the different continents, we talk, really, only about the point where we deliver the parts to. So when it comes to rear light designs, we have many rear light designs for American customers that are done in parts in Europe because the Tier 1 is a European Tier 1, and Tier 1s in the U.S.A., which -- because the OE is the Tier 1 from the U.S.A. But where will this be delivered to? It will most probably be delivered to some Asian states, Taiwanese or wherever. So in the end, if you look to that in our revenue distribution, you see it ending up in an area where business creation didn't take place. So when we talk about the fact that we are very successful and has been well highlighted in the calls that we had before, in this tail lighting scheme, then we talk really with Tier 1s all around the world. We are, in no ways, in this specific area, dependent from China in general. I wouldn't say -- I mean, we participate in the good development of the Chinese market, but we are not solely dependent on China up and down. Of course, if China goes up and down, we will see this in our figures, but it's not the case that it can be only solely referred to China as being the background of our increasing success now in revenue.
Got it. And rear lighting is really the most exciting content growth opportunity right now for you? Or is there another 2 or 3 that are really exciting?
No, I took it up because you mentioned it. Rear lighting is an exciting one, but we are also very excited about the other segments. I mean, when we had our last quarterly conference, we were excited about the sensor signal processes that is for battery packs, that is mentioned -- is meant for detecting early phases, thermal runaways. We have very good design-ins in the new HMIs, which is based on our HALIOS technique. We have a new successor project there, which is based on time-of-flight products, and we -- so across all business line segments, we have good participation in the revenue growth. I took rear lights only because you mentioned it.
And the next question comes from Mr. Werner Friedman.
This is Werner Friedman. There's only one question left from my side, and it's about the restructuring you mentioned, the voluntary leaving of some people and maybe other measures. Is there some expenses or provisioning taken for that in Q3? Or is something to be expected in Q4?
Yes. We took provisions. They go into the other income, and they actually make up the biggest chunk in the other income line for Q3. As of now, we wouldn't expect anything additional in Q4, but things are fluctuating. I mean with the voluntary lever scheme, you don't know how many volunteers they be and how many you actually want to accept their offer of leaving. So -- but generally, we have good provisions now in Q3 and wouldn't, at this point in time, expect anything big, additional in Q4.
There are no more questions. [Operator Instructions] There are no more questions.
So perfect. Thank you very much for your interest and your participation in the call. I would like to remind you that we will report our preliminary full year results on February 17, 2021, and the final results a month later on March 17. And we would be happy if you would join us for that conference call again. And finally, I would like to wish you personally and professionally all the best in these turbulent times.For now, goodbye, take care, stay healthy and stay confident.