Edited Transcript of LEHN.S earnings conference call or presentation 19-May-20 8:00am GMT

We are pleased to report that we have finished this financial year with sales and profitability within the guidance we’ve been giving, while we continue to have a strong balance sheet and healthy cash flow even in this tough economic environment. This allowed us to continue to invest a substantial amount in R&D as well as further develop our organization.

Looking to the long term, we are convinced of the strong fundamental prospects for LEM. We believe we’ve been managing the COVID-19 impact well to date. Prioritizing the safety of our employees and being in close collaboration with our customers and suppliers, we also continue to focus on executing our strategic opportunities. Our Chinese operations, representing 60% of our worldwide production, returned already to full capacity end of March, shortly after Europe went into confinement. All our operations continued without interruption throughout the confinement, while the sanitary measures for all our sites were implemented. The Q4 order book shrank slightly, while our Q4 sales reduced by almost 6% against the last year, mainly due to the extended New Year holidays in China. One of the biggest challenges in COVID-19 times is the supply chain management, both inbound, but even more importantly, the outbound since limited transportation means are available.

Now let’s move to the business performance. LEM is delivering products and solutions into the motors and drives business, the area of power storage, generation and conversion as well as energy measurement. We are organized in 2 business segments, Auto and Industry, that have about 20-80 share of the total in turnover. Both the Industry and the Automotive segment reduced sales by a low 1-digit percentage in comparison with the financial year ’19/’20; Automotive a bit more than Industry. However, it’s worthwhile noticing that despite the challenging economic environment at constant exchange rate, both segment sales in the last financial year have declined only slightly by about 2% altogether.

Looking at the geographic spread of our business, you can see that the global distribution has not significantly changed and remains nicely and balanced. China and Europe are our most important markets and both have been impacted by the economic slowdown that was caused by the Sino-U.S. frictions and additionally burdened in Q4 by the COVID-19 crisis. Our third most important market, rest of the world has been growing mainly due to positive effects in the Automotive business in Korea and Japan.

Now let’s look a bit deeper into the 2 business segments, starting with a bigger one, with Industry. In the Industry segment, our drives business has the biggest chain. This business has been suffering most in comparison to last year. The main drivers were the postponement of major investments in China, Japan and also Europe. Important to note here is that the most volatile renewable business as well as the long-cyclic traction business have helped to compensate for the drives sector, at least, partially. Projecting this picture now from a regional perspective, you can see that despite of the weak Q4 in the financial year, China is on par with the last financial year, however. That all other markets showed a weaker performance. And also important to understand that the North American market looks here worse and it actually is since in the last year’s period, we had to pay import taxes that were waived in this financial year.

Moving on, we continue to strongly invest into research and development and launch several new product families as well as new product generations. You can see here that for all segments, at least 1 new product has been launched. For an important Japanese customer, an open loop transducer for the new renewable business and 5-volt closed loop transducer, both products are getting manufactured in China.

For the smart grid business, an integrator that is sold together with our Rogowski coil — product with a more complex electronics, and this has been developed in Lyon, our new R&D site. 2 new voltage transducer versions for the traction market have been developed. And we are further updating our product portfolio in the high-precision market by completing our IN product family that is manufactured in Bulgaria.

One of the most complex products, which LEM has ever developed, is the DC meter for EV charging — for EV fast charging stage. It’s currently in the launch phase, and it’s part of our strategic initiative beyond pure transducer, that means to move up the value chain into adjacent markets beyond pure current sensing. The product is split into a sensor element that measures current and voltage and a metering unit that contains a lot of software. Certified DC metering is becoming mandatory in the EU and in the U.S., and this meter is part of the intelligent EV charging infrastructure that will accompany the increasing number of electrical vehicles we are going to see in the future.

Now let’s look deeper in the second segment in our Automotive segment. Now as you all might have heard, the automotive sector is under enormous pressure since COVID-19 has sparked the [collars] of car sales in the last quarter. And thus, car manufacturers stopped their production and just now slowly restart their plants. Therefore, our Automotive business developed less well than expected. Beyond COVID-19, there are 2 additional factors. On the one hand, China has changed its subsidy policy and the subsidy were reduced from about USD 10,000 by 60%. And this puts, for sure, enormous cost and margin pressure to all OEMs that is going to get passed on to the supply space. On the other hand, there is a huge variety of costs getting launched and not all OEMs make their promised volumes and are in time with their solutions. All this impacts our business. The conventional car business is as foreseen further effecting.

Looking at the global distribution of our automotive sales, you can see sharp decline in China in line with the lockdown in China in February and March. The decline in the U.S. is linked to our conventional car business that has been foreseen to decline. However, I would also like to draw your attention to a nice growth performance in Europe, although still full but with substantial potential and in the rest of the world, mainly Japan and Korea.

Now on this page, we would like to share with you the different application areas we have in the Automotive business. One of the most promising area is battery management, where batteries at different voltage levels need to be managed at 12, 48 as well as 400 to 800 volts. We are just about to complete our CAB family with a sensor that can send up to 1,500 amps current, and you see this depicted here. Besides battery management, we see for LEM the current sensor opportunities in the motor control business as well as in the onboard charging and DC-DC conversion, where we will apply our integrated current sensor technology.

Despite COVID-19, we see that the auto sector transformation is going to continue with electrification, connectivity, autonomous driving, mobility as a service. This revolution in the Automotive business will produce winners and losers in the existing supply chain structures and offer important chances for new entrants. We foresee clearly reduced car sales in 2020 in the order of magnitude of 15% to 30% depending on the region in the world, and we clearly expect that also the new energy vehicles will be affected. We might see a short-term delay in the volume ramp-up in UVs. However, we do not see any change in the general trend towards electrification for individual mobility. This is clearly confirmed on this picture, where, based on independent market research, we see that the share of new energy vehicles is forecasted to grow towards 50% in the next 5 years. So we monitor this development closely since incentive policy as well as CO2 emission limits are strongly impacting those developments. We believe that the Chinese market is and will remain the most important single market for new energy vehicles worldwide.

Now with this introduction, I would like to hand over to Andrea who is going to present the financial results.

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Andrea Borla, LEM Holding SA – CFO [3]

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Ladies and gentlemen, good morning also from my side. As the group CFO, I’m overall pleased to report steady financial results during the last 12 months. As already mentioned by Frank, we have been faced with a challenging environment mainly impacted by the ongoing U.S.-China trade war and now more recently by the COVID-19 crisis. Considering this difficult market environment, the sales held up pretty nicely and decreased by 4% and at constant exchange rates by 2% only. Those lower sales impacted logically as well as the EBIT, which is behind last year’s performance. However, the net profit exceeded CHF 60 million and achieved a record level, thanks to a nonrecurrence tax gain.

Let’s now have a closer look on the various P&L elements. The gross margin in absolute value dropped by close to CHF 4 million from CHF 146.5 million to CHF 142.7 million. This is the consequence of the top line drop just seen before. The good news is that in spite of the sales drop, we could manage to further improve the gross margin rate by 80 basis points. How did we achieve that? Several ongoing efficiency programs optimizing the supply chain, the purchasing and the production contributed to that improvement. Our 2 low-cost locations situated in China and Bulgaria cover 80% of all sensors produced by LEM. This percentage will further increase in the future.

On a negative note, Q4 gross margin was impacted by a onetime provision for not used auto ASICs components for a total amount of CHF 1.3 million. This as well explains the weak auto EBIT margin of only 4% realized in Q4 ’19/’20. In view of the soft top line, we have rapidly identified and implemented contingency measures already during summer 2019. We are very vigilant on the recruitment of overheads and continue to optimize the scope at our head office in Geneva. This resulted in the Geneva restructuring announced in January 2020, which resulted in the layoff of 21 employees and the setup of severance provision of CHF 1.5 million. If we exclude the nonrecurring elements in both years, the SG&As would have been by CHF 2 million slightly lower than in the previous year.

In contrast to the SG&As, we continue to grow our R&D expenses even though only slightly, we increased them from CHF 27.6 million to CHF 28 million. 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. Some exciting new product launches are scheduled to come in the next few months. For that, we have hired additional engineers and work together as well with third parties in order to speed up the product development. Going forward, R&D expenses are expected to remain in the 8% to 10% range.

Due to the Swiss franc appreciation, the currency evolution was unfavorable for LEM during the last 12 months, and we had to suffer exchange losses mainly in U.S. dollar and euro. Those losses were caused on hedges and depreciation, foreign currencies during invoice and payment date. The financial expenses of CHF 300,000 cover mainly interest costs on leases, which is following the new IFRS 16 norm.

Following our simplification of LEM’s Swiss legal structure done in November 2019, the technical IP has been transferred from LEM IP based in Fribourg to both LEM international based in Geneva as well as LEM China based in Beijing. And this has resulted in a nonrecurrent positive tax impact of CHF 14 million per year-end ’19/’20. If we exclude all nonrecurrent tax elements in 2019/2020, the underlying effective tax rate of the LEM Group was at 17%.

And here, you can see the complete P&L on the left side, the full year’s results, and I would like to add 1 additional remark on the Q4 P&L, which you see on the right side of the table. If we exclude the Geneva restructuring costs and also the nonrecurrent auto inventory provision, the EBIT achieved in Q4 would amount to around CHF 15 million and we would realize an EBIT margin of around 20%.

What have been the key points of the balance sheet per 31st of March 2020? The main net working capital elements as DSO, DIO and DPO have all developed positively, especially, the development of the accounts receivable has been very positive and the overdues remained very, very much under control. The net cash consists of CHF 19 million cash on hand and CHF 9 million short-term debt.

The equity ratio dropped from 60.5% to 51%. And this is mainly due to the stretching of the balance sheet following the lease capitalization in line with the revised IFRS 16 norms and the setup of an important amount of deferred tax assets following our IP transfer I just mentioned before. All in all, the balance sheet remains strong.

And last but not least, the cash flow realized a very pleasing performance over the last 12 months. Both the cash flow from operating activities as well as the free cash flow increased considerably compared to previous year. The main drivers have been an effective net working capital management and lower paid taxes following our new HNTE tax status in China. All in all, we have been faced with a challenging market environment. But we managed to protect first our overall profitability, which is reflected in a net profit margin of 20%; second, we managed to protect also our balance sheet, which is today essentially debt-free; and third, we protected as well our cash flow, thanks to good operational management.

In these uncertain times, you may now wonder what the future will bring. For that, I’m very happy to hand back to Frank.

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Frank Rehfeld, LEM Holding SA – CEO [4]

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Thank you very much, Andrea, for giving us here a more insight. Now what do we expect for the just started financial year 2021? As you know, our regular policy is to give a guidance with numbers after the financial year is 6 months old. Where we stand now today, like many companies, it is very difficult to make any concrete statements about the outlook. Due to the COVID-19 situation, the International Monetary Fund forecasted the global GDP shrinking by 3%.

Despite the fact that our Chinese operations are up and running at 100% again, the exports of our products is a substantial part of the plant loading. We can see today a pickup in the demand in China. However, it is difficult to foresee exactly how an unemployment rate approach 20% in the U.S. will impact the global demand. We are convinced that like this year, also in 2021, LEM can profit from our footprint across a wide range of applications as well as regions.

Based on our robust business performance and our strong balance sheet, we are committed to continue investing into R&D along the megatrends that drive our business. At the same time, we continue to work on our organization in order to make it more agile, shorten time to market and improve efficiently. We clearly see that this crisis is also an opportunity for them to prove that we are an ever improving, reliable partner for our customers. But as with many other companies, it will take a few months more before we can get greater visibility on the impact of COVID-19 across our customers and supply chain.

Meanwhile, we’ve not stopped in our programs to accelerate the organization, which we outlined to you a year ago, and we continue our path towards decentralization. Our headquarter in Geneva will more and more focus on innovation, strategy, the definition of standards and rollout of the strategic initiatives and move to the operations — and move the operations closer to our market, in particular, to Asia.

In order to do that, we have started several initiatives to make sure that we have the right talent available where we need them, that those talents have the leadership and ambition that we need to support us on our way and that the high-performance team spirit reaches all levels of the organization. Our plans for our new headquarter have been further developed and the Geneva organization is looking forward to move into the new site in Meyrin in 2021. This new building will not only be more in line with the LEM ambitions and brand image but also provide better working conditions and means of collaboration for the whole team.

We are also continuing to extend our manufacturing footprint with a new manufacturing plant in Penang in Malaysia. We are making progress here, and we expect to open it within the next financial year ’21/’22.

Finally, I would like to remind you that the foundation of LEM’s success today as well as our future growth are the important megatrends that you see listed here: renewable energy, reliable energy, distributed energy, mobility, automation and digitization. Based on those megatrends, the current sensing market is growing by about 8% year-on-year in average.

Now having these megatrends in mind, LEM has the potential to substantially grow in the future in the right — if the right investments are made. Even in those difficult times, where outlooks are difficult and the prices cannot be avoided, we are committed to invest into battery management competencies, in particular, in software development here and into integrated current sensing by increasing our knowledge on semiconductor packaging, supply chain and testing. I’m very much pleased to report that the results of those investments are clearly evident in this financial year ’19/’20, where we launched 10 new products such as digital integrator products for smart grids, semiconductor products for solar inverters and robotics, and will launch a DC meter for electric vehicle for fast charging stations.

So this is where we stand. And with this, I would like to hand over to our Chairman, Andreas Hürlimann.

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Andreas Hürlimann, LEM Holding SA – Chairman of the Board [5]

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Thank you very much, Frank. Thank you, Andrea, for your detailed explanations. As usual, I’d like to share a more long-term perspective on our ambition to create value for all stakeholders and to return also appropriate rewards to our risk takers being our shareholders.

Strategy is about anticipating scenario for the future, including the megatrends that Frank just mentioned. Then about developing an ambition, setting goals, planned and implement with actions. Now both megatrends, but also recent events that we were about to going through have confirmed our plans and actually like the significant R&D investment that starts to bear fruit, but also our projects to further derisk our supply chain to diversify our footprint and to enhance our regional competencies. This will make our company more resilient but also more agile and with this more competitive.

Moving on to the dividend proposal. The Board considered carefully the record free cash flow of this year of almost CHF 59 million, the underlying strength of the business across diverse business sectors and geographies but also the general economic uncertainty ahead. This is why we are proposing to our shareholders a slight reduction from CHF 42 to CHF 40 per share, which is a payout ratio of 75%, down from 91% last year.

Our long-standing stated dividend policy is to distribute significantly more than 50% of our net profit, so we are still there. It also demonstrates our high confidence in the company’s ability to generate strong cash flows. We also continue to make significant investments in talent, in research and development, in business development and marketing as well as operations, IT, infrastructure, which all results in new products, increased market share as well as geographic footprint expansion.

This leaves me to move on to saying thank you. On behalf of the Board of Directors, I wish to extend a special thanks to our employees worldwide for their expertise, reliability and innovative solutions. In particular, we are very proud on how our teams have responded to the extraordinary challenges of recent months using their resilience and creativity to keep delivering products and projects on time. Also, I thank our management team here present, but also the other colleagues from the executive committee and the managed — senior management for their prudent and empowering leadership. We also would like to extend our gratitude to our customers, suppliers and business partners for their continued trust. We thank shareholders for their confidence they continue to play in us, as we can see. And we thank all of you on today’s call, investors, analysts, media, bankers and consultants for your continued interest in LEM’s performance over the past year in our future projects.

It just remains for me to wish you all good health, a successful navigation of the unprecedented challenges ahead, which is likely to not be finished at this point in time. And now we look forward to taking your questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question from the phone comes from the line of Reto Huber, Research Partners.

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Reto Huber, Research Partners AG – Senior Analyst [2]

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I have 3 of them. First one is about the green car business in China. I was wondering how is demand at the moment there? And maybe also, the regularity — regulatory response to the COVID crisis? And maybe also a response to the impact of the reduced subsidies of the last year? Then the second question about your traction business. You see there some tailwinds, maybe coming from the government, from some programs there. And then the third one about your part of the strategy that you have mentioned, which is moving up the value chain. I was wondering why do you do that? And what are the challenges involved there? I mean, what your current customers think about that? And maybe you could also elaborate a bit on your new product families that are about to come?

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Frank Rehfeld, LEM Holding SA – CEO [3]

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Thank you very much, Reto. And these are pretty comprehensive questions. And I will try to tackle them one after the other and hope I can be specific enough. Now starting with the number one, green targets, what is the regulatory environment, in particular, in China? Now China has not changed on its will to privilege new energy vehicles also in the future. This has been a strategic target that has been, I think, set up even in the last century. And China is very consequently following that. So the reduced subsidies are rather, let’s say, a consequence of, let’s say, an economical decision in the country since the business size has reached 1.3 million cars out of — in this time, probably about 28 million cars, where the government has been decided that subsidies are not really an important, let’s say, a driver to make the new energy vehicle market happening. So here, we don’t see any change with respect to the green target in China. And this is also underlined with the developments that we see in the renewable energy business where also further a strong policy towards supporting this industry is visible.

On the traction business, yes, when you look at the development of the traction business in the last year, I would just like to recall what I’ve been saying a couple of minutes before. This traction business helped us to balance out the industry performance. And again, it shows that the wide application set that LEM has is helping us to basically balance also out the financial performance. We see at the moment that there are activities to sponsor infrastructure investments in this area. And being one of the important players in the power electronics business, we see that we can also profit from this.

Moving up the value chain, you were talking about why do you do that and what do you see as challenges, you were particularly referring to — you may be becoming a threat to your customers. This is the way I understood it. Now moving up the value chain is happening in the whole industry sector. So basically, everybody is moving up the value chain and looking at the very, very close interaction we have with our customers, for sure. The idea is not to become competitors for them, but actually to support them on their way to a higher level of integration. So that means when we do such steps in the Automotive business or in the Industry business, then we do that in close alignment with our customers. And at the same time, it will help us as an organization to further grow and to move out of the, let’s say, commodity current sensing by basically adding additional — know-how additional features, additional value to our products. So I hope I could satisfy with the fourth answer and the questions that you’ve been asking.

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Operator [4]

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Next question comes from the line of Michal Lichvar, Vontobel.

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Michal Lichvar, [5]

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I’d have actually kind of 3 topics that I would like to touch on. First, can you talk more about the pricing erosion impact and also the volume growth on declines in different divisions in the fourth quarter and the full year? Can you give us a bit of detail? That would be kind of the first question.

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Frank Rehfeld, LEM Holding SA – CEO [6]

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First of all, thanks for your question, Michal. Not an easy question because, for sure, we are in a competitive environment like everybody. And we are regularly faced with price down pressure that we have in the business. Did we see a particular high pricing erosion in the last quarter? I would not say so. I think the wide setup of LEM in different applications allows us to also defend the margin positions that we are having. At the same time, we are continuously working to improve our margins by cost improvements, both in the manufacturing, also in the purchasing area and also by enlarging our customer portfolio. So this is probably, from a pricing point of view and from a margin point of view, the situation, the way I see it. Yes, for sure, volume decline and we have been facing in the one or the other sector. In particular, in the drives sector, we were not performing in the way we were expecting that and to be frank, basically, in comparison to last year. On the other hand, we also managed to grow business in some other areas. And again, here, the LEM setup turned out to be an advantage because — and our products are not dedicated only to 1 sector, but our products can be used — at least partly can be used in several sectors. So a decline in one area does not necessarily mean that the overall volume is proportionally then also declining. I hope this has been answering your question detailed enough.

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Michal Lichvar, [7]

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Yes. Maybe just I hoped a bit more specific answer, for example, on your green car business in China, you said that the subsidies and the cost pressures there are higher. So have you seen maybe accelerated price erosions and price pressures on that segment. Can you maybe elaborate on that?

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Frank Rehfeld, LEM Holding SA – CEO [8]

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I think a very, very good question. Thank you very much. So the green car price pressure is a price pressure that goes beyond, let’s say, annual price negotiation. This is strategically a consequence out of the fact that subsidies have been cut and the subsidies were in an order of magnitude that only next technology steps will allow to make those green cars profitable. So that means at the moment, a lot of the green cars are actually cost subsidized by ICS — by internal combustion engine-based car. So this is the reason why we are substantially investing into R&D because we clearly foresee price erosion at double-digit level that require new technologies, new solutions that require miniaturization, that require integration. And we want to be ahead of that and plan accordingly for this.

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Michal Lichvar, [9]

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Perfect. That actually answers the question. And maybe just a follow-up, you mentioned this 8% CAGR of current sensor. Is this volume growth? Or is this kind of a growth in U.S. dollars?

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Frank Rehfeld, LEM Holding SA – CEO [10]

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That is growth in U.S. dollars. For the global current sensing market from sensing microamps to sensing ten thousands of amps, so that is a huge range for sure on technologies on current range that is covered for.

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Michal Lichvar, [11]

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And if you look at this 8% growth, your position — with your positioning, do you think that you could outgrow or you would be below this growth that you are not positioned yet in the growing markets, as you mentioned, that it’s quite a broad range?

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Frank Rehfeld, LEM Holding SA – CEO [12]

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Now let’s be fair here. The 8% are in average value that are seen over time. The market is, for sure, at the moment, not growing by 8%. The ambition level is to basically grow at market speed, but for sure, one needs to take into account the overall market conditions in which we are living. And I’ve been mentioning the IMF foresees 3% GDP shrink in this year — in this very year we are in. So therefore, also, we don’t expect that the market is growing at this, so to speak. But again, averaged over time, this is the growth that we can expect based on those important megatrends of electrification, robotization, digitization, renewable energy, and this is the ambition level that we follow this speed.

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Michal Lichvar, [13]

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Okay. And last question. I know that you mentioned that making any comments on outlook is extremely difficult. But can you at least give us a bit of an indication in your subsegments, which direction did they go in April and mid of May? And where are you kind of positive for this fiscal year? Where do you have the most worries among which of the subsegment that you are in at the moment?

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Andrea Borla, LEM Holding SA – CFO [14]

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Yes. Let me answer this question, Michal. So we — as you see, we have — we are really focused on reporting the fiscal year ’19/’20, which ends by end of March. Now we will not comment per se more in detail about the coming months. What we can say overall is that being geographically so diversified on the one side and then also the auto segment being reflected only by a bit more than 20% of our total sales and also, let’s say, the industry being so diverse in having lots of different applications, lots of different industries we are serving in, be in the renewable sectors, be in the infrastructure and so on, so we believe that we are set up in a pretty diversified way and that we are pretty well positioned to weather a storm, this COVID-19 storm.

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Operator [15]

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(Operator Instructions) The next question comes from the line of Charles Bordes, Kepler Cheuvreux.

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Charles Bordes, Kepler Cheuvreux, Research Division – Equity Research Analyst [16]

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So 3 questions, if I may. First one regarding the drives business. So you say that uncertainties remain and I know that you can’t comment on the outlook, but you said previously that sentiment was pretty important, especially in China. So what can you tell us about the sentiment in China at the beginning of this new year? Then the second one, regarding green cars. In China, the new subsided threshold is, if I understand correctly, too low for the Tesla Model-3, which is a very popular electric car worldwide. So there were rumors of price cut at some point to make the price of this model below the threshold. What would be the impact on LEM’s business if Tesla were to be subsidized in China? And last question regarding R&D. You’re talking about partnerships with third-party players. Is it possible to have a bit more color on that? What competencies are you looking precisely for — from these partners?

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Frank Rehfeld, LEM Holding SA – CEO [17]

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Charles, yes, very good questions. Thank you very much. I will not be — it will not be possible to give you here a concrete forecast for the drives business. What I can tell you is, for sure, some encouraging signals that we see basically on a mid to longer term. I think you are all aware that 5G technology is getting invested. You are probably also aware that there are some positive signals in the semiconductor front. So all this needs manufacturing technologies, all this needs new drives in order to make those things moving. So we expect that the drives business is not at, let’s say, a — rather a bit dire level forever. We expect that this business is picking up again. However, to give you a time when this is going to happen, it’s probably very difficult.

The second question refers to green cars, in particular to the Tesla performance in China with respect to their pricing and basically implying the question, are we part of Model-3. Yes, may I refer to the general policy that we are not talking in particular about concrete customers and concrete models where we are in. Anyway, let’s be honest, you would probably not really see that in our P&L because, for sure, our P&L is comprised by a huge volume of products. We are delivering LEM on an annual scale, delivers about CHF 55 million current transducers. So therefore, whether Tesla Model-3 is getting subsidized or not, we’ll have rather not an important impact in the way you see it then reflected in our numbers.

And third question, R&D partnerships. Now this is a strategically very important question you’re asking here. So thank you very much for that. When you look at the size of LEM and when you look at the competencies that are required for the future and the strategic decisions we’ve been taking, we are, for sure, in a — also in the competence sector in a make-or-buy decision. So that means when we talk about competencies like software competence, when we talk about competencies like those competencies you need in a fabless semiconductor production, then the question is, do you do all by yourself? Do you start with a partner in order to work together alongside? And from a certain point at certain volume and you go by yourself. And this is exactly what we did and we continue to do in all those new investments in order to make sure that basically we don’t reinvent the wheel. So when there are already existing solutions and existing competencies, we clearly do a make-or-buy analysis in order to make sure that we get the right competencies quickly onboard and then basically move on because clearly customer satisfaction and time to market are the most important drivers for our business success. Does this answer your 3 questions you had, Charles?

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Charles Bordes, Kepler Cheuvreux, Research Division – Equity Research Analyst [18]

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Yes, definitely. Just to add a small question. Could you give us an example of competency that you are looking at a partner? I saw some packaging, semi-packaging, but…

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Frank Rehfeld, LEM Holding SA – CEO [19]

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Right. For instance, semi-packaging is one of those competence, as you know, why this business is called for a lot of players, a fabless business because you basically share capacities. You don’t invest yourself, but you share capacities for packaging that you — that each huge investments. However, you need to design them. You need to basically know what these existing investments are able to do. And there, you basically need to have long-standing competence. Another example is, for instance, software competence, where certain software platforms are maybe already existing that are worthwhile to reuse rather than to reinvent here the wheel and establish here this competence from scratch, which would probably delay you by 2 or 3 years in your time to market.

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Operator [20]

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That was the last question.

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Frank Rehfeld, LEM Holding SA – CEO [21]

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All right. Thank you.

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Operator [22]

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We have a follow-up question from Michal Lichvar.

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Michal Lichvar, [23]

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I was just interested and I was excited to see that you already rolled out some of the kind of semiconductor-based sensors. This was kind of an area where you wanted to expand area with a lot of potential and where you are kind of relatively new. So I would be just interested to know how this has developed? What is the feedback from the customers? How does the competition reacted with you being in this market? Can you just give us a bit more color there?

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Frank Rehfeld, LEM Holding SA – CEO [24]

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Very good. And so what is the semiconductor or the fabless business for LEM? For LEM, the fabless business is nothing else than an extension of the product portfolio downwards to lower current. So that means the performance or the function of the product-integrated currencies has nothing else then a current sensor that probably sense is 1,000 amps. So that means it’s, on the one hand, an expectation of our customers that LEM has and well-established one-stop shop in this industry is able to establish here also a product solution and to have a product solution. So therefore, we have very strong customer support here to grow this business. And technologically, for sure, this is not easy. This is something that poses challenges also to us. But at the same time, you remember the chapter has been making about talent, getting the right people into the right positions. We have a long-standing competence in designing ASICs. And we are extending this competence and can build here already on strong pillar stones we have in the organization. So therefore, I think we are well set up to manage those challenges. But looking at the R&D investment that you’ve been seeing, for sure, these are substantial investments that eventually are necessary to make this step.

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Michal Lichvar, [25]

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And a question regarding CapEx, you mentioned that you kind of want to still invest, not only R&D, but you are building the new plant in Malaysia. So question for Andrea, what kind of CapEx can we expect this year and next year? Did anything change since the last time we talked because there, I think, you kind of indicated an increase in capital expenditures going forward? So can you maybe give us an update on the CapEx outlook?

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Andrea Borla, LEM Holding SA – CFO [26]

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Exactly. So basically, if you look at the last few years, the CapEx has been rather steady. And we will continue to have this level — this underlying level. On top of that, and this we announced also in our press release is that we invest on top of that in Malaysia, this additional factory and then also investments in our future head office. So for the next 12 months, you can expect, let’s say, higher CapEx than, let’s say, the usual run rate we have been experiencing over the last, let’s say, 3 years.

And to add here, why can we do that? Again, if you look at now the overall year-end closing figures ’19/’20 and you look specifically at the balance sheet, we have a rather strong balance sheet with no third-party debt, indeed a net cash positive. So we are in a position where we can finance ourselves and could possibly also do this financing in Meyrin and in Malaysia.

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Operator [27]

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The next question comes from the line of Marc Possa.

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Marc E. Possa, VV Vermögensverwaltung AG – CEO and Partner [28]

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I would have an additional question concerning the strategy and the exposure towards more software content in that conversion of hard and software. Is it reasonable to assume that over the next couple of years, the capital employed, therefore, in relation to the total turnover will decrease, i.e., we will see reemerging ROCE due to a limited additional capital employed after having built the new headquarters and the Malaysia plant, and given that software, where there is less capital intensity comes more into play? And then as a second question in that context, could you allude on the fact — I mean, do you find all the talents in new as well on the IP or R&D side since almost every company is probably looking for the same skill set? Do you have vacancies there?

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Andrea Borla, LEM Holding SA – CFO [29]

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Okay. So perhaps to the first question on the content, here, effectively, we will have less capital expenditures to be expected when we go into the segment there. So the really — the key question is, of course, how will we succeed? What market share will we achieve in these new markets we will serve? But in respect of the investments, it will be definitely be lower than what we have experienced so far in our traditional business.

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Frank Rehfeld, LEM Holding SA – CEO [30]

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Right. And maybe let me answer to the second part of your question, do you find all the talents? Yes, we’re talking about a war of talent. We’re talking about this war of talents, since — even since I started working, this is already a couple of years ago. And what do we see? I think we — LEM doesn’t need hundreds of people in the organization. We look for specific talents, and we want to basically also leverage existing know-how that can be found in the market, and for instance, we take over platforms in the software business. All in all, yes, we find the talents that we need. We clearly have chosen the side of Lyon in an area where energy management has been strategically focused by the French government in order to attract the right skill set and the same applies also to China and Bulgaria. And let’s say — but we look at the topic of talent really as a holistic topic, the whole topic of brand refreshing, the whole topic of talent development that we have stronger focus on, the whole topic of our cultural journey that we’ve been mentioning also in our this year’s annual review more in detail are important elements to get talents at different phases in stages of their careers and to also develop them in the company. And I think for the size of LEM, we can offer talents amazing development potential and development opportunities in this rather small company, but with a rather wide international regional setup.

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Operator [31]

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That was the last question.

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Frank Rehfeld, LEM Holding SA – CEO [32]

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Good. There’s one more.

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Andrea Borla, LEM Holding SA – CFO [33]

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You want to read out…

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Frank Rehfeld, LEM Holding SA – CEO [34]

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Maybe we can read. Yes. There’s 1 more question coming from Guenther Hollfelder from Robeco. The question is, is the China sales exposure of drive in line with the Industry segment exposure of 31%, below or above?

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Andrea Borla, LEM Holding SA – CFO [35]

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So thank you, Guenther, for this question, but we are not providing this level of detail. So we don’t provide by businesses, the regional exposure. I think we — overall LEM as we have enough financial transparency. But okay, you can also assume that China being an important market overall that it will not be extremely far off the overall average of 31%.

Okay. So in case there are no questions anymore, Andreas, Frank and myself, we would like to thank you for your continuous interest into LEM. You see here the slide, the financial calendar and the contact details. We are very much looking forward to stay in contact, stay in touch throughout the full year 2020/’21. So we will have our next milestone is the Annual General Meeting on June 9, with then a corresponding dividend payout a couple of days afterwards. And the Q1, I think a lot of people have been raising questions and showed a lot of interest in where we are heading. The Q1 results will be published on July 29, 2020.

And to close up. So overall, in a summary, we have been very pleased with this overall steady results which we have achieved over the last 12 months. And going forward, as we said, uncertain, but we believe in the long-term potential of LEM growing substantially in the midterm. We are present in the megatrends. We have lots of diversity in different activities, in different businesses and different industries. So we are optimistic about the future development of LEM. Thank you so much, and looking forward to stay in touch in the near future. Thank you.

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Operator [36]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.