U.S. Markets closed

Edited Transcript of LEHN.S earnings conference call or presentation 5-Nov-19 9:00am GMT

Half Year 2020 Lem Holding SA Earnings Call

Plan-les-Ouates Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Lem Holding SA earnings conference call or presentation Tuesday, November 5, 2019 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrea Borla

LEM Holding SA - CFO

* Frank Rehfeld

LEM Holding SA - CEO & Senior VP of Industry

================================================================================

Conference Call Participants

================================================================================

* Daniel Koenig

Mirabaud Securities Limited, Research Division - Analyst

* Michal Lichvar

Bank Vontobel AG, Research Division - Analyst

* Reto Huber

Research Partners AG - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the half year results 2019/2020 conference call and live webcast. I'm Andre, the Chorus Call operator. (Operator Instructions) And the conference is being recorded.

(Operator Instructions)The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Frank Rehfeld, CEO of LEM Holding. Please go ahead, sir.

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [2]

--------------------------------------------------------------------------------

Hello, also welcome from my side. My name is Frank Rehfeld, I'm the CEO of LEM, and I'm here together with Andrea Borla, our CFO.

So when you look to the agenda of today, on Page 2. And basically, it doesn't really deviate from previous half year reviews, I will do a couple of opening remarks and then go in the details of the business performance of our 2 segments. Andrea Borla, our CFO, will then introduce our financial results, and I'm going to conclude with an outlook for this fiscal year.

Moving to Page 3, you have certainly already read our press release that in comparison to the first 6 months of the previous financial year, we have turnover shrink by about 6%. Now for sure, this is not a satisfying results for the ambition that we have long term, however, looking at peers, customers, competitors, we see ourselves at par or better. The reason for the nongrowth, so to say, can be clearly attributed to the global economic environment that impacts China and radiates from there also to the complete Asian and European market. Considering the market reduction in automotive -- automation and drives in the order of magnitude of about 15% to 20%, you can see that the Industry business held up well.

In auto, the LEM Green Car business was growing by about 4%. However, the planned continuously shrinking business with conventional cars led also to a negative growth in the Automotive business. It is the combination of our internal efficiency program that we've been starting in 2018 and that is leading already its first fruits and the internal cost control that gave us the freedom to continue investing on a high-speed at about 9% R&D cost of sales, while still delivering a 20% EBIT.

Now looking to the next slide, you see the global PMI split here between manufacturing and services. And you've been for sure witnessing this continuous deterioration of this PMI. You also see here very clearly that the manufacturing industry is more severely impacted. And from the beginning, actually, of our financial year, the manufacturing index was crossing the line from growth to reduction. And then this is, for sure, impacting our overall business environment.

Moving on to the next slide, you see what is the reason for our overall still very optimistic outlook. And then what you see here is basically a total picture of CO2 emission into the atmosphere. And then you see that plotted over time from 2015 to 2050. You can clearly see that the accumulated energy-related carbon emission is growing continuously until 2037, reaching an amount, if we don't do anything that will result in a 2 degrees of temperature increase on the global climate. So this will obviously be a rather heavy burden for ourselves and our children.

When we, however, this shows the green line managed to asymptotically reach this 800 gigatons, you see here the dotted line, we need to reduce the accumulated CO2 emission by about 470 gigatons until 2050. So that means by about 35 gigatons in 2050. If we don't do nothing against 10 gigatons till 2050. Now moving on, one more slide, you see what that means.

So the reduction of 35 gigatons in 2050 to about 10 gigatons can be reached by investment into renewable energy by increasing electrification by energy efficiency and these are exactly the businesses in which LEM deliveries. So renewable energy in wind, solar and energy as storage, electrification, in mobility for both Industry and Automotive, energy efficiency in automation and drives. And for sure, all that supported by an intelligent infrastructure, the so-called smart grid. So, therefore, we are convinced, long term, there is a very, very interesting business structure ahead or environment ahead for us for future growth.

I would like to do one more opening remark that, in particular, also impacts me personally. You have been probably realizing that I've been doing the 2 responsibilities as Head of Industry and as CEO in the last 2 years and myself, and I'm very, very happy to announce that Rebecca Cullinan will follow me in the position of Senior Vice President, Industry from the beginning of December.

Rebecca is a British passport holder, has Chinese roots and very extensive experience in what I would call, one of the most challenging industries of the world, you can see that here in the automotive industry and will soon strengthen our team, complete our team and the expert team of LEM. With this, I would like to go now into the business performance. Now you've seen, read this picture and before I've been mentioning that in my introductory statement. So basically, we witnessed half year on half year compared and about 6% shrink of our business, both in the Industry and Automotive.

When you look at the distribution of our business regionally, you see on the one hand that our global distribution has not really been significantly changing and they remains nicely balanced. China and Europe are and remain our most important markets and both have been shrinking due to the economic cooldown. The third important, most important market, the rest of the world market and has been growing mainly due to positive effects from our Automotive business.

So let's now look into the regional distribution, where we will show this picture again and explain what that means in this kind of businesses. With this, I would like to move to the Industry segment in there directly to the first page, where we show the sales performance of the Industry business application by application.

Now the drives business has been the business that has been most suffering, you see here at 16%. We see that clearly at our customers, we see that this is driven by the postponement of major investments in China, Japan, and Europe. Important and interesting note to see here that the actually more volatile renewable business, as well as the long cyclic traction business have helped to compensate this drive impact to the overall sales performance of Industry, at least partially. So that is very good news, and you see that this then resulted in the minus 6% in the overall sales performance. And the renewable activities as well as also traction and were mainly coming from Asia, in particular, China and India.

Moving to the sales distribution, you see. China, again, being our leading market and you see here that was basically from the several segmental effects, a mix that you see here in China. And that we were initially for sure, hoping would be stronger, but you see here that there was only 1.7% growth in China, half year on half year. So it's slightly positive with obviously a strong Q2 that was helping to show here on the half year, a positive result.

The other markets showed a weak performance. The North American market looks worse actually than it is because here, we see a strong impact from the fact that the import taxes were in comparison to last half year, where we're still paying import taxes, waived and this for sure then also lowers our sales performance.

Now with the positive Q2 trend, the question is, for sure, will that be sustainable and then eventually translate into growth in Europe, and this remains to be seen.

We're talking about substantial investment that we continue to do, and I would like to introduce you 2 of the newest launches that we've been doing. You see here on the smart grid side, a Rogowski Coil in the lower part and an integrator in the upper part. So these Rogowski Coil is actually made for outdoor applications to actually increase our market in which we can deliver this and the integrator has actually exactly the same purpose. It did work together with the Rogowski Coil and allow us to tap new market segments that cannot be tapped with a pure Rogowski Coil.

Now on the renewable side, you see a ASIC-based closed-loop sensor for the solar business that has been launched in our China factory and is at the moment in a very steep, high volume ramp up. Moving on to the Automotive segment. Now our Automotive business has been developing less strong than expected. You can see that the Green Car business has been growing by about 4%. But for sure, in an overall difficult environment.

Recalling here that the subsidy policy in China has been changing. So we come from about USD 10,000 per car subsidy that are gradually lowered to 0 in the beginning of 2020. Now, this puts obviously an enormous cost and margin pressure to all our OEMs that they are trying to pass on to the supply base. Obviously, looking at the order of magnitude, only partly that can be absorbed in technical solutions. So obviously, everybody looks for alternative concepts redesigns as on sequential steps. In addition to that, there's a huge variety of cars that are getting launched now and not all OEMs actually make their promised volumes and are in time with their solutions so also this impacts our business.

The conventional car business is as foreseen and continuously from the past going to further shrink. Now looking also here at the split of the Automotive segment into the different regions, you see the important share that China has in our regional distribution as being the biggest new energy vehicle car market in the world.

For sure, we are not happy here with the performance and we will move further R&D activities into this market to counteract this development. We are also reviewing our customer strategy here very carefully in order to make sure that in this sharply growing market, as you remember in my previous statements that this market is going to quadruple in the next about 10 years to make sure that the share we are getting in this market is going to substantially improve. But for sure, there are also positive news as you see here that the nice performance in Europe and also in rest of the world, mainly here in Japan, in Korea, helped to also positively see some aspects in the Automotive area.

Now here on Page 18, looking again into the all overall development, we are convinced about this Automotive market. This is a rock and roll market for the next 10 years. On the one hand, by an increasing number of new energy vehicles that are going to get launched. And each of these new energy vehicles will have in comparison to a conventional combustion engine vehicle have about 8 to 11 sensors depending on the architecture.

That will basically allow to substantially increase the market by volume. But for sure, the cost pressure is high because we allow the cost for those cars are not higher than combustion engine car. So this Automotive segment is in a tradition and then you see this nice statement from the IMF that you can read while I'm making a couple of comments here, that the success of the journey is very much depending on the right customer strategy in the different current sensor applications. So the question is for sure out who in this upcoming multitude of customers are the winners. The ability to afford substantial pre investments in customer projects. Since, for sure, the volumes, in the beginning, will be small in the first years. And for sure, the right technology choices that allowing -- that allow to reach the allowed cost. We are and remain hungry and ambitious, and our whole team is exactly working on this to grow and drive this forward.

On the next slide, you see here also some success stories that we've been launching and -- in the recent weeks and months, you see in the battery management segment, a product called HBCT, very interesting application for a Japanese customer that is a very high-volume application. And you see here that the CAB another important product where we are implementing high and, let's say, also challenging functional safety required.

In the motor control area, just to maybe here mention this HC16, this is a special application where we are designed in -- at 100% for the motor control business at an American high volume customer. With this, I would like to hand over to Andrea Borla, our CFO, to go a bit deeper with respect to the financial results.

--------------------------------------------------------------------------------

Andrea Borla, LEM Holding SA - CFO [3]

--------------------------------------------------------------------------------

Ladies and gentlemen, good morning also from my side. As already mentioned by Frank, we have been faced with the overall challenging market environment and this was specifically reflected in the orders and in the sales. Sales actually came in lower than last year at 6% and in local currency by 4%. We could witness this overall sales cloud -- sales slowdown in many of our peers. Those lower sales impacted logically as well the overall EBIT and the net profit, which are well behind last year's performance.

Let's now have a closer look on the various P&L elements, and it will start with the gross margin. The gross margin in absolute value dropped by CHF 3 million from CHF 77.6 million to CHF 74.3 million in this first 6 months. This drop is the consequence, of course, of the witness sales drop. However, the good news is that in spite of this sales drop, we could manage to further increase the gross margin rate by 80 basis points. How did we achieve that? Several ongoing efficiency programs optimizing supply chain, purchasing and the production contributed to that improvement.

Today, our 2 low-cost location situated in China and Bulgaria cover now 80% of all sensors to produce by LEM. And this percentage shall actually further increase in the future. I move on to the next slide on the SG&A. And in view of the soft top line, we have rapidly taken up and implemented contingency measures. We have been very, very vigilant in the recruitment of overheads and continue to optimize the scope at our head office in Geneva. The results, the SG&A dropped by close to CHF 1 million compared to previous year. You can see that on that slide from CHF 29.1 million to CHF 28.3 million.

What about the R&D expenses? In contrast to the SG&A, we continue to grow our R&D expenses by over CHF 1 million from CHF 13.1 million to CHF 14.3 million. We focus not only on renewing our current product portfolio but we, as a whole, focused on developing new product families, which are addressing new markets and applications in the future.

For that development, we have hired additional 25 engineers compared to previous year and work together as well with third parties in order to speed up full product development. Going forward, R&D expenses are expected to remain in the 8% to 10% range. Next slide, on the financial expenses. The currency evolution was unfavorable for LEM during the first 6 months. We have to suffer losses on the U.S. dollar and Euro caused mainly by losses on hedges and also lowering exchange rates between the invoice date and the payment date.

Underlying financial expenses, we cover here mainly the interest costs on the leases, which is now following the new updated IFRS 16 norm. On taxes. The effective tax rate is at 17.3%, which is substantially lower than the tax rate last year of 20.7%. The reason for that reduction is the granted HNTE status in China which results in a Chinese tax rate of 15% instead of last year's 25%. We have as well informed in our press release this morning about the planned simplification of the Swiss legal structure.

The objective being to reduce complexity and as well to simplify our internal processes. Amongst others, this includes as well the transfer of the technical IP from our company LEM IP based in Fribourg to LEM International, which is based in Geneva. And this will result in a positive tax impact on this year's financials of around CHF 13 million. And this all leads us to the consolidated P&L, which you see the overview with the different lines going down to the net profit.

Overall, we, again, we can confirm more or less the EBIT margin and net profit margin from the last year. On the balance sheet, what have been the key points there? We focus on a few key elements, starting with the net working capital, which was slightly reduced, more or less in line with the sales drop. The main net working capital elements as the DSO, DIO, DPO, they remain pretty stable.

Specifically, the accounts receivables overdues, especially also in China, they remain very well under control. The net debt, they consist of CHF 40 million, as you can see that, here the net debt consist of CHF 40 million short-term debt and CHF 17 million cash on hand. The short-term debt is for the financing of the dividends we paid in July this summer and shall be gradually reduced during the second half of the year. The equity ratio, which you also see on this table dropped from 60.5% to 41.9%. This is mainly due to the dividends paid in July on the one side and as well from the lengthening of the balance sheet following the lease capitalization in line with the revised IFRS 16 norms.

All in all, the balance sheet remains strong for LEM. And last, but not least, is the cash flow realized, a good performance in the first half, both the cash flow from operating activities as well as the free cash flow increased considerably compared to previous year. Main drivers are an improved net working capital management and as well lower taxes paid.

So all in all, and as a summary, we have been faced with this challenging market environment during the first 6 months, but we have managed to protect our profitability, our balance sheet and our cash flow. Now you may wonder what will the future bring to LEM. And for that, I'm very happy to hand back to Frank.

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [4]

--------------------------------------------------------------------------------

Thank you very much, Andrea. Yes. I think it's, for sure, the important question that we are asking ourselves, that we are asking our customers, that we are asking our peers where we are observing the overall market developments. But to conclude here, we do not see a fast improvement of the global business environment. Therefore, we hope for the best but plan for no improvement in the next 12 to 18 months. That means, based on our performance in the first half year, we are expecting no growth in the second half against last year.

Therefore, our guidance for the full year '19/'20 is around CHF 310 million in sales, which means about 4% reduction against last year. With all the activities that I've been mentioning, and Andrea when -- even in further detail that we do to improve our structure, to improve our cost position and to increase our efficiency, we foresee a margin of close to 20%.

Now again, to stress that here, referring to all information I've been giving you on the global picture, we are convinced the fundamentals of LEM remain strong based on the megatrends. This applies both for our Automotive Green Car business as well as also the Industry business. Therefore, we continue to substantially invest in new product development and prepare our structure to do more development close to our customers. With this, I would like to finalize here the introduction here within the framework of the half year results and would like to open the Q&A to all participants.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

The first question comes from the line of Daniel Koenig from Mirabaud.

--------------------------------------------------------------------------------

Daniel Koenig, Mirabaud Securities Limited, Research Division - Analyst [2]

--------------------------------------------------------------------------------

I have 2 quick questions. First, on the CapEx, I've noticed that it went down year-over-year in the first half. Can you give some flavor to this? And what can we expect for the full year? And maybe even more visionary into the next fiscal year? And then my second question would be, I've noticed that some electric vehicle producers in China have some financial problems. Has your policy, your financial policy versus these companies changed?

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [3]

--------------------------------------------------------------------------------

The line was a little bit disturbed, but I think we understood the questions well, I suggest the first question with respect to CapEx will be answered by Andrea, and I'm referring then to the electrical vehicle producer situation in China.

--------------------------------------------------------------------------------

Andrea Borla, LEM Holding SA - CFO [4]

--------------------------------------------------------------------------------

To respond to your first question in respect of the CapEx status after 6 months. This is correct. We have been slightly lower than the CapEx last year. This is mainly due to timing differences and we expect CapEx for the full year at a very similar level of what we have witnessed last year. I don't want though to comment on the next year's CapEx at this stage.

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [5]

--------------------------------------------------------------------------------

Okay. Now, electrical vehicle producer, you remember probably what I said in the statements about the Automotive business.

You probably know I've been living myself, 12 years in China and that we have in both businesses in the conventional car business and also in the electric car business, a lot of overcapacity. And there's also a lot of money in China around -- about investment into car business. And this money comes from a lot of sources and also of sources that had in the past not too much to do with the automotive industry. So the challenge is who are those customers to win, who are those customers who are eventually making the volumes that they have been promising. And who are those who are probably losing? That means a -- we've been doing a selection when we were acquiring our business. But for sure, we need to revisit and revise our selection with respect to the future. And when we take on business to be sure that we are going with the winners and not going with those who might not eventually make it.

With respect to our financial policy, so for sure, we are tracking our accounts receivables very carefully. And you've probably seen that also in the financial slide to have here a pretty okay-ish performance.

And that I would not see a risk position at the moment at all.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions)

The next question comes from the line of Michal Lichvar from Bank Vontobel.

--------------------------------------------------------------------------------

Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [7]

--------------------------------------------------------------------------------

I would have 3 questions. At the beginning of your presentation, you mentioned that in the market, you developed, sometimes at par with some of the peers and sometimes better. Could you maybe give us details per market, where you actually won the market share, where you kind of developed within the market? That would be my first question.

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [8]

--------------------------------------------------------------------------------

Okay. And so let me quickly elaborate to that. When you see the -- let's start with the Industry business. In the Industry business, you see a substantial deterioration in particular in the drives area. And when you look at important drives customer, then you see that in the global business, there are a lot of -- there's a lot of pessimism talking about 10%, 15%, 20% of reduction in the Automation business, in the Robotics business, in the drives business. What are the reasons for that, they are all impacted by postponement of investments.

Now I think in this comparison, we are clearly at par. We've been analyzing very carefully our market situation there and clearly see that the situation is -- for us, we are really in line with those developments. And have been even here and there, managing to increase our market share. The same applies to the renewable business, the renewal business, obviously, helps us to compensate partly at least the rather substantial drive effects.

And we see there also the way we are doing our business, the width of our portfolio, the closeness to our customers, helps us to be very close to the market developments and to even manage in difficult times and increase. I think the situation in Auto is a little bit more challenging, more difficult. For sure, we see their companies who increase in those times and we see also companies whose performance in those times is worse than what we saw here. This for sure depends very much on the content that those companies deliver, that depends on the customers with whom they are working, that depends on, for sure, also certain seasonal effects.

But again, and with also for the Automotive business, say we are here in a situation that is tough, but we have a very strong footprint, a very strong base for the future.

--------------------------------------------------------------------------------

Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [9]

--------------------------------------------------------------------------------

Okay. And then maybe a follow-up on this, as a second question, just in Automotive, rest of the world has been a substantial driver for some time. And also making rather significant impact on sales. And I guess, the rest of the world that includes Korea and Japan, do you see here, kind of, going forward, kind of, a more difficult competitive situation, one of your biggest competitor, Tamura, is a Japanese company, and we know the Japanese like to work with Japanese. Do you see there any risk going forward that you will lose market share in rest of the world?

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [10]

--------------------------------------------------------------------------------

And a very good question, Michal. Now, I think the Japanese market has been for non-Japanese, always difficult. And I think it has not become more difficult or more easy in the last month. When you see how successful industry has been getting there to a substantial market share in its history, you'll also see that it's possible.

Now when you look back to the product and the launches I've been mentioning, you remember, I've been also mentioning that we've been working with one of the big, high-volume customers in Japan, where we've just been launching products and we've been foreseeing here that this is getting actually also introduced in other car lines of the same group. So I don't see that this market is more difficult now than it was before.

The charm of the Japanese market is that despite a -- rather, let's say, important entrance hurdle, it provides rather big stability long term. And for sure, therefore, also our Japanese market and the success of LEM in this Japanese market is an important confirmation also of our strategic direction.

--------------------------------------------------------------------------------

Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Okay. And then just another question on Automotive with this motor control new product, is this something where you're, kind of, going to tackle again the conventional car market?

And are we going to see kind of a stabilization of the sales there going forward on the basis of these new products?

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [12]

--------------------------------------------------------------------------------

And -- so both products you see here on Page 20 of the presentation are for new energy vehicle market. So you remember in the past, we said we are not strategically investing in the pure ICE market. And so both products are clearly going into the new energy vehicle market, you might be a little bit disturbed since you only see one phase for this HC16, but this is still a product for a high-volume Tier 1 customer in the American -- from the U.S. American origins.

--------------------------------------------------------------------------------

Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [13]

--------------------------------------------------------------------------------

Okay. And just the final question, regarding your R&D spending, what would need to happen for you to scale back on R&D? I mean, if you would see a decline in sales of 20% or something, would you be able to keep the R&D spending going forward?

Or is there kind of -- maybe would there be a decision to also scale back on R&D? Or is this really kind of fixed end part of your strategy to keep this high at around this CHF 14 million or -- I think that was CHF 14 million. That's my last question.

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [14]

--------------------------------------------------------------------------------

And so we are committed to the future because we know that the opportunities by far outweigh the risks. Now would I be able today to say what happens in the terms, let's say, the market goes down by -- let's take the 20% you mentioned. And would we still spend exactly the same amount? And what would be the future amount we are going to spend?

And probably, that would go too far because this is unrealistic to make this estimation, but we for sure do always is not only to increase spend for strategically important topics, but also to question. Where do we spend our money? Is the way we are working the best possible way of work? And are we working on the right topics? So to do things right and to do the right things, applies to all business areas. And we are, in particular, in times where the market development is not turning into growth, for sure, look in all our cost positions.

So we try to even go so far to say that we don't want to waste this tough, let's say, business situation, I'd rather see it as an opportunity to question the way we are working. But again, we are committed to the strategic investment and would not change them.

--------------------------------------------------------------------------------

Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [15]

--------------------------------------------------------------------------------

Okay. So basically, you are able to -- or you would be willing to have margin reduced for temporarily just to secure future growth.

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [16]

--------------------------------------------------------------------------------

Exactly. So here and this also a strong alignment with our Board, the investments for the future are strategically important and therefore, we would not cut them for the sake of a short-term profit improvement.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(Operator Instructions)

The next question comes from the line of (inaudible) from (inaudible).

--------------------------------------------------------------------------------

Unidentified Analyst, [18]

--------------------------------------------------------------------------------

I have a question relating to the equity ratio, you explained that the decrease partly relates to the dividend payments. So I'm wondering what measures can you take in order to be able to sustain the dividend in the longer run and also this year?

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [19]

--------------------------------------------------------------------------------

So our business model, how we are set up within LEM is that we generate high free cash flow during the years, which allows ourselves on the one side, then really to pay out dividends, and that's what LEM has succeeded over the last few years so even from a quite some time to do so. So our objective and ambition is, of course, to generate cash flow to be able then to allow ourselves in a position to distribute dividends.

Now about the equity ratio, this drop is, of course, only temporarily because it hits the balance sheet and the equity ratio, mostly in the beginning just after the dividend payout, and then the equity ratio will steadily increase with the generation of the net profit and we expect, of course, in the second half of the year to have still a substantial net result for the 6 months to come, and this will then mathematically increase the equity ratio back to this 60% level, which we have seen in last year or end of March.

--------------------------------------------------------------------------------

Unidentified Analyst, [20]

--------------------------------------------------------------------------------

Okay. And another question relates to -- if I understood that right, you used to be exempted from import taxes into the U.S. -- from China into the U.S., is it correct that now you don't have this exemption anymore?

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [21]

--------------------------------------------------------------------------------

No. I can -- so the import tariffs here, if I call the whole story it was about in July 2018, we had to have this import duties from Chinese products to be imported into U.S., this was the same as 25% rate. And since April 2019, we don't have to suffer any more of this 25%.

So we have like kind of a 1-year moratorium on these tariffs, and by April next year, 2020, we will know if this will be completely canceled or if this import tariffs will again come back to life.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

(Operator Instructions)

We have no more questions from the phone. Sorry. We have a last-minute registration from Reto Huber from Research Partners.

--------------------------------------------------------------------------------

Reto Huber, Research Partners AG - Senior Analyst [23]

--------------------------------------------------------------------------------

I was wondering how do you see sales development in Green Cars, how it's going to develop in the next year? Do you see it rather going down? Or will growth come back already in the next fiscal year?

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [24]

--------------------------------------------------------------------------------

So volume-wise, we clearly see that Green Cars are going to further increase. There is no question about that. The question is, what does this mean to turnover of component suppliers like LEM. And this question is by far more difficult to be answered. I told you, we basically assume in the second half very stable performance in comparison to the first half, in first half of last fiscal year, right, financial year. So this is basically what we see.

And afterwards, we, for sure, assume that with the measures taken, we are going to retake growth but again, for this fiscal year, financial year, we are assuming a stable development against last 6 months of the financial year and '18/'19.

--------------------------------------------------------------------------------

Reto Huber, Research Partners AG - Senior Analyst [25]

--------------------------------------------------------------------------------

In terms of volumes or also prices?

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [26]

--------------------------------------------------------------------------------

So what I was talking here was in terms of sales. Sure volumes are increasing, but prices also are sharply dropping or what you could say is that the cost per phase, the cost per measurement phase are under pressure, mainly also driven by the reduction of subsidies in China.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

And that was the last question from the phone.

--------------------------------------------------------------------------------

Andrea Borla, LEM Holding SA - CFO [28]

--------------------------------------------------------------------------------

We have one question from the webcast from (inaudible).

What will be the role of your Geneva head office in the future? You mentioned that you do some R&D close to the customer, does it mean less R&D in Geneva? What would this mean in terms of headcount, are you vigilant with headcount, overhead?

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [29]

--------------------------------------------------------------------------------

Very good question. So the role of our headquarter in Geneva will change. Change in a way that the headquarter of Geneva will be the site where we are driving more innovation, where we are doing really the strategic decision taking, where is, let's say, operational everyday decisions will stronger and stronger move to our production sites or to shared service centers.

And at the same time, we will do, let's say, next-generation developments of an already existing technology that then also closer to our customers at the end production sites. What will this mean for headcount? We will keep headcount wise rather stable. So we are in a position to basically change the competencies and the way of working in Geneva and do this basically with a stable headcount over time.

Will this answer the question so far?

--------------------------------------------------------------------------------

Andrea Borla, LEM Holding SA - CFO [30]

--------------------------------------------------------------------------------

Yes, it should be.

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [31]

--------------------------------------------------------------------------------

Good.

--------------------------------------------------------------------------------

Andrea Borla, LEM Holding SA - CFO [32]

--------------------------------------------------------------------------------

We have no more questions from the webcast so far, I think we can -- we will close the webcast for now.

--------------------------------------------------------------------------------

Frank Rehfeld, LEM Holding SA - CEO & Senior VP of Industry [33]

--------------------------------------------------------------------------------

Good.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

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