Elmos Semiconductor Ag

Good morning, ladies and gentlemen, and welcome to the ELMO Semiconductor SE conference call regarding the results of Q2 2021. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Dr. Arne Schneider, CEO. Go ahead.

Good morning, ladies and gentlemen, and welcome to the Elmos Q2 conference call. I can once again present to you a solid performance with strong increases in sales and EBIT in the past quarter, despite a challenging market environment characterized by an ongoing high demand for semiconductors and the corresponding allocation challenges. As usual, you have the opportunity to ask questions at the end of my presentation. Before I'm going to explain the current market situation and the financial results of Q2, I would like to give you a short update about the COVID-19 situation at Elmos. Since the outbreak of the pandemic in January 2020, we have introduced extensive protective measures at all Elmos sites. This has enabled us to maintain our own production and business operations until today without any major disruptions. Starting as early as April this year, ELMOS has coordinated three vaccination rounds for our employees and their relatives. This campaign was very successful. At our Dortmund site alone, almost 600 people had been vaccinated by external physicians. Every ELMOS employee received a vaccination offer with the vaccine of choice. I think this is a great success and important step for us in the fight against Corona. Since July, we have now introduced first small steps to ease some of the corona-related measures at Elmos concerning small group meetings or business travel, and we also started the gradual and partial return to the offices. However, we are prepared to tighten the protective measures immediately should it be necessary. Turning to the market environment, we currently see. Since Q4 last year, we have witnessed a very high demand for semiconductors across all industries. The ongoing boom of office and consumer electronic products and the faster than expected recovery of the automotive market resulted in soaring demand levels for semiconductors which could not be satisfied by the global IC manufacturing capacity. This led to a longer and also more severe than expected allocation situation which is also by far from not over. The entire semiconductor supply chain including wafer production assembly and testing is still under a great deal of pressure. In addition to the increasing real car demand, all automotive OEMs and Tier 1s naturally want to rebuild their inventory levels and increase safety stocks after the reduction during the corona crisis last year. To secure as many ICs as possible and to avoid potential line shutdowns, The current order levels of some automotive customers are significantly higher than their real production demand, adding even more stress to the already tight value chains and leading to some heated discussions concerning how much can be obtained. More and more market participants now expect that the current situation most likely may get worse before it will get better. There's also extensive coverage on the topic in the newspapers. The capacity bottlenecks, especially for 8-inch wafers, will continue in the next year, which could temporarily dampen growth in 2022. All IC companies, including Elmos, are faced with a limited FAB and foundry capacities, supply bottlenecks for key components, significant material price increases, and logistical challenges, all leaving traces on the business performance. I will further comment on this later in my presentations. In this dynamic market environment, Elmos once again had a successful quarter. Group sales increased significantly by 34.2% in Q2 to 78.9 million euro. Again, a new record in quarterly sales. You may have noticed that a part of that sales, of course, came out of our inventory. The EBIT improved to 12.5 million euro in the second quarter of 2021 based on higher volumes. The EBIT margin improved significantly to 15.9% compared to 5.4% in the previous corona-ridden year. Overall, the Q2 results are in line with our quarterly guidance. However, as I mentioned before, allocation-related effects, especially material price increases, started to impact our results in the second quarter. Our R&D expenses continue to remain on the high level, supporting the numerous serial launches and new development projects in all application fields. After six months, we are still fully on track with our new design win activities, and we are able to acquire new projects in all of our product segments. Despite the temporary allocation situation, we have significantly intensified our own CapEx program in the backend area, as already announced earlier this year. In Q2, We have invested 17.3 million euro mainly in the testing area to install the necessary capacities at the Dortmund sites and at our partner sites in Asia to secure our delivery capabilities. Although we have further reduced our own inventories by around 3 million euro in the second quarter, the cash flow from operations was lower compared to Q1 mainly due to seasonal effects. As a result of the current allocation and the lack of external foundry capacity, We have reduced our inventory by more than 10 million euro to fulfill our delivery obligations in the first six months of 2021 alone. The significantly higher capex spending led to a slightly negative adjusted free cash flow of minus 3.4 million euro in Q2. The higher spending will continue in the next month, influencing free cash flow in the further course of the year. Accordingly, our net cash position decreased to 47.3 million euro at the balance sheet date due to the negative free cash flow and the dividend payment in May. Looking ahead to the third quarter, based on the current order situation, we expect another successful quarter, which will continue to be notably influenced by the allocation situation. For Q3 2021, we expect sales of 79 million euro plus or minus 5 million euro, and an EBIT margin of 15.5%, plus or minus 2 percentage points. The wider range of our sales and EBIT guidance reflects the increasing uncertainties about the future course of the allocation situation, the pandemic, and related challenges such as logistical delays. That's also why a reliable forecast for the full year is still not possible at the present time. As I mentioned before, we expect that the challenging market environment will continue for the time being. Looking ahead into the next year, we are currently in negotiations with our foundry partners to secure sufficient wafer capacities for 2022. As you can imagine, these negotiations are very tough, and it has become pretty obvious for everybody that the capacity tightness will continue to the next year, especially for 8-inch wafers. Although some foundries have announced that they will allocate more capacity to automotive products, we do not expect a significant increase in overall 8-inch capacity next year. As you may know, all Elmhoff ICs are manufactured on 8-inch wafers only. And since our own FAB in Dortmund is fully loaded and cannot be expanded any further, our growth potential critically depends on external 8-inch founder capacity. Our view regarding potential capacity constraints in the next year is supported by various announcements made by foundries or OEMs in the last week. For example, DigiTimes Asia published an article in early July stating that, and I quote, founder capacity supply could become even tighter in 2022, particularly at 8-inch fabs, and that, quote again, capacity promised for 2022 can satisfy only 70-80% of demand. This is It is today a realistic reflection of the actual situation and the current state of our negotiations as more and more market players expect that the global semiconductor shortage will continue into the next year. We of course work closely together with our wafer factories to ensure that Elmoth is not the cause of any line downs. We were not the cause up to now and we will do our utmost to keep it that way. However, despite these temporary growth dampers, the semiconductor market will continue to develop positively in the long term. And based on our innovative product portfolio and strong financial position, Elmos will be able to successfully participate in the positive development of our markets in the future. So far, thank you very much. I'm opening the floor for questions.

Ladies and gentlemen, if you'd like to ask a question, please press 9 star on your telephone Please press nine stars if you'd like to ask a question. And the first question comes from Stefan Uri from Odoo. Your line is open.