Elmos Semiconductor Ag

Good morning, ladies and gentlemen, and welcome to the Elmos Q3 conference call. We are still operating in a very challenging market environment, heavily impacted by the ongoing semiconductor shortage and by persisting restrictions of the coronavirus pandemic. But once again, Elmos was able to post record sales numbers in Q3 and could further improve profitability. Our solid operational performance, we actually faced less disruptions than we feared this quarter, made the past quarter a very successful one. As usual, you have the opportunity to ask questions at the end of my presentation. The COVID-19 pandemic is still part of our daily lives, so I would like to start my presentation with a brief update of the situation at Elmos. After almost two years, I can say that Elmos has managed the pandemic very well. 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. Since the end of the summer, we have eased some of the corona-related restrictions regarding travel and business meetings, as well as, of course, less important, in our company fitness studio and sports programs. We have also decided to gradually return to a normal office routine with around 50% of our employees now on site, and have introduced a new company agreement that applies for the remote office working in the time after the pandemic, which can be summarized as a day per week remote working is okay. We hope to be able to ease further restrictions and to finally return to a more normal business life when the current wave is over. However, we remain cautious and are prepared to quickly tighten our safety measures once again should this become necessary due to high infection rates or new virus variants. Let me now talk about the current market environment. As we all know, the high demand for electronic products and components across all industries is heavily impacting the entire supply chain for semiconductors since the end of last year. The soaring demand levels for semiconductors are much higher than the global IC manufacturing capacities, which led to a severe allocation situation which is by far from over. Automotive OEMs and Tier 1s are trying to secure as many semiconductors as possible, forcing IC manufacturers to prioritize their deliveries based on the real demand of their customers. The bottlenecks along the entire value chain led to massive delivery problems and line shutdowns at the car OEM levels. In its latest study, Alex Partners estimates that 7.7 million cars cannot be built this year due to this shortage. And in its September forecast, IHS, also a forecasting agency, has significantly lowered its light vehicle production forecast for this year and next year. The current ship shortage has more and more effect on other industries as well. Apple, or even Apple, is likely to splash production of its iPhone 13 by as many as 10 million units due to the global shortage in semiconductors and other supply chain issues. And also PCs, tablets, or gaming consoles are in short supply right now, so I guess we should all order our Christmas presents very early this year, or go for homemade cookies, as I will do. The Amos focus is to meet all of our delivery obligations based on the real demand of our customers. Every day we are fighting for a sufficient allocation of wafers from our foundry partners. The current situation requires close coordination with the foundries at the operational and on the management board level. Our own fab in Dortmund is also fully utilized and running very well. Overall, the situation is demanding a lot from us, but our efforts have paid off. So far, we have been able to supply all our customers so that Elmos had not caused any production line stoppages among the Tier 1s or OEMs this year. Please remember that our higher inventory level at the beginning of this year helped us with the tight situation in 2021. As our stock levels are now very low, we will not be able to use inventory like we have this year, also in the future. It is obvious now that the semiconductor shortage will most likely persist in 2022. This may limit our growth potential next year. I will further comment on this later in my presentation. Of course, you all want to know when the allocation ends, but to be honest, nobody knows for sure when the allocation situation will end. Coming to the Q3. In this very dynamic environment I just described, Elmos was able to continue its positive business development in the third quarter, with a further increase in both sales and earnings compared to the previous quarter. With an increase of 98% to €80.8 million, sales in Q3 almost doubled versus the previous year, which was, of course, heavily impacted by the coronavirus pandemic. This, once again, is a record sales within the quarter and slightly above the midpoint of our quarterly sales guidance. The EBIT further improved to €13.6 million in the third quarter, supported by higher volumes, but also impacted by allocation-related effects and higher prices from our foundries. The EBIT margin improved to 16.8%, which is at least close to our midterm target of 17%. At 16% of sales, R&D expenses continue to remain on a high level. Our R&D activities support the numerous serial launches and new projects in all application fields. We were able to acquire attractive new projects in all of our product segments, and we are still on track to meet our ambitious target for new design wins this year. Our investments also remain on a very high level, as already explained in the last conference call. The CapEx program is mainly targeted for the testing area to expand the capacities at the Dortmund site and at our partner sites in Asia. which are necessary to secure our delivery capabilities for this year and for next year. In addition to the backend CapEx program, we have invested in a new building for our software division in Q3. As you may know, we are strengthening our software activities at Elmos. The acquisition of online engineering at the beginning of the year was an important component of our software strategy. Now we are further expanding our activities and building a bigger Elmos software organization. With all these measures, we will be able to further enhance our innovative semiconductors with high-performance software functions, and to increasingly pursue in-house software development for our customers. In total, we have invested 18.6 million Euro, or 23.1% of sales in Q3 2021. At 23.6 million Euro, the cash flow from operations was supported by a strong net result and slightly positive impact from working capital, mainly by increased trade payables. The higher cash flow from operations combined with the ongoing higher cap expanding resulted overall in a slightly positive adjusted free cash flow of 2.7 million euro in Q3 2021. Due to our successful public share buyback program, our net cash position decreased from 47.3 million euro at the end of June to now 8.3 million euro at the end of the third quarter. We are confident that the last quarter of this year will also be a successful one. We estimate that sales for the fiscal year 2021 will overall reach 320 million Euro plus or minus five million. The full year EBIT margin is expected to reach our midterm target of 17% plus or minus two percentage points. I've mentioned it before, the global semiconductor shortage and therefore the challenging market environment and uncertainties will continue into 2022. For Elmos, the wafer capacity situation for 2022 has gradually improved compared to our last communication. We could secure additional wafers from our foundries, but we still need a lot more wafers to cover what we call the bare minimum demand of our customers and to eliminate the risk for delivery constraints and line shutdowns caused by Elmos. The worst case scenario, however, a noticeable revenue decline in next year is not likely as of today. Still, the wafer shortage hurts growth, and we have to put a lot of effort into resolving that. The negotiations with all of our foundry partners are still ongoing. We are pushing very hard for additional capacity, also together with the OEMs and tier ones. So we do our utmost to ensure that Elmholtz will be able to continue its successful business development in the next year and beyond. We are sure we have innovative products. We are sure we have leading market positions. We are sure we have a strong balance sheet and we are just as sure we have a great and highly motivated team. So we look with confidence to the future. Thank you very much. I'm now opening the floor for questions.

Ladies and gentlemen, we will now begin the question and answer round. If you'd like to ask a question, please press 9 followed by the star key on your telephone. After pressing 9 star once on your telephone keypad, you will hear an automatic confirmation. To withdraw your question, please press 9 and the star key again. Now, given the key combination 9 and star key once, to raise a question. Our first question is from Mr. Zantier.

please your line is now open okay hi everyone and thanks for taking my question and maybe i would like to start off with understanding your guidance a little bit more and could you explain what's really based into the upper end of your margin guidance because and i mean really looking at what's implied for the fourth quarter i think the event would be about 25 so how realistic would that be and if so what would be the the levels that could be driving this

Well, I mean, we have a rather broad range because a lot of things can happen in this dynamic environment. We ask some customers for certain payments for engineering efforts. This is one thing that could happen but does not necessarily need to happen. There may be other one-time effects that could happen on the good and also on the bad side. That's why we think a relatively broad range is actually appropriate now. Of course, revenue is also a driver, as you know, but this is reasonably obvious. And revenue is a volatile thing. I mean, we look back at the Q3 and we saw a lot less disruption now towards the end of the quarter than we feared. We had disruption within the quarter, but not towards the end. So it's not really visible in quarterly numbers due to COVID in Asia. We had shutdowns and capacity restrictions at some of our suppliers. So the world isn't completely back to normal. It is what we just have to accept. It may be transitory problems, but it's still not back to normal.

All right. And then a second question on the whole allocation topic. So you have just said that you have been able to avoid, or you're going to be able to avoid the significant phase decline. Are you, from an allocation perspective, at a level where you would be able to grow next year? Or have you basically reached a situation where you can expect stable top line from an allocation perspective?

Well, the first question is, of course, always in units or in euros. In euros, we would say it's certainly not a decline. It should be some sort of growth, but we can't tell you how much. I mean, we do not have price agreements with most of our customers for next year because these are just in the making. We have initial allocations, but... We are kind of fighting for more wafers really every day. We have a lot of trilateral calls. We have some bilateral calls. Some of our customers have bilateral calls. So there's a lot of heat currently in the system to resolve the wafer issues, which are still unresolved. I mean, they are partly, slightly resolved. And we're trying to... to do our utmost that no serious and long shortage reaches the OEM and leads to plants still there. But this is a very, very dynamic thing.

All right. And then maybe a last question on CapEx. So you've been spending quite a lot on expanding your testing capacities. How much more should we expect for the fourth quarter? And is there going to be some substantial similar to this one CapEx spending in 2022?

Yeah, I mean, currently the CapEx level is maybe not that bad. So we will continue spending money in the fourth quarter. On 22, it's hard to tell for the full year because actually what we spend in the second half of 22 depends more on our expectations of growth on 23 than on anything else. And on that, I really can't comment because I don't know yet. We don't know how the end of this allocation will look like, whether it will be smooth whether it will be a prolonged allocation because everyone now wants additional safety stocks once we're able to build it and we're coming into a phase after the kind of planned shutdown allocation to an allocation where everyone wants to build safety stocks and openly and transparently wants to build it, or whether we get a hangover after the party. We fundamentally do not know how this whole thing works. will play out and end. And this is a key driver, of course, for investments. So I'm sorry, I can't tell you how 2022 investments will play out.

All right. That would be it for now. Thanks.

Thank you, Mr. Zante.

Our next question is from Malte Schaumann of Arbor Research. Please, the floor is yours.

Good morning. Can you please on the OPEX levels. It has been quite stable during the past quarter, so with some more reopening, more travel activities. So what's the expectation going forward? What kind of additional costs might come through when you could do more marketing activities, whatever? So, yeah.

Yeah, we do see a return of travel to some extent, but actually on a relatively low level. The whole trade fair thing may be kicked off again with the CES next year. Maybe not. Who knows what will happen? But we somehow expect it to return. We do kind of see that travel is by far not back. The video conferencing is convenient, is very effective, also with customers. We also need travel, but there is a certain focus on the key travel activities. So, I mean, you could dare to say maybe there will even be a lasting effect on travel costs. Maybe this is going too far, but currently it feels like there will be a lasting effect on travel costs, because people think twice before they fly to the other end of the world, which is, I mean, in China you... do not really get in well and get out well, but also the inner European travel. There is some substitution going on with video conferencing.

So probably wise going forward, but not too much.

Yeah, it won't be too much. I don't think it will be a big financial impact. At least not, I mean, if you're referring to Q4. Over the next years, this is a long shot, and I don't really know. This year, I don't think it'll somehow burden our Q4 too much.

And early next year, do you expect further increasing dynamic next year?

I would say it will be a slow development. I mean, it of course depends whether you believe that the pandemic will be over kind of in a big flash and then Corona is gone. My assumption is more that it will drag out a little bit and a lot of things will become possible but burdensome. Also, the learning effect from this video conferencing and there have been a change in habits and a change in kind of meeting options. And people go for this virtual options in a way that wasn't imaginable before.

Yeah, okay. Then on the fourth quarter sales level, the incremental sales in comparison to the third quarter, is that already driven by additional wafer capacity going forward? And do you have kind of then similar or should we take it a fourth quarter one rate or available capacity that the number might indicate as available capacity then going into next year, early next year, and then as a starting point?

I would love to, but it would be wrong. This is, I mean, our implied Q4 guidance is more than we could, I mean, this is meaning that there's actually some payments that are not directly linked to waivers, some price increases that are necessary to cover additional costs affected in, but also some one-time effects that would likely come. So I wouldn't calculate as easily for next year as the times four on the Q4.

Yeah, okay. Okay, so R&D funding, et cetera, also plays a role, probably.

You have to get that money. I mean, every million counts.

Yeah, sure. Then on your visibility in the negotiations, if they can elaborate a bit on that, how negotiations proceed, is that kind of a structured process, that kind of a black box? Do you have fixed dates until when you should have final visibility for next year? Is that really ongoing? You might still discuss Q1, Q2 about capacities in the second half.

I believe structured process, I mean, it's a fact-based process as good as people can base it on facts, but it's not pre-structured. There are no fixed deadlines or optioning of dates of capacity that we have seen with memory years back. It's just a set of exchanges between the interested parties, the OEMs, the tier ones, and the foundries. And this is actually a pretty continuous process. So you wouldn't expect that when you have a certain gap in wafers that you get that filled at once or on a single day or even a single month. You may talk about a very small increment and then you agree that that certain increment is doable and then you have a few thousand wafers more, if it's a few thousand or sometimes less. So this is just a moving, developing thing. And the talks continue because they need to continue.

Do you think that the decision-making process has changed at your supplier side?

Well, fundamentally, I think no. But, I mean, when I read in the newspaper that Apple is not building iPhones, that, I believe, highlights how tight the world there really is. I mean, if you read in the newspaper that a Chinese toy is not being built that's sold for $10, okay, that tells you really nothing because it doesn't matter in this world. But if you look at iPhones, I mean, these are relatively margin-rich devices. You may earn more on an iPhone than on a basic small car. So if iPhones are not being built, that tells you something. It tells you it's really super tight. And the trade-offs that the foundries, namely TSMC, for instance, have to make, they are real. They are not kind of virtual and in reality there is enough for everyone. No, these are real trade-offs. You're deciding is an iPhone not being built or is a car not being built. And you try to get that all squared and that both things are being built, but it's a hard thing to do. And you make trade-offs on both sides.

Yeah. And then finally, my question would be, do you see the risk of losing market share in dual supply situations where maybe competition has more capacities available due to in-house production or other reasons?

We see a certain development that some customers are forced by their decision-making bodies to evaluate options to ease the supply situation by qualifying other chips. We also ask a lot, could you do that? And in certain cases and under special conditions, we can help, and in other cases, we can't help. But I don't think there will be a structural shift in market share.

Okay, fair enough. Thanks.

Thank you, Mr. Schaumer.

At the moment, there are no further questions. Ladies and gentlemen, please give him the key combination 9 and star key 1s to raise a question. Our next question is from Mr. Robert Sanders from Deutsche Bank. Please, your line is now open.

Yeah, good morning. Thanks for taking my question. So, Ana, last time you talked about TSMC not adding any 8-inch capacity next year. Has that changed, or have you seen some reprioritization by that foundry, or have you found wafers from elsewhere? That's my first question.

Well, on the capacity side, not to my knowledge that that changed, but yes, we got some more wafers, and that applies to all of our foundries.

Got it. My second question is, is it possible that an IDM like an Infineon could engage in some foundry business in order to support the overall industry? We have seen in the past some IDMs doing outsourcing, and would that be something you would ever consider doing with a potential competitor?

Well, we certainly would consider it. I mean, you have to ask them whether they want to offer it. I believe in this current environment, there are more people kind of on the asking for capacity side. I mean, we've been asked whether we could offer kind of give a little bit of our FAF capacity to a certain foundry? And we said, honestly, no, because we need it for our own. I mean, what an idea. But, I mean, going out of such an allocation phase and going into a phase where you actually need to fill capacity, this may be a viable model. I mean, you shouldn't say no to such discussions.

Got it. And then this year, I think everyone understands that the microcontroller was probably the biggest path dependency and reason for line downs. But looking into next year, it looks like a lot of that demand will be served by TSMC. So a lot of kind of 95% finished cars that are sitting around will come onto the market in the first half, I think it's fair to say. But is the issue then next year that microcontrollers less of an issue, but sensors and power discreet or something else becomes an issue. I guess what I'm trying to understand is, is there gonna be a sudden kind of increase in production in the first half as microcontrollers deal with that issue, but then do you become the cause of line downs? I think in the past you talked about being potentially the cause of line downs in Q1.

Yeah, this is very hard to say. I mean, on relatively stable volumes, we do our to be not the course of line downs. Any sudden jump is, of course, a risk. That is true. And we are all in the industry facing the problem that there is never complete transparency where material is, how quick it moves, what tiles will be built in six months' time. But if you do not act now, then problems will not come tomorrow, but they will come months and months later. So, yes, there is, of course, a risk that you solve one problem or put out one fire now and then another fire lights up in a few months. We try to be as transparent as we possibly can with our tiers, with the OEMs, to the foundries to show what is needed to avoid that second fire. Yes. We had some partial success with that, not complete success. So we're still in a risk zone, I would say. But the discussions are also ongoing. So let's see how much we can, with all the tradeoffs that are going on in the industry, move out of that risk zone.

Got it. Last question would just be on despecking. You know, there is this idea that... some OEMs like GM are willing to sell cars with slightly reduced specs in order to get them out of the production, you know, out of the parking lot. Whereas I think Ford were publicly saying that they would never ever sell a car that didn't meet the spec. I think in the case of some of the products, we've talked about, you know, climate control, maybe being despec to one zone rather than four or this kind of stuff. So what are you seeing in terms of behavior at the OEMs, and how does that affect you guys?

Well, we have not seen that too much. Maybe because our product portfolio is... I mean, we do have some things that can be specced as extras, but a lot of the things, I believe, would be considered core for buying the car. I mean, it's hard to leave away an airbag. It's virtually impossible to go from... one lighting concept to another and still have the same car. So with the ranging thing, this is something that is a loved customer feature. So taking that away means people would switch brands. So per se, it's not a bad idea, I think, to think about de-specking if that solves shortage problems. But I believe in reality, it is not really easy to do. It's easy to do on a rarely taken extra. It's not easy to do on the core of the card.

Got it. Actually, one last question would be, you know, obviously this year the OEMs have prioritized selling premium cards because that's where the margin is. How do you, I think historically you've been more exposed to kind of the mid-range rather than the ultra-premium segment. So, If there is a big snapback of basic vehicles, how does that affect you guys in terms of content trends? Obviously, the guys in the premium segment have seen a big jump in content relative to history in the current year, but obviously that's not going to last forever. So I was just wondering how that affects you guys if there's a big snapback away from premium back to kind of basic cars.

I wouldn't guess too much. I mean, we're also exposed to the premium cars. The only thing is when we think about a product going only to an S-class, only to the big SUVs, won't make the necessary volume to really justify a typical product because it's not millions and millions of ICs a year that can go into super premium cars. So I would guess that we have a lot more chips, of course, in a premium car than in a basic car. So in a way, we like premium cars being sold. But overall, we need the volume cars and we need the electrical solution in the volume cars and the innovation in the volume cars. So I think that is... That is a move that is already happening. You can buy full ADAS functions in a golf, or almost full ADAS functions in a golf, even in smaller cars. So we do not really fear the shift from premium back and forth. This is not as strong an issue for us.

And you're agnostic to the move. I mean, it looks like that plug-ins are kind of, going to be taken out of the roadmap in four or five years and replaced with battery EVs. That trend seems to be accelerating quite rapidly. You're kind of agnostic to that trend as well, right?

Yeah, pretty agnostic. And if anything, we like it being more hybrids, but we also like it being more EVs or pure EVs. It's not super big for us in quantitative terms, but it's very nice for us, and it opens new chances. We are discussing a lot more with our customers on EV solutions now that in the predictable future, we will see substantial volume. Because always when you want to do kind of specific ICs, you need to bring volume. It's just not enough to say I have 100,000 units.

Do you see that roadmap change? major roadmap changes? Because that's what we see is basically cars that were anticipated to ramp in 25 are being radically rethought because of the shift to EVs. Are you seeing a kind of flux in the roadmap?

Well, we kind of uh do see changes at the oem level but we do not see changes at at our level because our products are actually i mean for for for new ev products that you discussed they get a little bit more momentum out of such things but uh for the broad part of our portfolio um we're actually adopting towards these these changes because they they will have no no impact you you will take our ranging product anyhow you will take our motor product anyhow you will take our lighting product anyhow regardless of whether you cut out the hybrid and move to pure EV or you're a little late and have a diesel engine, it doesn't matter for these products. With some new products, we like to move towards EV because this is even more electrification. So this is good for us. But on the first level, we are agnostic, and on the second level, we like it.

Got it. Thank you very much, Phil, and cheers. Thank you all.

Our next question is from Mr. Dylan Belgian of SKM. Please, the floor is yours.

Hi. Congratulations on another strong quarter. I was just trying to think from a longer-term perspective, how are you thinking in terms of the revenue growth for the business given the uncertainty on the supply of semiconductors?

Well, I think we're going through a phase of allocation now, but with all the semiconductor investment activity, which is very, very substantial, and there's also a tailwind from politics, we will get out of that allocation in due course. I believe in the long term, what is relevant is demand, because supply will adjust, and And we have a positive view on demand in our hat. We see most people forecast that there will be a rising number of cars. I mean, our current level of cars being built is not – this is just not a lot. So there's a rebound that is possible there if you're talking now on the mid and long term. And for sure the cars will have more electronics in them. So in general, we think we are in a great market.

Got it. Thanks.

Thank you very much.

As of the moment, there are no further questions.

So, if there are no further questions, thank you very much for your participation and your interest in ELMOS. I would also like to remind you that we will publish our preliminary 2021 results on February 17, 2022. And finally, I would like to wish you all the best. Stay healthy and stay confident. Goodbye from Dortmund.