Elmos Semiconductor Ag

Good morning, ladies and gentlemen, and welcome to the ELMOS Semiconductor SE conference call regarding the result of the second quarter 2023. At this time, all participants have been placed on a listener-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.

Good morning, ladies and gentlemen. I'd like to welcome all of you to the ELMOS Q2 conference call. Thank you very much for your participation. and your interest in our company. During the second quarter, we once again delivered an outstanding performance. We continued to record strong sales growth combined with an improved profitability. We invested record levels in future growth. Moreover, we have set the course for the successful transformation of Elmos into a selfless company. So today, I'm very happy to present to you the highlights of another successful quarter and a positive outlook for our future business. As always, I would like to remind you that all relevant figures can be found in our investor presentation, which is available on the Elmos website. And as usual, you have the opportunity to ask questions at the end of my presentation. First, on the sale of the wake pack. So besides the strong operational performance, the highlight of the second quarter was the agreement with the U.S. technology company LittleFuge to sell the Dortmund wafer fab for a purchase price of around 93 million euros. We have found a sustainable and a long-term perspective for the Dortmund wafer fab and can now implement the important structural transformation into a fabless company as planned. After the disappointing prohibition at the end of last year, we have worked very hard and diligently to find a new solution for the wafer production in Dortmund. To find a very good new deal within such a short period of time underlines the execution capability of the entire Elmos team. We do not allow ourselves to be distracted by setbacks or roadblocks and continue to pursue our strategic path with high focus and perseverance. And as a fabless company, we are convinced that we will become even more innovative, even faster, and even more efficient. Before I'm going to present the financial highlights of Q2, let me quickly summarize the transaction with our new U.S. partner, LittleFuse. Amofet agreed to sell the wafer fab at a net purchase price of approximately 93 million euros to LittleFuse, who would acquire the Dortmund wafer fab with approximately 225 employees. All other activities, including testing operations, will remain with AMO. In acquiring the Dortmund-Braser FAB, Littlefuse enhances its capabilities in power stem conductors for power conversion applications like renewables, energy storage, and e-mobility charging infrastructure. We have also agreed to enter into a long-term supply agreement until at least 2029. so the supply of sufficient wakers from Dortmund will continue to be secured without interruption for a very long time. The closing of the transaction is expected to be effective December 31st, 2024, and is subject to certain closing conditions and regulatory approvals, among them the investment control procedure under foreign trade law conducted by the German Federal Ministry for Economic Affairs and Climate Action. Following regulatory approvals, Little Fuse will make a payment of 37 million euros. The remainder of the purchase price will be paid at the final closing. Elmoth will remain the owner of the building and will rent out the clean room under a long-term lease. In addition, Elmoth will provide the necessary infrastructure and certain services on the basis of separate lease and service agreements. This agreement is a milestone for semiconductor production in Dortmund and will strengthen Germany's standing as a high-tech location. Elmos, on the other hand, will use the advanced technologies from our foundry partners best suited for sustained innovation and product performance. We will be able to continue to deliver groundbreaking innovation in mixed-signal automotive semiconductors for sustainable future growth of the company. So let me continue with an update about the current market environment. The allocation situation, as you know, has further improved, so we expect a path towards normalization as we are heading into 2024. We are also working hard to prepare our supply chain for the upcoming REMS in the second half of this year. The demand for Elmos innovations continues to be very strong, and we are very happy with the progression of our new design branch so far, acquiring many attractive projects in all of our segments. from existing and actually also from interesting new customers. For this reason, we have accelerated our investment once again in order to be prepared for the increasing order volumes. Our mixed signal applications address key mobility trends and offer additional value to customers and end users. And our innovative solutions combined with the structural trends for more electronics in modern cars are, as we think, a very solid basis for the future development of airmobiles. On Q2, so once again, we, as you have seen, achieved another strong top-line growth in Q2, the 10th consecutive quarterly sales record. Group sales increased significantly by €30.2 million to €136 million in Q2. This is a plus of 29% year-over-year and a plus of 4% sequentially. The main growth drivers for Amos continue to be higher volumes in all of our product segments, and some inflationary cost patterns, while FX actually had no major impact on the reporting quarter. Impacted by both higher input costs from suppliers and the corresponding patterns to our customers, gross profit margin improved to 48.9% in Q2 2023. EBIT rose by 35% to €34.1 million in Q2 2023, compared to €25.2 million one year ago. The higher volume with a high gross margin and the under-proportional increase in R&D expenses contributed to this strong performance. The EBIT margin further increased by 1.3 percentage points year-over-year to 25.1% in line with our expectations. As already mentioned, we have decided to once again step up our investments for future growth. We see an encouraging level of new orders and new design wins, and we are not hesitating to secure these attractive volumes for the coming years. Although our back-end investment initiatives affect cash flow, we will not limit our future growth potential by insufficient testing capacity. The opposite is true. We have invested a record level of €42.4 million in the last quarter, mainly for the further expansion of our testing areas. In addition to the high capex level, adjusted free cash flow was impacted by higher working capital as a result of our preparations for the upcoming product trend and totaled minus 36.7 million euro in Q2. Due to the negative free cash flow, Elmos recorded a net debt position of 77.4 million euro at the end of the second quarter. Ladies and gentlemen, at the end of my presentation, I will highlight our outlook for 2023. The global automotive market is expected to grow slightly, by around 5% to 86.7 million new vehicles this year. According to the latest industry forecasts, the overall global semiconductor market will shrink by 10% in 2023, while the automotive semiconductor market is expected to grow by 14% this year. The main growth driver is the increasing IC content in modern cars, fueled by structural trends such as more autonomous driving, e-mobility, comfort, and safety. For the current fiscal year, we confirm our guidance as of June 28th, despite challenging and uncertain economic and geopolitical conditions. Based on our current order book and the available capacity, we continue to expect full-year sales this year of more than €560 million, representing a strong growth of more than 25% year-over-year. The full-year EBIT margin in 2023 is expected at 25 ± 2 percentage points. Amos also continues to increase its efforts to expand testing capacities for future growth. We are forecasting capital expenditures of approximately 19% plus or minus two percentage points of sales in 2023. And as a result, we expect an active operating free cash flow this year. Ladies and gentlemen, Q2 was a very successful quarter, and we are looking forward to another promising second half of the year. So thank you very much. I'm now opening the floor for questions.

Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your telephone keypad. In case you wish to withdraw your question, press 9 and star a second time. And the first question comes from . Please go ahead with your question.

Yes, good morning. First, again, congratulations for this great event. Like always, some questions first to your wording regarding the second half. If I remember right, after Q1, you said you expect an acceleration because of the ramp of... designs in the second half. Now you said you still expect a strong second half. Is it only a wording without maybe a deeper reason behind or did you get, given the general more weaker economic environment, a little bit more cautious regarding the second half?

No, this is, I mean, first, thank you for your congrats on the deal. On the second half, we could have chosen the same wording, but we just exchanged the words for, I don't know, for variety's sake, I guess. There's no deeper meaning.

Okay. You know, there are analysts and investors who look at every word and the formulations of wordings, if it's Thanks for this clarification. That helps a lot. Maybe second point, inventories. You have increased your inventories because of the ramp. Therefore, maybe no reason for concerns. But how you see the inventories in the value chain and supply chain at the tier ones, at the OEMs, Is there any signs that inventories has risen strongly or maybe there is a risk of an inventory correction, but still some analysts see also coming in the automotive space? Or is it very different because you mentioned the structural growth drivers and therefore the demand is nothing, not so much coupled like you even see with this chart about semi-market and auto market. on the number of cars. It's a much higher percentage or much higher content of semis. But only the inventory, it's heavily discussed in the analyst space. What do you see from your perspective?

Well, I do think there will be a normalization of the supply situation. I mean, we are still working through our allocation lots this year. but generally we will be able to offer customers kind of a lead time based approach maybe not the short lead times that we have seen in the past and kind of five or ten years ago but we go back to a reasonable lead time based approach for The majority of all things. There are still some pockets where capacities are so tight that we will remain in a little allocation mode. But for important growth projects on newer technologies, we will go back to a normalized world. I believe the general fear in the market of massive undersupply As we have seen it kind of two years ago or one and a half years ago, this is slowly going away because I believe generally you get by with what you get in terms of chips. Maybe not every single sub-segment, but by and large, you can kind of reduce the number of people you have on your chip shortage task force at the tier one or OEM. So I do think, or at least we expect some normalization effects, but this is also what we expected at the beginning of the year. So this is all within what we think is and should be reasonably happening. The question how much inventory exactly is out there, I can't tell you. you only know when you have these super tight escalations where all involved parties along the value chain come together to try to avoid line downs and I mean we've not been responsible for any line downs at the OEM during all this horrible allocation period and yes we had some escalations but we managed them I believe well so that our customers could rely on us Apart from these rare moments of extremely clear visibility, there is no such thing as a complete transparency on inventory. I think we are very much in a structural growth mode. There are a lot of design wins of the last years that come online and go into production. so generally the world is not too bad.

Okay. And there have been double orders, definitely. You have seen maybe some one or other cancellation because the topic is on the way to normalize, but you're not published your order situation or your order book, but that's still very healthy, I think.

Oh, yes. Well, we have a very healthy order book, and I mean, normalization is actually good for a lot of people. You can tell your IC supply again, look, I need a little less, and others can come and say, look, I need a little more, and you can actually balance these things again, or at least this is how we wish 2024 to look like. I mean, compared to a year ago, we could only say no, no to the one, no to the other. I mean, the decrease never happened, and the increase couldn't happen, so It was a very inflexible kind of situation where we found ourselves in. And this allocation, I mean, operationally, it's not fun. So I believe it is good that we go back to a pathway where you could actually adjust to demand shifts. Some OEMs, you know, they may take less while others have a higher share. The general number of cars is healthy and not particularly high, I would say, at some 86 million or so this year. So there we do not have so much fear that the car market, I believe it's in the right direction globally at least.

Great. Also, on the pricing, I've been just in the ST call and they see at least stable pricing. Because always another discussion is automotive customers are very price sensitive and if the supply maybe shortage goes a little bit away, they would start to make pressure on prices. Do you share the opinion of ST that is not to see at the moment?

Well, I believe generally input costs rarely go down in this inflationary times. And, I mean, we do want to offer fair pricing to our customers. On the other hand, what we all in the value chain must accept that we do have had, and, I mean, maybe a little less pronounced, but in some respects we still have higher input costs. as far as wages are concerned, as far as chemicals are concerned, as far as spare parts are concerned. In a lot of areas, we do see higher input costs. We may be able to deliver a little bit of efficiency, but this is not in the magnitude that we see at the general inflation. So we do not see a decrease in pricing.

Okay, super. On your huge capex, first, you don't do it if you don't are optimistic even for the following years because this test algorithm you're now buying, it's not for primary for the second half, it's more for 24 and 25. So that may be the right assumption. And what could we expect going forward? Because investors and analysts are always a little bit concerned if they see that the cash flow is negative and the working capital is growing. Could we see some easing going forward, that maybe at least the supply situation is getting a little bit eased, that the working capital comes down and you could return next year to at least maybe a slight positive or at least neutral cash flow?

Well, I think that we shouldn't kind of over-pronounce this single quarter. If you do the simple math and then take the year's expectation for CapEx, then four times the current Q2 or even adding two times this Q2 leads to hugely more than we expect. But yes, we need it now, and we need to get our value chain ready. We do that on purpose. I mean, I do love the machines, but not so much that I would buy them if we had no need. So we actually do it on purpose. In the second half, on average, it will be a little less. But you also have lead times on these things before they get really productive. On the next year, I think... If I look at the capacity that we have built this year and that we actually will have ready at the end of Q4, this is a pretty good run rate. So I wouldn't be too pessimistic about the cash flow next year. I mean, it's way too early. It's pure speculation. But in my kind of emotional state, I would say I wouldn't be too pessimistic. We did invest a lot this year. We have some working capital. a build-up, which also made a lot of sense, but this is not necessary to do the same thing in 2024 again.

Very briefly, and I'm finished with a lot of questions, but the design bins you mentioned, the strength was in the past, therefore you built now capacity, but if I understand it right, also in the first half, your strength and the design bins has gone on, is that right?

That is right. No, no. I mean, maybe I did not say that correctly. We had an excellent first half in terms of design wins. This is also what, I mean, we're happy about it. It's not immediate revenue, but it makes us very confident that we do have the right product and the right features that people really like. So this is good.

Sounds very good. Thanks a lot. I go back in the queue. Thanks. Thank you, Mr. Lee.

At the moment, we have no further questions. If you would like to ask a question, please press 9 and star on your telephone keypad. And we have one more question coming from Robert Sanders, Deutsche Bank. Please go ahead with your question.

Hi, good morning. Sorry I joined the call a bit late. I just wanted to ask about your design wins. and how you're feeling about next year, and in particular how the route to market for your design wins is changing. How much is today an OEM decision? How much is a reference design with a platform partner like a Qualcomm, and how much is via a sale to a Tier 1? I was just interested if you've seen that evolve given what's happening in the assisted driving domain. Thanks.

Yeah, I believe... I mean, first of all, we are extremely happy with our design wins in the first half of the year. On this structural shift, of course, we see that we continue to have strong Asia demand, also strong Asia design wins, not only from China, also from other parts of Asia. And we... We do have that situation, particularly in the ADAS domain, not so much in the other domains, a bit but not as pronounced in the other domains, that the OEMs want to get involved, want to understand, and if they developed an idea of what the right chip is and knowing that there is no real alternative, that they are willing to just specify that chip in. That is something that we do see in some cases. I cannot give you a percentage number to be honest because we're happy in the cases where we have that, but we also win a lot of other cases. It's not that we would depend on that to win business. It's just nice to kind of be in such a situation and it underlines our strengths.

Got it. And then just on Ultrasonic, obviously one of your biggest customers, former biggest customers dropped using Ultrasonic. Have you seen that be sustained? Any change there? Obviously there are trade-offs. And have you seen any other customers following suit? Thanks.

Yeah, I believe you're referring to the Tesla stopped the ultrasonic use in their cars. They were actually not the biggest customer by far. So yes, we noticed, but you will not see a bump in our growth line due to that fact. I mean, our market position in ultrasonic is extremely strong globally. and we continue to see excellent growth there, even without the Californian one, or this Californian one.

Got it. And just last question on China. What are you seeing competitively in the domestic domain? And, you know, do you agree with people like Melexis when they're saying basically China is, you know, quite a few years ahead of Western OEMs when it comes to electrification. Would you agree? And are there domestic players starting to pop up that may be an issue for you? That's it. Thanks.

Well, the issue sounds negative. Yes, we do see domestic players pop up. We love all of our customers. The US ones, the Japanese ones, the Chinese ones, the new ones and the old ones. And the new ones are also among our beloved customers. We're happy to support the growth of these newer OEMs. Some of them are now very established. Some say it's a Tesla BYD race. But there are others, and they will also be successful. You've seen the recent news out of the Volkswagen group. We are happy to supply to all of them. So we are a little bit bystanders and support any customer.

Right, right. You don't see any... domestic China, you know, in, for example, microcontrollers and power discreet, there are Chinese players in semiconductors that are evolving. Ah, this is what you're referring to. Yeah, I was just wondering if you started to see the sensor industry starting to see some players pop up.

We start to see activity. Most of them have a limited kind of readiness to supply today. I would guess that within the next five years that we do see Chinese local competition. Got it.

Okay, thanks.

Thank you, Rob.

For any further questions, please press now nine and star. There are no more questions from the audience.

So at the end, I would like to remind you that the Q3 reporting is scheduled for November 8, 2023. Thank you very much for your participation today and your interest in Elmos. We look very much forward to meeting any of you at the various investment conferences and roadshows in fall. For now, goodbye from Dortmund. Take care, stay confident, and see you soon.