Elmos Semiconductor Ag

Good morning, ladies and gentlemen, and welcome to the ELMOS Saving Conductor SE conference call regarding the result of the third quarter 2023. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. So let me now turn the floor over to your host, Dr. Arne Schneider, CEO.

Good morning, ladies and gentlemen. Welcome to the ELMOS Q3 conference call, also from my side. I'm very happy to present to you today the highlights of another very successful quarter. And in addition, I have some exciting news to share about our ESG activities. I would like to remind you that all relevant figures can be found in our investor presentation, which is available on our website. The audio recording of this conference call will also be available on our website shortly after. And of course, you have the opportunity to ask questions at the end of my presentation. Unfortunately, I have to start my presentation with the latest geopolitical conflict, the war in Middle East. Similar to the ongoing war in Ukraine, there are no direct effects for Elmos due to this latest escalation between Israel and the Hamas. We do not ship products to Israel, nor do we have offices or relevant suppliers in these regions. We hope, of course, that this new conflict, as well as the ongoing war in Ukraine, will end as soon as possible and the people can live their lives in peace. Now to a very positive topic. In August, the German Federal Ministry for Economic Affairs and Climate Action, the BMVK, and the German Federal Castle Office, the Bundeskartellamt, granted the approvals for the sale of the wafer fab to Littlefuse without any conditions. After the regulatory approvals, Elmos received a payment of 37 million Euro from Littlefuse in Q3 2023, The closing of the transaction with the transfer of the remaining purchase price of 56 million euros is expected to be effective end of December 24. With regulatory approvals, the path to a fabless company is now finally paved and we will become more innovative, we will become faster and we will become more efficient than ever before. Ladies and gentlemen, as mentioned in the beginning, I would like to share some exciting news about the ESG activities at Elmos, highlighted actually on page five of our investor presentation. Since many years, sustainability is an important part of our corporate strategy, management processes, and business goals. Our social and ecological responsibility is reflected in many activities and projects. As you all may have noticed, we continuously make our efforts in this area even more transparent to all stakeholders. Our ESG team has compiled a large amount of ESG policies and KPIs and uploaded these documents on our website. The latest project of our ESG team was the calculation of a comprehensive corporate carbon footprint, including Scope 1, 2, and 3. The calculation of a corporate carbon footprint is based on the International Reporting Standards Greenhouse Gas Protocol. And it is the basis of all Elmos climate targets, which I'm happy to announce today. Based on our future organizational structure as a fabless company, we want to reduce the greenhouse gas emissions of our own activities, that means scope one and two, by 40% until the year 2026, compared to the base year 2022. To achieve this significant reduction, we plan to lower our greenhouse gas emissions each year by 10% in the next four years. So then we reach minus 40% in 2026. And we want to become climate neutral for our own activities by 2035. With these targets, we are supporting the European Green Deal and we have defined specific activities to achieve these reduction targets. In addition to our own climate targets, we are encouraging our suppliers to reduce their own carbon emissions as well. I won't go into more detail today because we will invite all of you interested in a special webcast on November 29 to learn more about ESG at Elmos. So we will soon send out a separate invitation and have this special ESG call for all that want to join. So please do join us. It's an interesting topic. Let me continue with an update about the current market environment. The fiscal year 2023 will continue to be affected by many geopolitical crises, economic uncertainties, and high inflation. The allocation situation has further improved, and we believe that the supply and demand levels will be more or less normalized, at least in the course of 2024 latest. For the remaining months of this year, we continue to execute our allocation plan with our customers and transition also back to the lead time-based system for the next year. The demand for Elmos innovations continues to be very strong, and we are happy with the progression of our new design wins. From an operational standpoint, we continue to focus on the preparation and execution of various ramp-ups in the second half of the year. The hard work of the Elmos ramp-up team and the targeted investments in the expansion of our test capacities are now paying off, underlined by the strong growth in Q3. With this growth momentum, we are clearly outperforming the automotive semi-market and most of our peers this year. So, let's now have a closer look at the Q3 results. Once again, Elmos delivered a very impressive performance, I think, in the last quarter. Sales in Q3 increased by €32 million year-over-year to €151.5 million. This is the 11th consecutive quarterly sales record. Both the growth rate of plus 27% year over year and the increase versus the previous quarter of plus 11% underline the momentum of the Elmos business. Besides the ongoing high demand for our innovative mixed signal semiconductors, the strong increase was driven by the various product ramps as mentioned. Fueled by the high growth and underproportioned OPEX increase, Q3 EBIT rose by 40% to €41.6 million compared to €29.8 million one year ago. The EBIT margin further increased by 2.6 percentage points year-over-year to now 27.5%. In the last quarter, we continued to invest in the expansion of our testing capacities as explained. We have invested another 34 million euros in Q3 after the record spending of 42 million in the second quarter. Our investing program is a key element of our growth strategy, and some of the invests we've seen now were really just in time when we needed them now to get the growth going. So this provides us also with capacity for future growth. And by the way, of course, you will ask, I can tell you now, there will not be that much investment in Q4. Due to the ongoing high capex level and increasing working capital for the product ramps, and without proceeds from the FAP sale, the operating adjusted free cash flow, so operating cash flow, and we always use the adjusted for the other assets, was slightly negative at minus €3.3 million in Q3. However, including the payment of €37.2 million for the sale of the WaveFab, the adjusted free cash flow totaled plus €33.9 million in Q3. Due to the positive free cash flow, Amos recorded a lower net debt position of now €43.8 million at the end of the third quarter. So now I come to the outlook for the year. According to the latest IHS light vehicle production forecast, the global automotive market is expected to grow by around 8% to 88.6 million new vehicles this year and another small increase of plus 1% in the next year in 2024. According to the available industry's forecast, the overall global semiconductor market will shrink by 10% in 2023, while the automotive semiconductor market is expected to grow by 12% this year and by another 10% in 2024. So it's really important to look at the different market segments separately. Although the overall share of automotive within the entire semiconductor market is relatively small, the automotive semi-market proves to be a lot more resilient than the overall market. Driven by the increasing IC content for autonomous driving, e-mobility, comfort and safety, there is actually good growth. Ladies and gentlemen, after nine months, Elmos is heading towards another very successful fiscal year. For 2023, we confirm our guidance as of June 28th despite ongoing challenges and uncertain economic and geopolitical conditions, as well as the ongoing high inflation. We continue to expect full-year sales in 2023 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% plus or minus 2 percentage points. Elmos continues its expansion of the testing capacities for future growth, and we continue to forecast capital expenditures of approximately 19% plus or minus 2 percentage points of sales in this year. As a result, Elmos expects a negative operating adjusted free cash flow in 2023. Ladies and gentlemen, I'm very excited about the future prospects of our company. We're executing our growth strategy, preparing for future growth and innovations as a sapless company, and reducing the carbon footprint of our own activities. Or, in line with our vision, we are shaping the mobility of the future and make our world more sustainable, safer, and a better place to live. So that is the end of my presentation. Thank you very much for your attention. I'm now opening the floor for questions.

So, ladies and gentlemen, if you would like to ask a question now, please press 9 followed by the star key on your telephone keypad. And if you wish to cancel your questions, please press 9 followed by the star key again. So now let's start, and please press 9 star to state your question. First one is Robert Sanders. Mr. Sanders?

Good morning. Hi. I just had a question regarding the EV lineups next year and the Western OEMs. Obviously, there's been a big slowdown in the EV market and Western OEMs are going to be changing their ramp schedules next year quite considerably given weak demand and given losses that they are anticipated to make on those EVs given the prevailing market price. So, As you see those OEMs switching back to ICE-based vehicles where they make money, how will that affect you? Are you agnostic to that trend or do you see some impact potentially from revised ramps and rescheduling of ramps into the future?

Well, generally every car that is sold is a good car for us. So we are on the first level of calculation. We are pretty agnostic to what the powertrain looks like. Of course, we like big cars and we like well-equipped cars because there's just more in them. On the other hand, kind of shifting some EV programs back to internal combustion engine may actually result in a pretty good take rate of certain options. So I wouldn't say this has a major effect pro or con our products. By the way, we also like how the Chinese are ramping their EV programs, because not only the Europeans are customers, it's also people from the PRC that buy a lot of Elmo's chips.

Got it. And just for my follow-up, there was a lot of discussion on the on-semi conference call regarding Tier 1 inventory. You've got high inventory for ramps for next year, but how concerned are you about excess Tier 1 or OEM inventory or perhaps excess consignment inventory?

Well, we see that we are going through a normalization phase. So a little bit of the fear that we had in the beginning of this year was, I believe is gone. People believe that by and large they can get the product they need, at least if you kind of, I mean lead times are still a little bit higher, but if you keep on planning well and you do your logistics properly, there's no need for excessive fear. And that I believe leads to the idea that you can reduce inventory levels a little bit. This is for us pretty much as expected. So we look at 2023 that overall it comes out very much as expected. Had we believed everything that was maybe part of the discussion at the beginning of the year, we would probably have to tell you, oh, this is less than people wished for. But we were always in an allocation where we said, let's let's kind of be honest and see what people really need and what is the run rate and should the run rate be based on the cars they build and you make your kind of little algorithms to determine what it should be. And if you align on something like that, actually, for us, there's not a huge amount of news.

Just last one. On the working capital, obviously, inventories ballooned. significantly, but as you prepare for these ramps, should we expect an inventory to start declining or at least inventory days to normalize to 2022 levels in next year?

I mean, generally, I believe now that we get out of the allocation and that our ability to deliver is a lot safer because the value chain is functioning again, we can optimize working capital a lot more than we dare to do so this year. So it is a fair assumption that we will take a much closer look at the inventory development over the next year and following.

Thank you very much.

So next up is Tim Wunderlich from Hauk and Aufheuser.

Good morning. Thanks so much for taking my questions. First one is on pricing. Could you tell us a bit about the pricing development that you're currently seeing? I'm talking about your products with your customers. And then also the expectation. I mean, you've had a lot of tailwind over the recent two years when it comes to pricing. Could you give us an indication how is that most likely going to develop in 2024? And then I have a follow-up. Thank you.

Perfect. Thank you for your question. Well, it is, of course, a difficult situation when input prices rise. So, over the past two years, we had to ask our customers for a participation and pass on of these higher input costs. We fought for the adequate volumes such that we actually are not the cause of any OEM line down in this allocation phase. And this is something we are actually proud of. But then, on the other hand, we have to share this burden and we have to pass on the cost associated. Now, on the input side, I believe it's pretty flattish. I mean, in the big average of things. So what we see in the industry is that most of our peers will have a pretty flattish pricing for next year. Okay. Okay.

Thanks. I remember prior to COVID and prior to these, to these high supply chains, you typically increase prices by three to 5% at the beginning of the year. I don't know if I remember this correctly. I mean, That is not something you would expect for 2024 then?

Well, I mean, we still look at an inflationary environment. So some of the inputs like labor will inevitably be more costly. So there are some efficiency gains. There's also some higher input costs, maybe not wafers, but for sure labor costs. and other elements, I mean, things like spare parts, for instance, these are kind of oligopoly-like situations. So they tend to develop with inflation, to say the least. So I believe that the net result of all of that is rather flattish.

Okay, understood. Then regarding the the product ramps that you spoke about, and that is these ramps that are helping your top-line performance, can you give us an indication what regions are these, you know, the respective customers coming from? I mean, where are you seeing the most traction? And then also what product or product groups are we talking about when it comes to the ramps? And you also said that, one last thing, you said in 2024 automotive semi-market is expected to grow by 10%. I mean, is it a fair assumption that you can once again outperform the market? Thank you.

Maybe on the last question first. I think any double-digit growth would be a great success, but it's within the realm of possibilities. I mean, we can't give you guidance right now for the next year, but it's not something I could rule out today. This is quite possible. On the REMS, it's actually a multiple product. It's from multiple regions. There will be Asian or are happening and will be even more Asian ramps. There's a European ramp. But it actually goes, I mean, only because it's a European customer, it goes into a lot of cars in this world. So beyond the tier one level, this is then spread out to all the regions. So it's a little bit complicated. it's a little bit random, actually, where the tier one sits. Yes, we want something in Asia. Yes, we want something in Europe. There will be a U.S. kind of type of ramp, so this will most likely show up in the Asia numbers again because this is where they will build it. So it's a little bit then beyond the tier one level in terms of end market exposure, again, spread out pretty globally. I mean, you can try to But then if you do this, I mean, you can try to rule out certain regions. Hey, there's a little less in that product in that region, but then it's a little more in another product. So it's actually pretty global exposure.

Okay, got it. Thank you so much. Mr. Ulle, thank you for your questions.

We have another question coming in from Malte Schormann.

Yeah, good morning. The first question is as well on the inventories. I mean, we have seen quite a significant raise until the end of September. Just from a trend perspective, should we expect a further increase in the fourth quarter? Do you expect that to remain flattish before then inventories potentially start to develop a bit better during the next year?

Yeah, well, I think, as I have said, I think we are now – We're coming out of allocation and this inventory situation is also a normalization path for us or will be a normalization path. We were happy to take some more wafers to have a little bit, try to drive towards a little bit more stock to be really able to deliver, to kind of buffer all the uncertainties in the supply chain we had in the last two years because there were uncertainties, to be frank. not everything was as smooth as in the years before. So we're returning to a more normalized path, and that means also inventories can return to more normalized levels. I do think we have adequate inventory now, and we, however, can manage that down now over time. Whether it's in the Q4 and what exactly the effect will be, I actually can't tell you. We wouldn't guide inventory for a single quarter. But the general direction, I believe, is clear.

Okay, good. Then also on the current ramp-ups, maybe qualitative comments on the magnitude of what's about to come. I mean, we have seen pretty strong development in the third quarter. So what do you expect then further tailwind from progressing ramp-ups in the current fourth quarter and then going into – So from the bulk of the ramp-ups you're currently seeing, when will most of the tailwinds come through at the top line? Obviously, you're expecting them to grow further, but from the current strong trend you're seeing from a timing perspective, maybe you can add some color there.

Okay. Well, you know our full year guidance. We are very confident that we will fulfill that. I mean, it also says more than. Usually more than is not a million more than. So this is not going to be too bad. Well, we are fighting to make the ramps in the next year work. We do have kind of two things. We have a normalization effect on the one hand, where some of our peers kind of fear that they are not growing at all or so, and we don't see that for us if we look at it today, because we also see that we promise certain product and have to deliver it and are preparing for that. so maybe that is also why we're not that negative on the next year we're positive on the next year I mean it doesn't look like the same growth we see this year because there is the pricing component largely missing if we talk in very kind of big blocks but the general growth component is there and active and there's a lot of momentum so the world doesn't look too bad

Yeah, okay. We already touched on Zemi's comment, et cetera, potential mix and the change in the mix. Do you see any change in the inventory level, et cetera? Do you see any unexpected weaknesses in demand from your customers at the moment that evolved over the past couple of weeks and then going into 2024? As you said, as you already said, really everything changes. more or less developing fully in line with what you had expected or would expect then, given the pipeline you see?

Well, the general picture is in line. That, however, does not mean that each and every individual customer, I mean, they are the ones and they are the majority that are totally in line with expectations, but they are also the ones that need more. on sometimes short notice. And you can, I mean, we can speculate about the reasons offline. But this is, this does happen. And the same is true with others, but this evens out. This is just the kind of error term and the usual chaos that can happen. But generally, it's a very kind of controlled environment.

Okay, so nothing unexpected, more or less. So it's, as you said, the usual movement.

This is the usual. So, I mean, next quarter we will, I guess, grow a little bit again. We have to see how much of the short-term things we can actually do for our customers. If some customers want to take out a little, we can also see how much we can do there. But this is kind of Part of the normalization, this has always been the case over the last 15 years, that people call you and tell you, oh, I need to pull in. I know we only should get it in six weeks. Could we make it three weeks? And you try to make it happen if you somehow can. And others say, ah, could you send it maybe two weeks later? It would be convenient because it's year-end and we want to optimize it. And this is all things that the supply chain manages, and we try to be nice to each other, to our customers' demands. If that is reasonable and possible, we can discuss it.

Yeah, okay. Last one, pretty quick one. Would you be disappointed when you grow slower than the automotive IC market next year?

Yeah, a little bit, yes. I mean, if the 10% comes true for the general market and we are below that, this would not be in line with our ambition.

Okay, good. Many thanks.

Thank you, Mr. Schama. Next up is Lukas Spand from Tikris Capital.

Yes, hi, good morning. I have just one question. I think your growth is impressive and your margin is also very nice. But coming to the cash flow, I think that's not that nice part of the story because I think it's not just about earning money but also making money. So free cash flow topic is also something you could improve. And so the question is, how should we think about investments and so per cash flow development in 2024? What is going on on the investment side? You also touched that for Q4 that investments will be not that high. So what is your expectation for next year?

Yeah, we have two quarters of record high investment now. You may even call it an investment program in our testing facility buildup. We really needed it because otherwise we would be discussing other things here right now. This is kind of one big step. I think this won't be enough invest forever. But kind of for the more foreseeable future, we will not need that amount of investment for sure. We now reach quite a good level. We're getting all the things productive. We will need not that much investment, little investment, you may even say, in Q4. And I also would foresee in 2024 that we will utilize the existing invest. And, I mean, investment will never be zero, but it will be significantly less than this year.

Okay, but significant less, but still in the double-digit area related to revenue?

Well, this is hard to say, because you're picking a point that is within the kind of, if you say it's 10% within the possibilities, maybe. But honestly, we're just doing the budget this autumn. We'll have the budget finished in January. So maybe it's a little early to be that precise with numbers. But it's not going to be kind of one percentage point less than our guidance this year. This is not what I would kind of expect out of my feeling for numbers. Yeah. Okay.

Thanks. Thank you. So next question comes from Johannes Ries from Apus Capital.

Yes, hello, you can hear me?

Yes, we can.

Yes, hello, it works. I feared maybe my telephone is not probably working after we moved. Most questions have been asked from my colleagues. Maybe only some clarification. First, maybe you didn't mention maybe concrete how the design bins have been in this year so far. Maybe you can update us on this because that's the base for the growth in the coming years.

Yeah, I mean, you know that last year was kind of a super overshoot in design wins, where also kind of the work of some years preparation showed in that year 2022. This year will be less than last year, but if you wouldn't know about last year, you would be very much impressed about this year. It's I mean, if I look at design wins, it makes me smile.

Why? I mean, because it's okay. I see. I got it. Yeah, okay.

It's good inner satisfaction if you think, yeah, this is where our sales team, our business lines are really doing an excellent job, and we are very proud jointly on what we actually can achieve there. It's very reassuring.

Okay. And how is the funnel maybe before the design wins, maybe the projects you are discussing and maybe bidding for, how is this developing?

Yeah, this is always, of course, a lot bigger than the design wins. Pretty stable and big, I would say. So there's no lack of innovation or of need in the car industry. I mean, people continue to innovate. People continue to want the newer, the better, arguably, ICs from us. So some products actually see a prolongation of their life. I mean, we talked about the internal combustion engine products. And in certain applications, there are customers where we would have expected the request of the next generation, but they just say, well, we keep the old generation. We invest in the EV space. We have no R&D resources to redesign old ICE content. We wanted another five or seven years, and we are, of course, happy to do that.

Okay. Only two design wins with a smile. The 23 design wins will maybe somewhat lower compared to the extreme year 2022, but clear higher above 21. Is that the right reading?

Yes, yes, yes. Very much higher than the 21 numbers.

Okay. I got it. Thanks. Okay. Coming back to maybe this pricing component, in this year you said next year this pricing component will – Yeah, well, this may roughly be correct.

Maybe it's a little less than half by the pricing component. But generally, this is a good view of the world.

Okay, super. So maybe on the investments you're making in the test environment or your test equipment, how much maybe percentage-wise now you have increased your testing capacity? Only to have a feeling for what maybe longer-term growth you'll prepare your organization.

Oh, it is substantial. I mean, I wouldn't comment too much on these numbers because they are always a little bit tilted by different generations of test machines, different generations of handlers, times multi-site. So the calculation is actually pretty complex on what this means for capacity. But I believe that the invest that we did will help us also very much in the next year.

Okay. Like you said, it's definitely enough to handle the next CNC year after year. Maybe on your guidance, only to read it, right, you said in one comment you expect some growth in Q4. I think it will grow sequentially to Q2. If I would take the low point of your guide and your set, your guide for above, if I would take this 560, you would have a sequential decline in Q4. That's definitely not what we should expect.

No, no. Well, I mean, maybe it shouldn't be a decline. Maybe it's not a huge increase, but maybe it's – If it's a decline, this would be a little bit disappointing, I think.

Okay, I got it. So for next, the 12th record quarter maybe is ahead of us. Super. Not more questions. Colleagues have asked most things. Thanks a lot, and good luck.

Thank you, Mr. Rees. Yeah, we also need luck. We are working hard, but we also need luck. So thank you very much. Thanks.

So thank you very much. At the moment, there are no further questions now. We'll wait a few more seconds if another one is coming in. No, it isn't. So I hand back to your host, Dr. Anne Schneider, for the conclusion of the conference.

So thank you very much. At the end, I would like to remind you again about our ESG call on November 29 and the publication of our preliminary financial year 2023 financials, including our expectations, the guidance for 2024, which is scheduled for February 15, 2024. So for now, thank you very much for your participation and your interest in Elmos. We look forward to meeting many of you at the upcoming investment conferences. Goodbye from Dortmund. Take care and stay confident. Thank you.