Elmos Semiconductor Ag

Good morning, ladies and gentlemen, and welcome to the ELMOS Semiconductor SE analyst conference call regarding Q3 results. At this time, our 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.

Ladies and gentlemen, good morning. Welcome to the ELMOS Q3 conference call, and thank you very much for your participation. I'm happy to present to you the financial results of another successful quarter. And just as a reminder, as always, all the relevant figures can be found in our investor presentation, which is available on the Elmos website. Of course, you have the opportunity to ask questions at the end of my presentation. Ladies and gentlemen, before we start, let me briefly comment on the publication of our midterm financial targets yesterday. You have seen we want to continue our successful profitable growth strategy and continuously improve our cash generation. We will provide more details regarding our operational and strategic activities in our Capital Markets Day. You are all invited next week. In today's conference call, I will focus on the highlights of the third quarter. Despite an ongoing challenging market environment, Elmos was able to continue its positive business performance in the third quarter of 2024 and we are on track for another successful fiscal year. So concerning the market, we see that the automotive market is characterized by a variety of challenges. You have all read the negative news by OEMs and Tier 1s and other market-related news in recent weeks. Due to the existing uncertainties about next year's development of the global automotive market, the slower progress in e-mobility, especially in Europe, And the overall weaker economic expectations, customers are adjusting their orders accordingly and are also placing orders at much shorter notice. Many of our customers are still focusing on inventory and cost optimization. These temporary inventory adjustments are taking longer than anyone expected at the beginning of the year. Of course, as you know, this does not only affect Elmos, but all of our competitors and many actually in a much more severe way. Despite the effects of the normalization phase, our business performance is relatively resilient and we have no reason to be pessimistic about our future. In contrary, we think inventory destocking is a temporary phenomenon after the allocation and the structural trend for automotive semiconductors remains intact. With our innovative IC solutions, and a great product pipeline, the growth opportunities for innovative and agile players like Elmos remain high. Beyond our positive financial performance, we could successfully initiate or complete important strategic initiatives. As you know, the acquisition of new business has been very successful in recent years. With our outstanding delivery performance during the allocation, we have been able to develop a strong basis for our future growth. And this year, too, we have been able to win numerous attractive new projects and are able to further expand our position in all... OEE stands for Overall Equipment Efficiency Program. We are running in the testing area, has started, I would say, very successfully. The first positive results, both at the backend facility in Dortmund and at our external test partners in East Asia, are in line with our expectations. Increasing operational efficiency is a key element in optimizing the utilization of our testing capacities and sustainably reducing capital expenditures. You may have seen our midterm target, less than 10%. This is, of course, linked to the success we are currently having in getting our operations more effective. Our new China strategy, with a much stronger local presence, is... also progressing according to plan. I would even call it at China speed. The new local entity is fully operational and first units of local Elmos ICs will soon be delivered to Chinese customers via our new local hub. Increasing our local presence and value chain in China is an important requirement for defending our strong market position in the world's largest automotive market. Our commitment in this region is highly appreciated by local customers, OEMs, and also by the authorities. And of course, you know, as a fabless company, the risk of a localization strategy in China are actually limited. We can increase our value chain by selecting local partners for local products. And we do not need to invest in fabs, well, obviously. So this helps our risk profile. Our China strategy, the OE program, and much more will be highlighted at our Virtual Capital Markets Day on November 11th, so next Monday. The new Elmos Executive Committee will be present and tell you about all the also other key strategic initiatives for growth and innovation. And we think we'll deliver valuable insights into our product and financial roadmaps. So we have put together an exciting agenda. Sorry, this is the advertisement block for the Capital Markets Day. This is a solid growth of 3.4% year over year and a very positive increase of 10.3% sequentially, despite the mentioned ongoing inventory adjustments by our customers. The Q3 gross margin supported by the high sales volume stood at 47%. EBIT reached €39.9 million in Q3 2024 supported by lower OPEX ratios. The EBIT margin was very solid at 25.5% of sales. Our investments decreased further to a very low €5.9 million or 3.8% of sales in the third quarter of 2024. As I explained, we are well on track to sustainably reduce our capex ratio. However, it will not be every quarter that it's less than 4%. Our inventories came down by almost €7 million during the quarter. However, the inventory level is, of course, still higher than we wanted, and we will further reduce it in the next month. The adjusted free cash flow amounted to 45.5 million euro mainly due to the strong operating cash flow and low capex. Ladies and gentlemen, let me finish the outlook for 2024. The latest A global light vehicle production forecast by S&P has been slightly revised downward and shows a total production volume of 88.5 million new cars now, down by minus 2.1% versus 2023 volumes. The adjusted forecast reflects overall weaker demand for electric vehicles, the still lower market level in Europe and the US, as well as the muted economic and end-customer sentiments in most regions. Accordingly, the forecast for the automotive semiconductor market has been revised as well, now showing a slight growth of 1% year-over-year. Based on estimates by S&P, the ongoing inventory destocking effect is hurting market growth by minus 6% for the full year 2024. In these challenging conditions, we are performing reasonably well and better than many of our competitors. We are confirming our original sales guidance of between 580 to 630 million euros for the fiscal year 2024, and we forecast full-year sales in the lower range, of course, of this guidance. You can do the math by yourself. Due to the ongoing destocking and our customers' short-term audit behaviour, Q4 sales will not quite reach the level of the previous year. However, for the full year 2024, we still expect a small single digit growth compared to many of our peers that will actually shrink substantially. Even more important and a first real test of the resilience of our operating model, we still expect an operating EBIT margin of 25% plus or minus two points for the full year of 2024. Just as a reminder, the expected operating EBIT margin does not include any special effects like the extraordinary income from the closing of the sale of the Elmos wafer fab. Then, of course, it will be a lot higher, but it's less interesting on our structures. We also continue to expect significantly lower capex in 2024 compared to the previous year, and we are forecasting capex of around 12% plus or minus two percentage points of sales. The free cash flow in Q4 will be influenced by typical year end cutoff effects, working capital movements, the remaining payment of 56 million Euro by little fuse for the sale of our wafer fab, and actually substantial income tax payments based on our strong financial result in the previous years. We therefore expect a positive adjusted free cash flow for the full year 24, but only after including the effect of the closing of the sale of our wafer fab. Ladies and gentlemen, we are navigating these challenges I think extremely well, with a clear focus on cost control, operational excellence, strong execution, and with an outstanding team here at Elmos. The ongoing positive performance in the third quarter and the positive outlook for our anniversary year, some of you may know we are turning 40 as a company this year, this is a clear testament to our strength, our resilience, and our commitment to profitable growth. Elmos is well positioned to capitalize on structural trends as well, as on short-term opportunities that arise for innovative and agile players like ourselves. We are confident to continue our positive development and create sustainable value for our shareholders. 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 the star key on the telephone keypad. If you would like to cancel your question, please press 9 and the star key again. please press nine and star to ask a question. So if you would like to ask a question, please press nine and the star key on your telephone keypad. And the first question comes from Florian Sager. The floor is yours.

Good morning. Can you hear me? Yes, very well. Good morning, Mr. Sager. Good morning. Thanks for taking my questions. I got three, actually, and I would take them one by one. My first one would concern your midterm targets, and I just was curious as to how you got to the $1 billion in sales, what you were looking at.

$4.30 billion. Yeah, sure. I mean, we had that on our minds for some time, toying around with it a little bit. It's, of course, based on design wins. It's based on what we can achieve in different segments, how different segments grow as a trend grows. And all of that you put into an overall assessment of the situation.

Okay, understood. And then you talked about your China strategy, and I know you're going to go into more depth here at the CMD, but just do you already have some chips of yours being manufactured in China already? Is this the case? Because you said you're moving at China speed, just wanted to better understand what that means.

Yeah, I mean, we do have some chips that have parts of the value chain in China. We currently have a chip in development with a Chinese wafer foundry, but that is not up for delivery right now. So there will always be a mix of chips that have more local content, less local content, so it's a diverse portfolio. But I believe it is important to show that gradual expansion in the China local value chain as well as some first kind of lighthouse projects where you can show that you're actually doing things and things are running.

Yeah, that makes sense. No, very clear. And my last question would be, what are your thoughts maybe on pricing going forward? So I know that's probably difficult because you have very short lead times right now. But just for our understanding, do you think a double-digit price decline is realistic in 2025 or is that too pessimistic, just in light of everything that's, you know, all the news headlines?

Oh, you can have double-digit price declines with us if you only triple, quadruple or have ten times the volume versus last year, but I see very few customers asking for that. I think, of course, pricing is kind of back to the state we had prior to the allocation where we have serious discussions what the price should be and how we can develop. And these may have been more tilted towards the IC supplier side during the allocation, and now it's back to what it always was. I think generally that we will get some little efficiency out of the value chain, but then in the price negotiation is of course always concerning volume developments, it's concerning specific savings that you can have by very specific measures you may jointly do with the customers. Some have gold bonding. You may switch to copper bonding. There's qualification costs involved. Do you jointly decide to do it? Do you jointly decide it's not worth it? There are very kind of, I would say, fact-based discussions of what should happen, like it has always been. Okay, perfect.

Thank you so much, Mr. Schneider. Thank you, Mr. Sager.

Thank you. And the next question comes from Johannes Ries. The floor is yours.

Yes, good morning. First, congratulations to this outperforming sector. And that leads me even to the first question. Maybe you can give a little bit more background why you are performing so much better than really all of your peers. Is there a reason that some of your peers, like Melexis or ST, have signed more LTEs? and now they're falling off the cliff if these LTEs are ending and the customers have much higher inventory? Or is it that you less depend on e-mobility, especially in the power space, than others like Infineon or so? What is the reason? Or is it that you have maybe a higher percentage of ramp of new products than others? There must be something behind that to clearly outperform the sector. Maybe you can give a little bit more background on your view of what the reason is.

Yes, well, I don't want to pick on peers. I mean, if you kind of made a big bet on power semis rising very steeply with more and more EVs and a really kind of aggressive EV adoption curve, this may not be what we see happening today. So, You always kind of take what externals forecast, and then you make your bets. So I believe it's kind of nobody's fault if some companies that betted on higher EV adoption and will help the society a lot by providing power semis for these type of vehicle concepts. We also like EVs, as you know, and we are exposed to EVs, but we also have a lot of content in the ICEs. the switchover gives us less benefit, or you could also, as we can witness it today, see that we have less risk if that switchover is kind of delayed. Then we sell airbag chips into a normal car and not maybe two or three more into a modern EV. We, of course, also had our ramps now in the second quarter. We won business during the allocation based on our good delivery performance. where we, I believe, had a kind of mixed field between us and our competitors, and some did not so good, some did well. I believe we did extremely well in terms of serving our customers. So that certainly helped in convincing some people that Elmos is a very reliable, very dedicated supplier to our customers that makes a lot possible in times of need. We also feel the headwinds of the Q4. You have certainly calculated what our Q4 may look like. So we're kind of all on the same ocean. We are all swimming, sometimes at different speeds, but the big tides of this world move us all together. sometimes a little bit at a different pace, but we're not totally immune to what the big tides of the world are. But we do have a good growth momentum based on what we won, based on what we kind of were able to achieve on our product portfolio, which is strong and with the ramps gets a little better again. So we're kind of, relatively okay. I mean, can you be satisfied with low single-digit growth? Depends, right? Relative to others, I think we should be satisfied relative to what our normal year aspiration is. For sure not.

Great. Thanks for this additional information. Maybe on the pricing side, maybe on the other side of the chain, how is the development at the waiver prices at the foundries? Maybe in the more mature nodes, it looks like there is more overcapacity compared to the shortage we had one or two years ago. Is there maybe a price reduction possible there, or how is the situation?

Well, I mean, the foundry that is most written about is the Taiwanese foundry, right? Yes. and they said sometime during the year that they could envision, I believe, a 2% price down. This is all not finished, so what they're envisioning will come to, we don't know. But this is kind of, of course, always a bellwether for the whole industry. I do not see foundries kind of... going for incredibly low prices because they want to fill some fabs for a quarter or so. But you can at least discuss about the normal situation of price downs again. While in some years you also remember them, we had the discussion to limit the price increases somehow. And I don't know whether... everyone could succeed in that. So we are also on a new level of wafer prices, that is sure. But over time, we will also get them a little bit down again.

Great. Thanks. On the working capital, maybe next question. You said because it's still at a very, very high level, what is the target going forward and how fast you can reduce it? You moved off an inventory to a trade receiver, but this will go out. So will we see next year a clear reduction in percentage to revenue?

Yes, that is right. We will see a very clear reduction in percentage to revenue next year.

And so that must be maybe a clear positive operating free cash flow. It must be.

This is, as always, a good hypothesis. But, I mean, you will find, and I have to do the advertisement block again, for our capital markets. There will be a lot more kind of details and elements of our cash-related strategy, because, I mean, cash is, of course, inventory, and we will get inventory down in steps, but substantially also next year. We will also think about CapEx. You've seen our midterm target, and maybe there are even some years that can be below that. And then we have to think about taxation also, which is a place where our competitors are taxed at much lower rates, and we want more money for innovation and growth and all other good things. So this is also part of the cash equation, and we'll talk a lot more about it at the capital market stage.

I'm looking forward to this. Finally, only one short question regarding Rams. You have this record design over years now. And any idea, you will also dive more in detail next Monday, I think. But how maybe is this? Ramps are, since this design is moving to ramps, is it so that you stay at a high level or even increasing level of new ramps and new products in the mix of your revenue?

Well, the ramps happen pretty, I mean, we're a small company, so there's a little, not everything is averaging out at each moment in time, of course, because we're just too small for that. But there will be a continuous number of ramps. But it's compared – I mean, actually, design wins increased more than the number of new products we can do. So, overall, of course, we have to generate more revenue with a single IC development project. Okay.

Thanks a lot. That's all the questions.

Thank you, Mr. Ries.

So if you would like to ask a question, please press 9 and the star key on your telephone keypad. And there's a new question from Malte Schaumann. The floor is yours.

Good morning. First question is on some P&L items. The R&D costs have been below the last year's level after nine months. So what's your expectation for the full year? I mean, they decreased quite significantly quarter over quarter. And then secondly, the other operating costs, expenses had quite a high item during the third quarter. Maybe you can provide some more color on that.

In the other operating expenses, we actually had a little provision for various cost optimizations that we want to do. As you know, some cost optimizations also require some upfront costs. I don't know whether I should mention more details there, but when you to change the course of some employees' future, this has upfront costs. Then on the low R&D, this is not structural. We just had a little public money that we got this quarter and we say thank you for the money that supports our R&D and our innovation. And this comes a little bit sometimes in bundles. So our R&D quota just dips down for this quota. This is not structural and will not be the same in Q4.

Okay, so we'll bounce back to 17, 18 million approximately in the last quarter. Yep. Yep. Okay, then on cash flow in the fourth quarter, the tax payments will probably only be – or most could be seen in the final quarter, right, which will then present a burden to the cash flow generation.

This is a burden to cash flow generation. We commented on taxes before. I don't ramble about it, but I could. I really could because it's not right.

Yeah. Can you quantify the amount you expect for cash tax payments in the last quarter? Now that there has been quite a significant... It will be a higher double-digit value, I think. Okay. Then we already touched on the relative development versus the peers, maybe more general. What's your...

take regarding the near term do you have any visibility regarding the near term development going into early 25 so I mean maybe sequentially year over year growth so maybe you can share your I mean near term Mr. Schaumann if I only could think about the first quarter as near term I think more about the fourth quarter as near term yeah it's Some customers are really not behaving according to our wishes when lead time is concerned. And this is the politest thing I can say. So, no, visibility generally is not super high because there's a lot of short-term ordering and, yes, some people get away with it. Some people then also struggle because, you know, there's a wide... spectrum of ICs and some may actually be shortened. If you try to get them four weeks in advance, it's just a very bad idea. So some get bitten, but not too many. So it's a low visibility environment.

Yeah, okay. And I have a comment on inventory corrections. I mean, which customers are, I mean, we heard a lot about especially European customers cutting the most in inventory, Chinese performs somewhat better, so maybe your color on that?

I don't see that regional differentiation. I believe some Chinese are through, others are not through, but with the Europeans, I believe some believe to be through, and now look at the overall environment and look at the development of their sales and their OEM sales, and this is not as expected, so they I have the feeling they rather double down and think, okay, so what do we need to do towards 31st of December to have a little bit more healthy number there? So this is also what we kind of perceive, that the generally weak European economic development at these customers rather leads to a reassessment whether you couldn't go even a little lower on inventories than people previously thought would be good and necessary.

Would you expect that inventory headwind would ease somewhat, maybe not fully fade away in the first quarter, but would ease somewhat in comparison to what you see in the current fourth quarter?

I do think we've seen the peak of it. It depends a lot on the overall economic development. If things go down further, people will reassess again, but this is kind of unlikely. So the most likely scenario is that it now gradually eases over time.

Yeah. Okay. Then on the R&D guidance, below 10%, would you already expect that for 2025? Probably we are in a lower growth environment, but maybe then growth accelerates in 2026 again, so where you can share your expectation for next year already?

You know, generally I don't give a guidance, but I will make a little exception on the CAPEX, so your statement may well be correct.

Yeah, okay, good. And then finally, maybe talk a little bit about the design wins, how they progressed throughout the year and the third quarter.

Yeah, this is the thing we are most happy about. I mean, we're also happy about that things are generally okay, but the design wins are even on absolute levels. It's going to be a very good year.

Okay, sounds good. Many thanks.

Thank you, Mr. Schaumann.

So if you would like to ask a question, please press 9 and the star key on your telephone keypad. And there is the next question from Hubert Sanders. The floor is yours.

Hello, can you hear me? Yes, we can.

Okay, great. Yeah, so I have a few questions. Hi there, everyone. So, yeah, my first question is just on your Q4 guide, which is obviously better than FEARED. When we look at Molexis, you know, in H1, they were very confident this was a soft landing, no big deal. And then September to August, they got a massive change from the behavior from their tier ones and OEMs, particularly in Europe. And they've missed Q4 guide by 20% on the sales number. You haven't seen that. Why should we not be concerned that that won't happen to you in H1?

Well, I mean, it's not that we do not see headwinds. It's just that in the overall scheme of things, we did it a little differently. I mean, we had a guidance. We had a reasonable range, which we thought reflected the insecurities that we had in February about the development of the year. And we do acknowledge that we will not come out in – the midpoint or above the midpoint of our guidance, which was, of course, I mean, if you asked me on the day we gave the guidance in February, I would have asked you, so what do you want? I would have always said, well, midpoint or above, of course, right? And this is not where we are. But we gave the guidance kind of knowing that it may be a very dynamic year and that in February we really do not know everything that happens. may happen during the year, good or bad. This is why we gave the range, and we'll come out within the range. So there was some truth to the not knowing, and there was some truth to our guidance. But we are not, I mean, we are a little bit swimming on the same ocean, of course, so we also have the these headwinds, we just had another way maybe of communicating around it. It's not that it's structurally different.

Got it. On the 2030 guide, I know it's just sort of long-range forecasting, but historically you talked about 2% to 4% content growth versus LBP. It feels like you're now moving to an era of perhaps of that 9.5% CAGA growth from this year to 2030, you're looking at something like 1% LVP growth, maybe 6% content growth just because you're in the good areas, lighting, ultrasonic or whatever, and 2% share gain. Is that the right way to think about it? It's mainly share gain and content growth in things like ultrasonic sensors and lighting, or is there something else? Thanks.

Well, for today I would say broadly yes, but for all the details on the products, the segments, how they develop, you're of course invited next Monday. But yes, it is a little vehicle growth. It is a little new applications also, which were not in the equation, I believe, which now and then do develop significantly. There's not too much share gain in it, but sometimes you do take share. Sometimes it's just that you're in the right segments, and you're exposed to the right segments, and then this looks like you're taking market share overall, and yes, you do, but it's just that you're in good segments that develop well, and you play these segments well. So generally, the assessment is not wrong.

But there's no swing back to ASIC or something. Historically, you did a lot of ASIC deals for tier ones.

Oh, no. Nothing like that. No, no, no. There's no swing back to ASICs. I mean, we still like to do ASIC deals when it makes sense. If there's very big volume and certain special wishes, you can cater for that, right? It's a good thing. But it's not the norm, and I do not foresee that happening. this will be the – for sure there is no swing back. It will continue to be part of our business, but there's no swing back in terms of share.

And last couple of questions. On the 25% EBIT margin, you know, I guess given you've yet to really benefit from the fabulous model, and by 2030 you'll be fabulous, so there'll be much less depreciation, et cetera, why is your – a bit margin not going up by more, particularly given the sales number. I would have expected a higher margin, but a much lower sales number.

Well, we think in this challenging environment, let's kind of keep the margin, defend the margin. You know, if we can make it a little better, we are not opposed to that. You know that, of course. But for a midterm target... we shouldn't also have too much things that are too challenging. We are happy to outperform. We're happy to adjust if we outperform some years, but now let's first make it work next year, the year after, and that year, or maybe after two years we can reassess. But we think in this current market environment, keeping the margin is already a little bit of a success. And also, we want to improve cash generation a lot, which is a bit focused. So, yes, you're right. You could be even more aggressive, but I think aggressive growth will benefit everyone a lot more than kind of getting a point or two more out of EBIT margins.

Great. Just last question. I noticed one of your historical partners, BMW, the CEO, was very public saying that the ICE phase-out in 2035 should be delayed. Do you think that will have an impact on the way OEMs line up their vehicles when there clearly isn't actually that much elasticity of demand for EVs? So do you think that would be

something that could shake things up and perhaps be good for you or or you think you're still agnostic i think overall we're still agnostic if you give some more years to the internal combustion engine i believe it may be a little windfall profit for us because we are well represented in a way and and a lot of old ships um I mean, if you add only a year or two or three, usually no one wants to invest new EE architectures or new chipsets or so. I mean, of course you don't do that just for a prolongation, a little prolongation of life. So we do see that some customers ask us to just deliver an old chipset a little longer because they don't want to invest R&D on the old cars So this may be actually on balance be a little positive for us, but it's hard to quantify and I wouldn't overstate the importance.

So if you would like to ask a question, please press 9 in the star key on your telephone keypad. So at the moment, there are no further questions.

Great. So, ladies and gentlemen, the next Elmos highlight is just a couple of days away. So please do register for our Virtual Capital Markets Day on November 11, next Monday. You are all invited. It's going to be a great event. And, of course, I hope to meet many of you in the upcoming Investment Conference.