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.