Elmos Semiconductor Ag

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE conference call regarding the Q1 2025 results. At this time, all 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 from Leverkusen, and welcome to the Elmos conference call for the first quarter 2025. Thank you very much for your participation and your interest in our company. I would particularly like to welcome our new analysts, Amelie and Gustav from Berenberg, who have started to cover Elmos last week. So together with our longstanding analysts, of course, welcome to all of you. They provide a broad coverage for investors. Ladies and gentlemen, in a very challenging environment, I can report a solid start into the new fiscal year in line with our expectations. Let me start with an update about the current market environment. The automotive semiconductor market is still impacted by lower order levels as customers continue to reduce their inventories. Visibility is also still weaker than normal due to the ongoing short-term order behavior. In addition to the overall subdued market development, the rising geopolitical tensions, trade wars, or however you want to call it, potential tariffs have led to further increased uncertainties in the last weeks, as of course all of you know. To quantify the potential direct and indirect effects of the new tariffs on cars, automotive components, or semiconductors is actually not really possible, and the situation is changing on a daily basis. However, if semiconductors would be included in the new tariffs, the direct impact on Elmos would be very limited. as we ship only 2% of our products directly to customers located in the United States. The current market and economic climate requires a high degree of flexibility and responsiveness from the entire Elmos team. Let us dive into the Q1 now. As communicated before, we have expected that Q1 2025 will be the weakest quarter this year, still notably impacted by the stocking effect. Sales came in at 126.9 million euros, minus 7% year on year. This represents a lower level compared to the last quarters, but it is, on the other hand, fully in line with our sales planning from the beginning of the year. So the good news is that we are not experiencing unpleasant surprises or major postponements of orders, and we are seeing gradual upwards trend in our order book for the next quarters. From today's perspective, we expect higher revenue and clear sequential growth in the second quarter. And also, you may have already read it, our book-to-bill ratio is greater than one. Growth margin was 43.4% in Q1 2025, impacted by some fixed cost effects, especially in the testing area due to the lower volumes. EBIT was €25.6 million in Q1 2025 compared to €33.8 million one year ago. This is mostly as a result of lower volumes and the slight increase in R&D expenses. The EBIT margin then decreased to 20.2%. As you know, we are responding to this with consistent cost-cutting measures. We initiated an optimization program that will lead to noticeable reductions in personnel, and also material cost in the coming quarters. The associated reduction in personnel, also at the Dortmund site, of course, will be implemented through mutually agreed solutions with the employees affected. There will be no additional one-time cost, I believe it's worthwhile to add, related to this optimization program, as we have booked the corresponding provision of around 14 million euro in Q4 last year. At 13.5 million euro or 10.6% of sales, Q1 CapEx decreased year over year. Please also note that we have acquired an office building directly at our Dortmund campus for around six million euro at the beginning of the year. And actually the reason why we acquired real estate was that it's directly next to all the existing campus. So we have included that in our full year CapEx guidance we want to exit some of our rented satellite offices in Dortmund and consolidate around 200 employees actually in this new building. So excluding this real estate purchase, the operational capex was 7.6 million Euro or 6% of sales. If you have been following Elmos for some time, then you know that I would normally now have to report a weak cash flow as we did that for some time. Not today. You may have read the adjusted free cash flow developed really nice in the first quarter, and we are at 21.5 million euro, of course, significantly higher than the previous year's figure, which was minus 48.9 billion euro. So, ladies and gentlemen, let me finish my presentation with a market outlook and our unchanged guidance for the fiscal year 2025. According to S&P Global, the latest global light vehicle production forecast shows a total number of 87.9 million new cars, down 2% compared to 2024. S&P lowered its most recent forecast by around 1 million vehicles, mainly in North America as an initial reaction to the new tariffs. So what is our outlook for financial year 2025? Please note that the potential impact of the new tariffs and future tariffs or developments that may come and may be associated with it and the increasing trade conflicts with the United States or a global recession cannot be fully estimated, and therefore we do not include that in our outlook. We will, of course, give you an update should this become necessary in the future. So for the current fiscal year, we confirm our financial outlook published in February. We expect full-year sales in 2025 of €580 million plus or minus €30 million. With more or less flattish sales at the midpoint of our guidance, this would be better performance than our closest peers. We expect a high single-digit sales decline on average in 2025. Q1 was the weakest quarter this year. We expect strong sequential growth in Q2 and a better second half compared to the first six months. We are confident of our resilient operating model and plan to keep our strong profitability with an EBIT margin of 23% plus or minus 3 percentage points for the full year 2025. Again, this means a better performance than most of our closest peers. Similar to 2024, investment in new machinery will be limited due to the lower growth, OEE optimization, as well as test time reductions, and we expect APEX in 2025 to be around 7% plus or minus 2% point of sales. And this, of course, includes the village. Based on the strong cash performance in Q1, we are forecasting a positive adjusted free cash flow in fiscal year 2025 of 7% plus or minus 2% point of sales, supported by lower working capital, low investments, and we talked about it, and I mentioned we are speaking to you from Leverkusen today. So let me summarize. In an ongoing, challenging environment, we were able to achieve a solid start into the new year. As expected, sales and earnings were impacted by lower volumes, but we were in line with our expectations. The program to optimize personnel and material costs was successfully launched, and our measures to improve our cash performance are also showing positive results. Ladies and gentlemen, we are convinced of our operating model and strategic positioning and are confident that we will be able to achieve our ambitious targets. Our approach, focusing on profitable growth, cost discipline, and operational efficiency, combined with a clear focus on a better cash generation, will enable us to create significant value for our shareholders, increasing the valuation of our company and create attractive opportunities for capital allocation. 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 3 and star on your telephone keypad. For any questions, please press now 9 and star. And the first question comes from Malte Schaumann, Warburg Research. Please go ahead with your question.

Good morning. A couple of questions from my side. The first is on the U.S. tariffs. Have you seen any change in the ordering behavior from your customers? What's the visibility? I mean, maybe it's difficult to talk about visibility, but, yeah, any change in ordering patterns from your customers during the past couple of weeks you had expected experience?

Well, we do not see a change in ordering patterns, but, of course, the U.S., China customers argument that is going on. While it is not reflected currently in our order book, we do not see any significant change there. It may even, for European players, offer chances in countries like China. Certainly some companies, and of course it's not the fault of a US chip company, they are just bystanders of the Trump policies, but nevertheless their kind of friendliness score may have decreased a little bit in China in the recent months. So maybe there are additional chances for those from more friendly nations.

Okay, so China had probably been pretty strong during the past couple of quarters and then might be for the upside due to the situation.

China is very dynamic and offers opportunities also this year.

Okay, good. Then on the inventory headwind, can you elaborate a bit more if that is playing out as expected? So easing situation going forward, and then specifically what's maybe – I mean, you always said to expect sequential growth in the current quarter. You can elaborate on that. What's the magnitude, low single digits, mid single digits, higher single digits, one could assume going into the current tier two?

Usually I should at this point in the quarter say we know it all and the case is we don't know it all. If we look, we have a million or more short-term orders each week. which are partly a little bit chaotic because, of course, some parts we can deliver, some parts we just can't deliver because it's kind of exotic old parts that would have been, or the customers would have fared a lot better would they have stuck to the lead time. But then, you can negotiate a later date. So we are operating in a very dynamic environment. What we're pretty sure about is that this running quarter will see substantial growth. It may be high single digit. It may be around kind of last year's level, maybe a little bit above, maybe a little bit below, but it is super dynamic. So we face a lot more uncertainty than before actually.

Okay. And with respect to the inventories, would you say that these should be more or less clear by mid of the year?

It is hard to say, but kind of the, I don't know whether we usually call it like that, but the rush orders seem to be increasing a little bit. Okay.

And then on the quick word on the design wins, how that developed during the first three months of the year or four months?

Oh, that is stable and nice. And I mean, we only have more or less half a year. But we are very positive. Okay, good. Our product portfolio is working excellently. There's no concern. Okay. Okay.

And the final question on the other operating income that was a bit higher in the quarter, what did you account for?

Yeah, we had some provision releases. Just you know that we do the restructuring thing and we are actually make quite some progress in finding voluntary agreements with employees and that just reflects the current progress.

Okay, understood. Okay, that's it from my side. Many thanks.

Thank you, Mr. Schaumer.

And the next question comes from Yanis Reis, Apus Capital. Please go ahead with your question.

Yes, good morning. Although some short follow-ons from my side. First, Arthur, the ramps of the design events of the past are developing like planned, or is there any maybe push-outs or maybe even acceleration to the current situation?

Well, by and large, things work out as planned. Some people are having tried a ramp this year. I mean, for those that have been to the Shanghai Auto Show, they You will certainly have noticed, for instance, BYD's God's Eye feature, where in three levels, all of them with a lot of ultrasonic sensors, which we are very happy to supply, produce level 2.9 assisted-slash-autonomous driving in the Chinese market and across all sizes of cars. So from the Dolphin, the very small one, to the very big BYDs, will be in every car. So this, for instance, is a ramp this year, which is challenging, but very satisfactory. So, by and large, things work out as planned. Some things are more dynamic and chaotic, and some things are... a little bit subdued, but if I take kind of the sum of all things, this is a very solid and good development.

Great. Maybe more technical or maybe from the bigger side questions, you have as assumption in your forecast the Euro-Dollar of 105. We have now maybe a much stronger Euro. If we stay at this level, what impact it could have on your forecast?

Yeah, currently we are, I mean, we are mostly structurally in a natural hedge. If we buy a little less wafers like today because we want to decrease our inventories, the U.S. dollar costs are a little lower than structurally or consistent kind of with structural run rate business. So we are even a little dollar long in the Q1. In any case, almost half of our revenue is dollar. So while the implication on profitability of the dollar is not so large, on the revenue, the dollar has, of course, a substantial impact.

Okay. But bottom line, it's nearly hedged.

So that's important. On the profit line, yes. And yet it's changing our dollar assumption to maybe 110 or so. But who knows? With so much volatility coming out of the Washington area these days, we are not really sure whether it's worthwhile to change it right now because it could be all wrong and then you change to here and there. So since the impact is not so large, we just kept it at 105 for the time being.

On the cash flow side, you mentioned very strong cash flow. I remember earlier your statement during the full year call, of course, with 24 figures, that maybe your forecast was a 7 plus minus 2% of free cash flow. It's a little bit cautious. If I look to the result in the first quarter, percentage-wise, you have been much more successful. Yes. Is that maybe the first sign that really your forecast, after all, maybe we have seen at the cash flow side in the recent years, is a little bit cautious that there could be upside? Or does that affect Q1 in the cash flow?

Well, actually, I mean, we had, I believe we had positive and negative effects in the cash flow in Q1. One of the effects that rather held cash flow down was our little buying exercise of the building. I mean, forgive us, real estate may not be always a great investment, but if you can get a building that is right next to your campus and there are so many satellite offices you get rid of and you get so many people together again in the same office building and next to each other in the same office space, this is just a unique chance to make the company a little bit better. and a little bit closer together and also showing our commitment to the Dortmund site. So that's why we thought it's a wise decision to spend the money on the building, but that actually goes out of cash in Q1. So if we would have state renters, we would have another 6 million more.

Okay. So for cash flow, free cash flow was 15% of sales or something like this in Q1. Not so bad.

It's a very satisfactory number. We like it.

Okay, super. Finally, your R&D quota has been higher at 13% something as a special effect because in absolute terms, it's higher than every quarter in the last year.

Yeah, just a little bit. It's pretty normal fluctuation. So over the year, I would expect a pretty normal R&D quota, maybe 11 or 12 or so. Now, of course, revenue was lowest in Q1. R&D is not so flexible that it fluctuates with revenue. It was a little higher, but, I mean, there's nothing structural or big around it. So you can expect a pretty normal R&D quarter over the year.

Okay. And really, finally, your cost measures are definitely – coming more step-by-step, are more to see in the bottom line the coming quarters, that's the part where you're optimistic after maybe a lower margin in Q1, which is partly based on the top line, that your margin get better in the coming quarters.

Partly top line, partly... Yes, this is pretty much... I mean, the cost matters. Some are a little earlier, some are a little later, so you kind of build it up. you can't have everything kind of like a schedule, end of first quarter, everything starts and then it runs. On the personnel, it just depends on when people leave the company and do other things. On material cost, it's largely a negotiation point with certain suppliers and there are also then different dates where these things set in. So they really build up and as a company we put a lot of effort and also think it's, I mean now is a very good time to discuss these things. We are not really growing this year. We have all the reasons to ask our suppliers for support and of course we're doing that.

Great. Thanks a lot.

And the next question comes from Abjarit, MWB Research. Please go ahead with your question.

Hi, Arne. Good morning, everyone. I just have a question regarding the demand, underlying demand. Is the expected sequential acceleration in the demand in the upcoming quarter is driven by the using inventories by customers only or is it also some uplift in the underlying demand?

Well, I think it's both. It's a little ramping product and it's a little returning to more normal, at least more normal order volumes, more normal order patterns. I mean, I tend to complain about that and Most of our customers are behaving very, very well and we have very good logistics arrangements with them and everything is okay. It's just some of them are very short-term and this is what we complain about. So volumes more and more return to normal volumes. Order patterns are sometimes a little bit short-term oriented still. but most people kind of recognize, particularly after they have the experience that a very short-term order may not be executable. It's a learning process that pushes people back to the old days.

Okay. So lastly, you mentioned or it was mentioned that in Q1 at least 60% of customers are ordering less than usual and at a shorter than normal lead times. Is there any improvement like in the number?

Yeah, we don't do these statistics every week or so. So I actually do not have an updated statistic on that for you. I would hope for gradual improvement throughout the year, as we all learn that it takes quite a long time to produce a semiconductor. But we actually don't do this statistic so often.

Okay. Thank you so much, Arne. Thank you for your question.

And the next question is from Robert Landers, Deutsche Bank. Please go ahead with your questions.

Hello. Good morning. I have quite a few questions. Could you just – first question would just be talk about your China order strength versus your non-China order strength in your bookings. Can you give us some kind of quantifiable, whether it's double-digit increase in China, single-digit decline in non-China? Just can you give us some color just to understand how China is driving your bookings or not? Thanks.

Yeah, China is actually experiencing double-digit growth currently. On the other hand, of the kind of non-compliant orders, China has its fair share, if that is polite enough. While Japan has kind of almost no share, no share at all, actually, in non-compliant orders concerning the lead time. China takes a little bit more than the fair share it would usually have globally. So it's very dynamic, but it's also very successful.

Right. And then on your competitor, Molexis, they're prepared to use local fabs in China. I don't think you're doing this. So does that mean that now that you're in China, you need to use local fabs?

Oh, we have the first product in development in a local fab. So we will also use local fab. I think even we, I don't know whether this is the right discussion, whether who's kind of half a year ahead or not ahead. But our localization efforts in China are developing quite nicely. We sell, now it's actually millions. of chips through our local brand entity, TYChain, which is one kind of spare head of localization. But of course also the Elmos brand is developing nicely and our local organization keeps growing. We will for sure add more local capabilities throughout the year. So this is a very, very positive development of the China business.

And, I mean, typically Chinese foundries tend to be doing commodity processes. Does that mean, therefore, that most of your products are supported by relatively commodity processes, or do you still need your MagnaChips and Samsungs and TSMCs of this world in the long term?

Well, I think as a fabless player, you should have a resilient value chain, which includes Chinese components, which also includes non-Chinese components. We have some U.S. customers who specifically would not favor the Chinese fab. We have some Chinese customers who favor a Chinese fab. We have some other customers who do not care at all or who have a certain preference or want to have certain ideas about resilience. So in structuring your value chain, I believe you have to take all these customer demands globally into account and then build a kind of high-performing network. And these networks must contain Chinese elements and it must also contain non-Chinese elements.

How do you avoid a kind of grey market appearing for your products where people try and arbitrage, you know, presumably the lower Chinese-made price versus the foreign price?

There's no discount on pricing. It's also not necessarily that all Chinese vendors will follow a low-price strategy.

Okay, so you're not seeing incremental pressure from Chinese customers like, you know, that report about BYD asking for 10% price cuts. You haven't seen any of that?

Well, I think generally the China market is a price-sensitive market, but for reasonable and good products, a lot of people are willing to pay what is globally paid.

Okay.

And then just tell us what has happened since Liberation Day in terms of order patterns. I mean, I would assume your U.S. customers might be taking advantage of, I mean, maybe taking a view to buy and build up more inventory. I know there's a sort of exemption today on semiconductor products, but have you seen any regional variation because of Liberation Day?

Well, some Tier 1s may see that a lot stronger. I believe some OEMs have shifted kind of in a short-term shift, shifted production volume to do a little short-term optimization. Since through the Tier 1s there's a certain filter function to our revenue and our orders, we do not see anything of that. we have only 2% of our revenue directly to the US and then these chips are exempt from the tariffs. So these customers have not changed their behavior. Maybe at some point they will if the chips get into more focus. On the other hand, I feel that the US government may have received some feedback or learned something about the potential effects tariffs can have. So maybe it was good that the chips kind of made it only into the second or third round of the discussion because you may learn something out of the first round of discussions and impact. So let's see where that really ends. Okay.

Just lastly, on Semi, which I think you compete with in ultrasonic sensors, yesterday they were saying they are doing selective price cuts to defend share. Is that a comment you think that's specific to the power discrete market where you don't play, whether it's because of Chinese competition or something else, or do you think there is incremental price pressure in the last three months in terms of what you sell?

We... We see a very reasonable kind of low single digital price development this year. So we don't see it. So your guess that it must be more in the power field is probably right. Also, what we hear about the market and I mean, the competition also in China on the power side is certainly intensifying. But this is just hearsay. It's not our business, right? It's just what you learn when you talk to people along the road.

Got it. You mean from Chinese auto companies, not China's. Yeah.

Okay.

Thanks a lot.

Yeah. Also, I mean, one thing that maybe noted that on Semi was maybe stood out as an aggressive player during the allocation phase also on pricing. At least some customers reported. I don't know. I have no data. But maybe if you kind of overdid it in the past and you need to adjust more now, right, it would be logical.

At the moment, there are no further questions. If you would like to ask a question, please press 9 and star on your telephone keypad. There are no more questions from the audience, so let me hand back over for closing remarks.

So at the end, I would like to remind you that we will host our virtual annual general meeting of the Elm of Semiconductor SE next week on May 15. I hope that many of you have registered to our AGM and will support the proposals of the management and the supervisory board. Perhaps we see you at one of our upcoming roadshows and investment conferences. A detailed overview of our IR activities, by the way, can be found in the financial calendar on our website. The next regular quarterly reporting is scheduled for July 31st, 2025, with the publication of our half-year results. So for today, thank you very much for your participation and your interest in Elmos. Goodbye from Leverkusen. Take care and stay confident.