Elmos Semiconductor Ag

Morning, ladies and gentlemen, and a warm welcome to the Elmhurst Center Conductor S.E. Conference Call regarding the results of Q2 2025. At this time, all participants have been placed in a listen-early mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Dr. Arne Scheider, C.A.O.

Ladies and gentlemen, good morning from Leverkusen and welcome to the ELMOS conference call for the second quarter 2025. Thank you very much for your participation and your interest in our company. Today I would like to welcome our new analyst, Weihl-Harder from Metzler, who has started to cover ELMOS since June. We already know the name, but the company is new and we very much appreciate the uptake of coverage. Ladies and gentlemen, we can report an encouraging revenue growth for the second quarter, although we continue to face ongoing geopolitical challenges and quite dynamic markets. So let me start with an update about the current market environment. The stocking activities in the automotive semiconductor market are slowly but steadily decreasing. Our customers are now increasingly returning to normal order levels as they continue to reach their desired inventories. Nevertheless, visibility remains low, and some of our customers still order on a very short notice. We also do see an increasing amount of rush orders, where people exceed the level that they actually planned for this year. The economic and geopolitical environment remains challenging. In particular, the Chinese automotive market has recently shown an even more dynamic growth momentum than in the past. But there is also increasing competition among Chinese OEMs, especially in the field of electric vehicles, so the new energy vehicles. This fierce competition leads to faster innovation cycles, increasing price pressure and ultimately will result in consolidation among the automotive OEMs in China.

And of course, everyone desires local chips.

We have adapted to these latest developments very quickly and are going to realign our Chinese footprint even faster and more consequently than originally planned. We will further expand our organization in China and establish a fully functional local company with all relevant business processes, including the development of ICs for the local markets. The entire Almost China business will then be handled fully locally. The new structure offers the flexibility needed to deal with future market developments and geopolitical scenarios. We want to continue our great success in the Chinese market and secure our strong position. To do this, we build a local and agile organization in China, and we do that at China's base. Before we talk about the second quarter results, I would like to comment on the latest Paris deal between the EU and the United States. According to the EU, there will be a basic tariff of 15% for the majority of EU exports going into the US. This rate applies across most sectors, including cars and semiconductors. This is all we know so far, because all relevant details will be analyzed only in the coming months. So, it is still not possible for us to quantify the potential direct and indirect effects of the new tariff on cars, automotive components or semiconductors. We also do not yet know whether analog mixed signal semiconductors will actually be included and what will be the basis for the tariff, as the majority actually of the value added of LMOS chips is generated outside the EU. However, let's assume the worst. If LMOS semiconductors were included in the new tariffs, the direct impact on LMOS would be very limited, as we only ship 2% of our products directly to customers located in the United States. And I have serious doubts that they wouldn't need to pay the tariffs that we pay and reimburse us. Lastly, I would like to inform that we have successfully transferred our SAP R3 system to S4 HANA. After more than 30 months of intense project work, the go-live of the new system took place in the early morning hours of July the 7th. So far, the new system is running, a great success for the entire project team, which includes more than 200 internal and external experts. However, we, of course, have to monitor the performance of the new system very carefully, at least until the end of September. This is called hypercap days, where the system is stabilized and any defects will be fixed. We budgeted some money first, so let's see whether we budgeted enough. So the SAP transfer has and will continue to impact our financial results, and we hope that everything will run as smoothly as possible. We saw some impact on Q2, and I'll actually comment on that a little later. Let me now continue with the financial highlights of the second quarter 2020 point. Our Q2 sales developed better than expected, driven by a strong demand for our innovative ICs. Compared to the previous year, sales increased by almost 3% to 145.7 million euro and almost by 15% sequentially. The strong pay performance is mostly driven by our Asian customers, whereas Europe and the US are still lacking in terms of growth. The weaker US dollar had a negative impact on our Q2 sales, almost 3%-ish points. So, as X adjusted, Q2 sales growth would have been even higher, with around 5% year-on-year and almost 20% versus Q1 2025. The growth margin was 41.2% in Q2, slightly lower than Q1, impacted by fixed cost effects and higher material costs, including higher gold prices in assemblies. EBIT was €30.1 million in Q2 compared to €35.9 million one year ago. In addition to the effects of the cost of goods sold, EBIT was impacted by special costs for the SAP transfer, consulting costs for the expanded China strategy as well as negative FX effects. As a result, the EBIT margin reached 20.6% in Q2 2025. Just as a side note, without the negative FX effect, the EBIT margin would have been around 24% in Q2. So, we are responding to these developments with consistent cost-packing measures and selected price increases to pass on higher material costs to our customers. I mentioned the gold issue, for instance. Our cost optimization program will lead to noticeable reductions in personnel and material costs in the coming quarters. of 3.2% of sales the Q2 capex decreased significantly. At 6.6% of sales after 6 months we are in line with our full year capex expectations and please keep in mind we bought the building in Q1 which was quite an expense. The transfer of our SAP system has not only impacted our P&L, but has also a noticeable effect on cash flow at the end of Q2. In preparation for the go-live, we had to freeze the system before the cut-off, resulting in higher working capital at the reporting date. So, while we had pretty good cash flow in April and May, we estimate this special impact in June at around 15 million euros. Despite the lower free cash flow of 0.5 million euro in Q2 then overall, we are still on a very good track for sustainable improvement this year, with a free cash flow of 22 million euro or 8.1% of sales after six months. And that includes, of course, the negative effects of the SAP changeover, which are only temporary offers. Ladies and gentlemen, let me finish my presentation with a market outlook and our guidance for the fiscal year 2025. According to S&P Global, the latest global light vehicle production forecast shows a total number of 89.9 million new cars, a slight increase versus the last forecast, still virtually unchanged versus 2024. S&P expects a plus 4% increase in China and minus 3% in Europe as well as minus 4% in the US, which is mainly a result of potential new tariffs on cars and automotive components. The good news is that S&P has upgraded its forecast in the right direction. Still, we think markets are volatile and visibility is, of course, more limited than it was before. Regarding our outlook for the year 2025, please note that the potential impact of the new tariffs and increasing trade conflicts with the U.S. or a global recession, of course, cannot be estimated and therefore are not included in our outlook. I believe a lot of people are in a positive mood concerning US trade policy, but you never know, right? We will, of course, give you an update should this become necessary in the future. Our four-year guidance from February 2025 has been adjusted regarding the US dollar exchange rate. Previously, it was based on a price rate of 105 euro to the US dollar, and now we base it on 1.15. However, Elmos continues to expect sales of 580 million euros plus or minus 30 million euros for the fiscal year 2025, and that's despite the new exchange rate assumption, which would imply a negative impact on sales of around 25 million euros. So for the mathematically inclined, you could say that we just increased our sales guidance by 25 million euros. We also continue to expect an EBIT margin of 23% plus or minus 3 percentage points of revenue However, based on the EBIT performance since the beginning of the year, and in particular due to one-time effects mentioned above, we think it's currently more likely that we may achieve the lower half of the forecast range for the full year. Overall, our full year guidance would be a better performance than most of our closest peers, of course you know, which expect a high single-digit sales decline on average in 2025 and a much more significant drop in profitability versus last year. Investments in new machinery will be limited as we continue our successful OEE optimization as well as tech time reductions and we expect CapEx in 2025 to be around 7% plus or minus 2 points of sales. Based on a solid cash performance in H1, we are forecasting a positive adjusted free cash flow for 2025 of 7% plus or minus 2 percentage points of sales and the CapEx and cash guidance is of course unchanged. So let me sum up. In an ongoing challenging environment, we have achieved a strong top-line performance in Q2. We are confident that the inventory adjustments will continue to supply it and all the levels will continue to improve. However, we have to manage significant market and geopolitical dynamics, leaving some traces on profitability in the short term and forcing us to react. Ladies and gentlemen, we are convinced of our operating model and strategic positioning, and we are confident that we will be able to achieve our ambitious targets in 2025 and beyond. Our approach focusing on profitable growth, cost discipline, and operational efficiency, combined with a clear focus on a better cash generation, will continue to increase the valuation of our company and create attractive opportunities for capital allocation. So, for now, thank you very much. I would like to open the floor for questions.

Dear ladies and gentlemen, if you would like to ask a question, please press 9 and then the star key on your telephone keyboard now to enter the key. I repeat, the combination is 9, star. If you wish to cancel your question again, please press 3 and then star. But for now, please press 9 and the star key. And we have the first question already in coming. It is from Johannes Christ of Apus Capital. Over to you. Please go ahead.

Yes, good morning. Congratulations to good top-line development. A couple of short questions. I will try to be fast in that open center call for the other participants. First, maybe on this one-time effect on the margins. Gabi, you got it right that the strongest one-time effect is the Fx effect. Like you mentioned, the margin effect in Q3 was that you would have achieved 24% without the Fx effect. What are the other one-time effects? Is it also the AP transformation or anything else?

Yeah, you're right, ethics is big and SAP is also very noticeable. We also spend more on goals than we did in the past and we are still working on some compensatory measures. We spent some contracting costs on our new China setup, which we also want to kind of get forward at China speed. this is one item and the rest I believe is smaller.

And also maybe there is some speculation that maybe there is more price pressure or margin pressure in China because of the competition between the players and overcapacity and so on. What is your situation and what are you facing in China on the margin and pricing side to make this clarification?

I mean, China has always been a very tough environment, but they also value innovation and the best product. China, I believe, is the market that can be described in their buying behavior as making a list of who's number one, number two, and number three in the market, and then just talking to these. And then of course it's also a question of price once you've settled on the engineering issues. So yes, China is a tough environment, but you can see that we are excessively successful in China because this is really a big source of growth. If now and then we have to make a little compromise, we do, but generally we steer our course.

Okay. To make it very clear that not the speculation in the market, your lower market size has nothing to do with market pressure or price pressure from China. Are there other reasons you mentioned before?

Are there some main reasons for this? Well, if... I mean, having... We fight in all regions to kind of extend our share and to be successful. So it would be completely wrong to say our lower margin guidance is mostly linked to China. China has an influence, the rest of the world has an influence, the one-time effects I mentioned have the most influence of all. So it would be a little short to say the pricing environment in China, because then you want to explain 100% and then you only, I mean, this is what you can explain not a lot with. So no, this would be the wrong connotation.

And on cash flow, you mentioned this special effect in receivables, also this, yeah, that you bought a building, which was also in the pre-cash flow. Therefore, as this was one-time effects, you threw in, I think, the receivables, now maybe coming to a lower level in the second half as the system is up and running. But there will be maybe some free cash flow in Q2 will be an exception and will be definitely the lowest free cash flow in the quarter since this year.

This is very likely. I mean, the thing is, we bought the building, by the way, in Q1 already. But due to the SAP changeover, we paid some guys that we wouldn't usually have paid. But the thing is, if you, yeah. But it's quite complicated to migrate all that data. And then for a week, you can do manual payments, but nothing system-based. So there is a strong rationale to pay a lot of people before you change over. Even if it's a little early, even if that hurts cash flow in Q2, Because you need a smooth cutover and you do that with the minimum amount of data that is critical payment data. So if you kind of pay some people even before it's due, it's a clever strategy. And of course, this is not structural. This only affects one quarter when you have little problems with incoming payments in this cutover phase.

so the assumption that the Q2 is the worst test performance is very justified super very quick final question design in the first half and the second quarter nothing said to this maybe update on this point because it's longer term future very helpful regarding the year 2030 Well, let me put it that way.

If the second half develops exactly as the first half, everyone on the call is invited to join for a little bottle in Liverpool or Dortmund. But it's too early to say, right? Because I don't know about the second half. But if... You know, the... There are a lot of things you should be cautious about, but this is something we may open a bottle up.

Super. Finally, the special chart on the topic of robotics, that could be also a very interesting opportunity, maybe in the mid to longer terms of their business. Okay, they are more in the center of business, but actually I could maybe imagine that could be also an interesting opportunity outside the automotive space. Or is it maybe different because they are in a... No, no, no, not at all.

We only wanted to tell people about robotics later. Well, I can do it now. We think robotics is a super interesting field because what currently happens in China with human and robots is great. And we saw a lot of these robots on the Shanghai Auto Show already. And if you go more towards the robot people, you will see more and more of them. They will be at an attractive price point. I think they will have huge market success. I mean, not next quarter, but I mean, China's speed is quick. So expect a lot to come. So we are talking with various potential customers. But today, of course, there is no volume because today everyone is developing and so the robotic sales of Elmos in 2025 will be very limited if anything at all. But let's see where that goes. We just don't want to ice the topic so much because it's not short term. But in the mid and long term, this is a super interesting topic and we are actually working, we're putting quite a lot of effort into that topic.

But is robotics in any kind included in your 2030 ambitions?

Not formally, but currently it looks like that it may well contribute something.

Okay. It could be another one right off the page.

Yeah, I mean, it was not kind of hard. It was not so big when we first told you about our 2030 ambitions. But I think it's a super interesting field, and by 2030 it should contribute.

Thanks a lot for these very concrete and clear answers, and good luck for the second half.

Thank you. We're on a roll.

It's good. Okay, I see.

Thank you very much. So, moving on to the next question. The next question comes from Malte Schoeman of Wabo Prefetch. The floor is yours. Over to you.

Good morning. This question is also on the growth mark. I mean, you mentioned rising input costs and then you referred to gold. Is gold the only factor that is leading to rising input costs? Are you seeing other cost limitations, lack of pricing, other stuff? question would be how are you able to mitigate these effects to potentially pass it on to the customers in place gold with copper and products etc. which might take a longer time so what are your thoughts on that?

that gold is actually about half of the issues. So the other things are small things that add up. So gold is a major issue for us. We still have a lot of old gold products and we're in the process, we already started in Q3 last year to transfer some of these. It takes some time. Gradually they are moving to copper, which is of course a lot less expensive. while the gold price keeps rising and rising. I mean, we look at $3,300 today. Wow, this is a lot. We've been as high as $3,450 recently. So, this is really something where we suffer a little bit. The discussion, I mean, we're currently in the discussion to pass on some of their blackbirds because we really dislike them. And it's not our fault. So let's see. These discussions now start.

Okay. And what should be the expectation then for the second half? It probably will benefit from rising volumes. So do you expect growth margins to go back to the Q1 level? Potentially even higher in the 40s? Should we expect something more than the lower 40s? So what's the expectation seeing all that moving parts for the second half of the year?

It is so hard to predict because there are a lot of moving parts these days. I think if we take the first half, this is not a bad indication per se because actually a good part of the first half was impacted by higher gold and higher material costs some of our measures concerning cost cutting only get online or get visible in Q3 or even Q4. I think there are so many moving parts that it's really hard to predict. Especially if you want kind of in the 1% and then we're talking very low percentages here, right, that we want to predict. So, we currently think that the first half may be the best indication we have. Writing volume will help, some cost measures will help, but still, we also may face additional headwinds out of volatile markets. So, Since so much is happening short-term these days, also in terms of sales development, it's particularly hard to predict our portfolio changing. We even now, for the Q3, do not have a complete view on the portfolio. You see that our book-to-bill is a little bit below one. Okay, you could round that to one. But still, there are a lot of short-term orders And it depends on what products are ordered, whether there's a margin impact on one or the other side. So I would love to know it, but it was a long answer for a very concrete question. But it's really hard to predict, I'm sorry.

Okay. Would you say that you have seen the trough in terms of gross margin in the second quarter?

Again, this would mean that we would kind of guess the growth margins. I mean, we certainly see some upside with the measures that are currently running. So we shouldn't kind of put our, I don't know whether to say that, put our heads in the sand. So within all the volatility that we have, there is also a fair chance that there's some upfront.

Okay.

Then with respect to the watch orders you mentioned, are these mainly coming from Chinese customers? Yes. Okay. And then on visibility generally, I mean, are customers, is confidence among customers growing in talks you have with customers going into the second half and potentially into the next year. Do you feel a sense of rising confidence that provides stronger visibility that inventory correction eventually is behind us, customers grow confident regarding required volume, country growth, et cetera, to become mechanics for the upcoming quarters and into next year?

I think that generally people feel that with the latest trade deals that things are kind of calming down, right, and that the range of potential outcomes we have of this big disruption is a lot smaller than some people thought, so that we're settling on things that are more manageable. Generally, I believe the Europeans, the Japanese are very much on track on what they thought. So, of course, there are structural challenges, but they have nothing to do with chip supply or chip needs. So that is all good. I believe the Chinese, by and large, are seeing a little bit more upside than they thought. and are not struggling in their value chain to make it happen. We just had a little test with the SAP tab over because we actually were not, and we announced it really long before and reiterated it a hundred times that we wouldn't be able to ship for one and a half weeks or so. And that everyone should kind of be aware. But still, we saw that even within a very short period of time, some people were on the verge of running dry so inventory levels were structurally too low yeah so on the way up with very low inventory levels now and then you struggle and I mean then you're confident about the market yes but you struggle operationally and does it feel good we make it work so I believe overall the market is pretty positive in China. It's very positive also in India. And Europe and the U.S. are kind of more muted, also in terms of health development. I mean, IHS is seeing slight declines in Europe and the U.S. and a reasonable upside in Asia. So this is also reflected, I believe, in customer sentiments.

No. Okay, great, thanks. Thank you, Mr. Helmer.

Thank you very much for listening to my talk. Dear ladies and gentlemen, last call. Please press 9 and then the star key to state a question. I repeat, the combination is 9 star. At the moment, there are no more questions. Thank you. Ah, there is another one incoming from Vejo Tase of Metler. The floor is yours.

Hey, good morning. Thank you for the A few questions, just follow-ups. On the rush orders, we have in this early season from the analog mixed signal companies, particularly from the large ones, a little bit mixed signal regarding are we seeing demand pull forward due to the tariffs topic? or not, and now you mentioned also the rush orders, although you said mainly China. Do you see the risk of any demand pull-in at this stage, particularly considering that we are still close to the cyclical bottom or that we just passed the cyclical bottom in the auto industry?

Well, I think that some of our dear customers have optimized their logistics and their inventories maybe beyond the level that is ideal for an upstream. And since the assumption, which was true in the last half year and what was always, chips will be available at very short notice because inventories are there. And this will, of course, gradually need an update. Because on the very short notice, not every chip is in stock. And so this is, I believe, where there may be some short-term shortages that we currently can manage. But I believe in the coming upturns, some people will have to be a little bit more careful in their logistics and plan a little bit more ahead, otherwise they might face more severe challenges, because ships are just not ordered a week, two or three or four in advance. On another note we saw, and this is just market related, And tariff-related has nothing to do with automotive chips, but a little bit of price impact. We see that assembly is pretty full. And that was because a lot of people from the non-auto space, consumer for instance, tried to get product into the US while still in a more favorable tariff environment. And of course, if you're doing, say, electronic toys or so, you can have a product ready pretty quick and get it beyond the border, even in 90 days or a little bit more. We think this shortage in assembly will subside now that it's more clear what the mid-term tariff conditions will be. But we have indeed that little assembly shortage. No impact really for us. We have our capacities and this is all good. But it created for sure some little friction in the value chain.

And then on the second half, the underlying growth in the first half was really quite strong, particularly when you see now the FX adjustments on your side and still confirming the sales guidance. Can you give a little bit of color around Q3 versus Q4? Do you think that we will see a much stronger seasonality into the Q4, or is it rather, let's call it confidence into Q3 already? And then on the profitability discussion, it looks like the one of... And you mentioned in your guidance also some one-offs in second half. Can you quantify the impact in second half related to the one-off? And would you agree that the face of or the spirit of several one-offs is behind the company and we should enjoy a little bit of cost-cutting benefits from the first quarter going into Q4 and second half?

So let me comment. I mean, we see the sales development to be a little bit more continuously facing up. We had actually a weaker Q4 than the Q3, and this was not normal in a way, right? So if you ask me today, I would guess that Q3 is a little bit below Q4, but not too much. So we see a pretty constant development with sales. with no huge surprises as late as we can see it today. Yeah, there is for sure some upside that I already commented. It's a lot of moving parts that we have here. I believe what is clear is that we will fare a lot better than most or all of our key competitors.

And on the profitability section, on the one-off, if you can quantify that. Well, we will continue to spend a little money on China.

Let's see where the gold goes. We don't know, of course, but currently gold is still a burden. We will just cut on some path on. This is starting now. let's assume no major FX impact, right? Because it would be kind of an outlying assumption to assume that the same FX occurs again. So that for sure is helping us, right?

So overall, we are kind of cautiously optimistic.

Thank you. Thank you very much. The next question comes from Lukas Fang of Star Risk Capital. Mr. Fang, over to you.

Hi, good morning, Mr. Schneider. Just two questions from my side. The first one is related to the CapEx ratio, though that was very low in Q2. What should we expect for Q3, Q4? I know you have this guidance of around 7%, but after 10% or nearly 11% in Q1, it was very low now in Q2. So Q2, more the range or the indication for the second half, or is there maybe some room for, let's say, the lower end of your CapEx ratio? And the second question is related to your revenue guidance. So if we exclude the FX for a moment, you would probably have lifted your revenue guidance to the upper end. So from an underlying perspective, there is, from my perspective, a positive development. And I would be interested if you could explain, please, a little bit more in detail that this let's call it underlying positive development is coming from.

Thanks.

Yeah, so first from the capex, we are at 6.6, I believe, in the first half. That includes the building report. So this was a little bit more than a percentage point. So... We think that the 10% is not kind of wrong, but we may use the guidance range also in the lower half of the CapEx a little bit. This is noted, but we didn't want to change because it's kind of, you know, These small adjustments of the midpoints, we generally don't do if we're still within the range. Then you asked about the revenue development. Yes, it's true. In the end, we, like for like, we increased our sales guidance by 25 million. We think that the Q2, we... This shows that we are a little earlier than expected in the up cycle. We thought actually at the beginning of the year more that the second half will be the up cycle and the Q2 will be part of the so-so part of the year. Now the Q2 already is very strong, so we made significantly more progress in revenue than was part of the 580 plan. We, of course, have the dollar development, which does not help. But given that we make this underlying very, very strong progress, we think that we will be able to keep the 580. So in terms of revenue, we're in really good mood.

And from your order intake or your order book, you can also exclude that this Q2 has no pull-forward effects.

Well, the key growth driver is China, and they tend to order as they need. I'm trying to find the most polite words I can. This is very much demand-driven audit behavior.

Okay. Thank you, Mr. Pan.

Thank you very much. At the moment, there are no more questions. The combination is nine stars, so please press nine stars if you have a question or a follow-up question. A question incoming from Robert Sanders of Deutsche Bank. Over to you, Sanders.

Yeah, hi. Sorry, I joined late on the call. I just was interested if this hasn't been answered, which is just regarding the China... I was just hearing from another player that was talking about their business in China being down sequentially in Q2 just because of slower production and excess inventory. Have you seen any evidence of any kind of slowing in the mass market in China? Thanks a lot.

We actually cannot kind of confirm that because we are very much up sequentially and kind of broadly in the portfolio. So we actually see that our China customers have very much optimized their inventories now and then and that they now have patches where they are a little short. and that the overall China market development actually is not bad. Maybe also concerned by the S&P numbers. I believe it was 3 or 4% up in China in terms of vehicles.

So we can today only report very good things in China. And have you seen some evidence of

uh presence for european members over um american competitors and i know you don't compete with that many but you know for example ultrasonic and so ultrasonic uh well i guess um uh we we do see that we do see that the um while all foreigners are foreign, of course, we see that the US are even more foreign than the rest of the world in China.

So how quickly could that affect your business? Obviously, it takes time to get designed in and all of that. China is very fast in getting things done. And...

I mean, recently, actually yesterday, I heard a rumor that a certain U.S. company, I don't want to spread the rumor, but it was a rumor that a certain U.S. company is now basically banned. And this is meant to be the first example of really excluding a U.S. company basically from the automotive chip market. I don't know whether it's true or false. I only heard it from one person, so... But I believe the general sentiment in China is that, particularly after the EDA tool crisis, where the US for some time was about to restrict the EDA tools used in chip development for all Chinese, all those, by the way, leading edge, lagging edge, everything, that that certainly did not help to induce confidence in U.S.

suppliers. Got it. Thank you. Thank you, Mr. Sanders.

Thank you very much also from my side. At the moment there are no further questions. So let's wait a couple more moments. Now I start the combination. All right. Since there are no more questions then coming, with that, I'll close in the Q&A session and hand over to the host.

So at the end, I would like to wish all of you a great summer. Perhaps we will meet at one of the many investment conferences in September and throughout the rest of the year. Actually, a detailed overview of our IR activities can be found in the financial calendar on our website. The next regular quarterly reporting is scheduled for November 4th with the publication of Q3. So for today, thank you very much for your participation and your interest in ELMOS. Goodbye from Leverkusen. Take care and stay cool.