Elmos Semiconductor Ag

Ladies and gentlemen, good morning from Leverkusen and welcome to the ELMOS conference call for the third quarter 2025.

Thank you very much for your participation and your interest in our company. Ladies and gentlemen, Elmos showed a very robust performance in the third quarter of 2025 with improving profitability and strong cash flows, while the top-line development was somewhat impacted by revenue shifts from Q3 into Q4 due to the SAP transition. In parallel, we are driving forward our operational and strategic agenda to even better position the company for future profitable growth and higher cash flows. Let me start with an update about the current market environment. The stocking activities in the automotive semiconductor market are gradually decreasing. More and more customers return to normal order levels, and our Q3 book-to-bill ratio was well above 1%. Nevertheless, visibility remains somehow low, and our customers still order at least some of them on a very short notice. Actually, especially in China, which is kind of the global headquarter of short-term ordering. This order pattern requires a high degree of flexibility and reaction speed from chip suppliers. But as an agile tabless player, you have a clear advantage here. Please allow a short comment on the Nexperia situation at this point. Nexperia primarily manufactures simple discrete components like diodes and MOSFETs. Elmos specializes in more complex analog mix signal semiconductors. So actually there's little overlap with Nexperia's product portfolio and we cannot expect any significant volumes we could take over from Nexperia. However, this situation is, at least I believe, another sign that the current inventory level by Tier 1s and OEMs are clearly too low to secure delivery and avoid line shutdowns when there is any kind of major disruption. The geopolitical environment remains challenging. I can report today that we are progressing very well with the adoption of our China footprint towards fully functional organizations. As of today, we have hired more than 20 additional engineers and IC experts in our new entity in Shanghai. The goal is to establish all relevant business processes and to manage most of our China business locally during the course of next year. China is indeed very dynamic, and that's why we are executing our localization strategy at China speed. I have already informed you that the successful go-live of the new SAP system took place at the beginning of July. We expect that the so-called hyper-care phase of the new system will be completed in Q4. Due to the system freeze before the go-live, we had to postpone some orders from Q3 into Q4, which I will explain later. The acquisition of new projects continues to develop very positively, with promising new design wins in all regions and across all segments. The performance year-to-date indicates actually a significantly better result last year, so we are very happy about that. Finally, I can report great news for my ESG team. Elmos has been awarded prime status for the first time in the ESG rating of the internationally renowned rating agency ISS. As part of the regular review, Elmos improved its ESG corporate rating to C+, and that's then the prime status. This wonderful recognition reinforces our strategy of achieving long-term profitable growth while making a positive contribution to environment and society. Let me continue with the financial highlights of the third quarter 2025. Order intake in the third quarter developed very positively with a book-to-bill ratio well above 1. The transition to the new SAP system in July has led to some orders being postponed from the third to the fourth quarter. The approximately two-week system shutdown at the end of June 2025 due to the conversion of the new SAP S4 HANA led to a production backlog that could actually not be completely cleared by the end of September. This resulted in orders equivalent to approximately one week of production being postponed to the fourth quarter. For this reason, revenue in the third quarter was somewhat lower at 140.8 million euros. However, despite this revenue shift, Q3 sales were above the quarterly average of the last 12 months, and I mean, kind of looking on a longer horizon, it's actually not a bad quarter at all. The order backlog will be caught up in Q4, which will then most likely result in a new quarterly sales record, and we confirm the midpoint of our full-year sales guidance of 580 million euros. In terms of regional dynamics, we once again saw very positive momentum in China and a more muted development in Europe and the U.S. The weaker U.S. dollar had a negative impact on our Q3 sales by around three percentage points. So if you do the grounded theoretical FX adjusted Q3 sales, it would have actually been about 145. Gross margin was 43.6% in Q3. improving 2.5 percentage points versus Q2. Like in the previous quarters, gross profit was impacted by fixed cost effects and higher material costs, including higher gold prices in assembly. I mean, those of you who regularly look at the gold price, it's really eye-watering. But you can also see the positive effects of our cost optimization program, which will lead to further reductions in personnel and material costs in the coming quarters. EBIT improved to €31.7 million in Q3 2025 compared to €30.1 million in Q2. The EBIT continued to be impacted by special costs for the SAP transfer, consulting costs for the expanded China strategy, and all by somewhat less pronounced by negative FX effects. As a result, the EBIT margin reached 22.5% in Q3 2025, which is around 2 percentage points above Q2. At 5.9 million euro or 4.2% of sales, the Q3 capex was at a low level as it was planned. At 24 million euro or 5.8% of sales after nine months, we're at the lower end of our full-year capex expectation. Adjusted free cash flow developed very positively in the third quarter. At 32.5 million euro or 23.1% of revenue, It was significantly higher than in the second quarter. The activities to improve our cash performance show positive results, and we are confident to build a very solid track record going forward. After nine months, we exceed our full-year expectation with a free cash flow ratio of 13.2% of sales. Due to the positive development, we have increased the full-year free cash flow guidance. So our initial comments that our free cash flow guidance for the full year 2025, if all works out, may prove to be conservative, this is actually true. Ladies and gentlemen, let me finish my presentation with the market outlook and our guidance for fiscal year 2025. S&P increased its latest global production forecast to 91.1 million new vehicles, up 1.2 million from its July forecast. This new forecast corresponds to a year-over-year increase of almost 2%. The positive trend of recent months continues. Still in April, S&P was forecasting a decline of minus 2% in 2025. The momentum is clearly driven by China, where S&P now expects 6% growth to almost 32 million new vehicles. For Europe, minus 2%, and North America also minus 2%. There's a somewhat lower production volume. mainly a result of the ongoing weaknesses of the European automotive industry and new tariffs in the U.S. Speaking of tariffs, as usual, I have to remind you that our outlook for the year does not include potential impacts of any new tariffs or potential indirect effects of this tariff situation and trade war beyond the level we actually see today. So for the full year 2025, we expect sales of €580 million plus or minus €20 million despite negative FX effects. As highlighted in August, we continue to expect an EBIT margin somewhere in the lower half of the guidance range of 23% plus or minus 3 percentage points of sales. Overall, our full-year guidance, both in terms of top-line development and profitability, would actually be a much better performance of Elmos than most of our closest peers. Investments in new machinery will be limited due to the lower growth. Our successful OEE optimization, as well as the test time reductions we've been talking about for some time now, and we now expect CapEx in 2025 to be the lower half of the guidance range of 7% plus or minus 2 percentage points of sales. Based on a solid cash performance in the first nine months, we have increased our guidance for the adjusted free cash flow in the fiscal year 2025 from 7% to now 10%, a plus or minus 2% point of sales. Let me summarize. Order intake continues to develop positively. There are clear signs that inventory reductions by our customers are coming to an end, and order volumes are returning to normal levels. Ladies and gentlemen, Thanks to our innovative product portfolio and excellent positioning as a fabulous company, we expect a strong final quarter and are also very confident about our growth opportunities in the coming year and beyond. We are continuing to work consistently on implementing our operational and strategic agenda for profitable growth and higher cash generation. We are convinced that this approach will continue to increase the valuation of our company and and also create attractive opportunities for capital allocation. 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 Johannes Ries, Arbus Capital. Please go ahead with your question.

Yes, good morning. A couple of questions, like always. In some regard, congratulations for a good job in difficult times. First, on the gold effect and the cost effect, can you explain a little bit more how important gold is in your total costs. And secondly, on the measures you have started, we will see it in the figures. Will it already be in Q4? Will it start in Q1? And remind us, what was the impact of the cost reduction program you expected or you are targeting?

Mr. Rees, thank you for your questions. We have gold, and this can be a low double-digit million euro effect. I mean, as we currently stand, we look at something around $4,000 per ounce. So this is This is really a high level that why there is quite a strong difference towards the levels we had seen before. I mean at the beginning of the year we were substantially lower and same is true for last year. So gold has a significant effect. We are gradually shifting more and more products from gold to copper wiring. These are generally kind of legacy products that have been with us for quite a long time. That's why they still have gold. All the modern IC developments, they are based on copper. Some customers also need to compensate for gold. But the gold price is a significant effect these days. And once we shifted these things to copper, which takes some time but is underway and we kind of plow our way through the portfolio, there's progress to be made. On the general cost optimization program, This is also an effect, if I talk in terms of total EBIT to be gained, which is a low double-digit million euro effect. We already see some of it in Q3. There's a little bit more to come also in the next quarters.

Okay. Thanks. Maybe another question on the margins. You mentioned also a negative currency effect. How important was this effect? Maybe what is the impact of the weak dollar on your epic market?

So generally we make very good progress with our natural hedging strategy. However, when the currency changes, our dollar receivables, for instance, are valued differently. So you see one-times effects of currency changes. Kind of as a run rate, we made very good progress with natural hatching. I mean, basically, we buy a lot of wafers in US dollar. We buy some machines in US dollar. And then we have US dollar revenue that stands against that. So you still have a receivable effect. We have an FX effect of minus 8 million euro year to date. However, if we would just stay at this level of dollar, this is a one-time. This would not reoccur. So I believe generally we have a good currency position, being pretty close to being naturally hedged. However, of course, even if you're naturally hedged, every change in dollar... has an impact on your balance sheet positions. This is something you cannot hedge. And of course, it also has an impact on our revenue. We now show lower revenue than we would if the dollar would still be a little bit stronger. So keeping the 580 is a good achievement. It's about 25 million euro that we just kind of breathe away. That's a negative currency effect. And then we can still keep the 580.

Very fair point. Another topic, working capital. You have this slight increase in the quarter, probably based on the SAP transformation. Could we expect that working capital will decline in Q4 and further on in the following quarters?

That is the trend that we also foresee. I mean, it's always hard to comment on individual quarters. However, in Q4, I mean, you can imply that we plan significant revenues, which generally weighs a little bit on inventories. So I believe you're right in Q4. And then the general trend is, of course, that we think our inventory level is higher than exactly needed. So we will see that coming down in the next quarters and the next year, of course.

So if I look to systems that you achieved already in the first nine months, free cash flow, margin of 13%, the new guidance is even in some regards not over-aggressive, right?

No, yes, Mr. Ries, you're right. It's not over-aggressive. However, there's a next year that is also coming after 2025. And I believe we show that we make significant progress. Please, I mean, generally, allow us some conservatism concerning free cash flow, because after kind of 15 or 20 years... having an average below 1% of cash flow, you need to find your new home and get comfortable in your new home. And the Excel sheet tells you one thing, and we tend to believe that, however, building a track record is not only good for your expectation and performance, your confidence is also good for management expectation and confidence that you see that you actually make it work. And I believe we, again, this quarter made very good progress and we are very happy that the year 2025 is the first really good cash year. That is quite an achievement.

I 100% share your opinion because it was always, maybe the most important negative point especially for investors that have produced no real free cash flow for years now. Maybe finally, what are the real drivers of your business from your activities? What products are maybe showing the strongest growth? And my general question every quarter, how was the development at the design website?

Yeah, design wins year-to-date are actually substantially above the year-to-date figure of last year. So it looks like it's going to be a very good design win year. If we don't screw it up in the last kind of, what, is it seven or eight weeks or so? If we exclude Christmas, maybe only less weeks. So it looks very good. We are very confident. We have a new ultrasonic generation that's currently ramping. We have an airbag that's ramping mostly next year. We have motor products that are ramping nicely this year and continue into next year. China is developing really well on a kind of broad portfolio basis. Rare Light has great... So there's... It's not only one thing, but there are good developments in a lot of segments that kind of carry us in terms of growth for next year.

Great. So we are very well looking for next year, especially for your midterm ambitions.

Yeah, we do not feel bad at all. We actually feel pretty well.

Okay, super. Sounds good. Thanks a lot.

Thank you, Mr. Ries.

And the next question is from Malte Schaumann, Warburg Research. Please go ahead with your question.

Yes, good morning. This question is on the Q4 sales level. Did you already... catch up with the delayed delivery so what's the risk that eventually at the end of the year revenues might spill over into next year or do you have pretty solid visibility that you will be fully catching up with the delayed shipments due to the sap transition

Yeah, I believe 50% yes, 50% no. I mean, operations happen day to day, so you can never be completely sure what happens the next day. But I think we are making good progress in getting rid of backlogs and delivering to everyone's expectation. our plan is clearly to be around the 580. And currently, there's no indication that that's impossible.

Okay, good. And in terms of GoSmart, let me... Q3 gross margin hadn't been too bad with the almost 44% after the week margin we have seen in the second quarter. Typically, the end margins are even stronger, often the strongest margin in the year. So is that a trend you would also expect for this year? So it would be very high volume in the fourth quarter. The gross margin should expand a little bit further in comparison to Q3.

Yeah, I mean, there's not kind of a real 200-page analysis I can now rely on. But generally, there are, of course, some scale effects. So a very good quarterly revenue typically always, if you do not have some other huge one-offs, this typically leads to a nice gross margin. So that would be the case of the coming Q4. Okay, good.

And then on the gold impact and mitigation effects, you indicated the magnitude of the potential impact for this year and what you're doing to mitigate that. Looking into next year, what do you expect? Can you share a number how much of the effect we are seeing this year might disappear because customer compensate for the use of gold? or transfer to copper wire bonding, is it 50-50 that you would expect maybe 50% to stay with you next year? Is it more? Is it less?

Well, I think on the pricing, it's hard to answer because negotiations are underway. The transitioning of products from gold to copper is easier to answer. It's a few million that we will actually get in savings. But then this builds because more products are added. So next year, I would expect kind of a few million in savings already.

Okay. Okay. And then a year further out, maybe $27 million. Probably you should have solved that issue.

Right, then you're getting into solving it more. I mean, there are actually two effects. One is that older products tend to decline while newer products ramp up. So we focus on the older products that have the longest life and the biggest volume in the switching from gold to copper. So we get out of these problems more and more. But it's not going to be all finished in 2026. Yeah, sure.

Okay.

Another question on pricing. If the gold price stays at the current level, of course. I mean, we've seen the gold price wildly fluctuating. I believe losing 10% or so from the peak. So let's see where we are next year. Honestly, I don't know.

Yeah, right. Another question on pricing. Any comment you might already... regarding pricing environment going into 26, more or less the same we have seen in 25, or more material changes to what to expect?

I mean, it's a little bit early to comment, but the general environment is not much different from what we've seen in the past. I mean, in the normal past, the non-allocation past. Okay, thanks. Thank you, Mr. Schaumann.

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

Yeah, good morning. Hi. Maybe a first question on China. I was just wondering when you thought that part of the world would be out of the worst of its kind of inventory correction that seems to be happening, particularly in electric cars. I'm also interested in just what you're seeing in terms of anti-American sentiment in China and how that might benefit you as well. Can I pull up? Thanks.

Yeah, for us, we see more kind of the value chain up to the car, which is kind of critical for us. As long as the car is produced, it's kind of pushing revenues. For us, we see that generally inventories are... really reduced. Some people are getting to inventory levels that are unhealthily low. So that any disruption whatsoever leads to a crisis mode and then this mostly can be resolved but still it's unnecessarily low in some customers. So I believe going into 2026 there are will not be anything or if so, only very, very little of inventory topic be left and maybe we even see a little restocking if some people learn from the past. On the sentiment towards North America, I believe this is somehow how mixed there are some companies that are very much associated with the administration, and they may fare a little bit not so great, and there are some companies that got a huge China footprint and are kind of positive within the set of American companies. I mean, overall, I believe it's no surprise that as an American in China, you have certain... you kind of have a carryover effect from your administration back home to your company. And while there may be kind of a ceasefire of a year or so, I believe everyone is aware that this is a dynamic situation and stays a dynamic situation. And I believe Europe is a lot more friendly towards China, a lot more reliable, and some of our customers actually cherish that. kind of are positive on changing to a European supplier.

And on the Nexperia thing, one of the things I think surprised some investors was how much of their chips were packaged in China. I think 70%. I personally wasn't that surprised because a lot of the OSAPs are in China, but are you feeling pressure from your Western customers to move your packaging out of China because of what Nexperia has illustrated, which is a very heavy dependency on China for packaging?

Yeah, well, we always have no package. I mean, there's very, very little, but you would need to find magnifying glasses to really get a good look of what we do in terms of OSAT use in China. We would rather, for the China for China strategy, build OSAT use packages in China, though this is then on business that goes to our Chinese customers. And I believe they would love to see more China for China. And we are developing in that situation. Currently, we have too little China OSOT exposure to make our China for China work. So we will build for the Chinese business a little bit more Chinese OSOT exposure. I mean, we have really next to nothing. This is currently the situation we are in. So in terms of the problem that there may be packing in China, this is not a problem that we face.

Got it. And last question would just be on the Dortmund fab. Obviously, you've sold it now. You're probably on some kind of cost plus wafer supply agreement or something with little fuse. How quickly can you wriggle your way out of that and then move over to market pricing? I would assume market pricing today is lower than cost plus, but interested if there's when you can see that margin and capture that margin. Thanks.

Well, we will use the FAB. I mean, this is looking like a triangle, right? It goes down every year over four or five years, I believe up to 29. then we may produce a long tail. So certain small volume products we may produce even longer, which is good for the customers. It's not that important in the overall scheme of things, but it's important for some customers. We have a very fair pricing arrangement with LittleFuse. So there is actually not that much potential demand in shifting things elsewhere. There may be a little effect, but our cost-plus arrangement is a very fair one for both sites. And some margin also the foundries want to make on their costs, so this is quite comparable. Got it. Thanks a lot. Thank you, Robert.

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. And we have one more question coming from . Please go ahead with your question.

Yes. Hello. Thank you for taking my question. Just one on the working capital. Obviously, the year is not over, so we don't really know how much of an improvement we will see in Q4. But I remember you put out this guidance that you want to be at around 25% net working capital to sales in 2027. So if we assume that 26 and 27 will be growth years, and we will obviously have sales probably more towards 700 million than 600 million, That would imply a number of maybe 170, 180 million of net working capital, which would actually be a decline to what I would expect for 2025. I mean, is this really realistic that you can, in absolute terms, improve working capital in the next two years, even if the top line grows by, I don't know, you know what you were saying, 9%, 10%?

Yeah, we do think so. I mean, in Germany, we would say selbst anzeige. So, I mean, if you look at our peers, you can do better in working capital than we have been doing. There have been reasons why we have not been focusing working capital so much. And these were good reasons. But now that we shift a little bit more towards cash and leaner operations, there's a lot of potential to reduce working capital more to the level of our peers. There's nothing structurally different with Elmos than with our broader set of peers, and they achieve a 25% or even lower number.

I agree, I agree. This is Ralph Hoppe speaking. Hello, Mr. Müller. We're currently running around 200 million of net working capital currently. And when you look at around 25% at 700 million, the number you gave us is exactly right. That's around 175 million of net working capital. So there is potential for reduction in absolute terms as well. But we have to do our homework and be doing it. And it's a bunch of activities we already started and we will see the benefits in the coming quarters.

Okay. No, very happy to hear. And on the CapEx in the following years, I mean, given the investments you did in the last three, four years, and you're now guiding for kind of a CapEx ratio closer to 5% in percentage, is this a number we should also use in the years to come? Or do you expect an upcoming CapEx cycle again?

Well, I believe for 2026 and most likely part of 2027, this is a very reasonable run rate. Okay. If we then also with growth, because we can use the CapEx we have for now, then probably at some point in 2027, we will switch to having to invest a little bit more. However, it should... not return to the levels that we've seen in the past, but rather be well below 10%. We may give a more concrete guidance actually at our next Capital Markets Day, I believe. Let's see. We are in the preparation. Let's put it that way.

No, it's already very helpful.

Thank you. Thank you very much for your question. Thank you.

There are no further questions from the audience, so a handbag for closing remarks.

So, ladies and gentlemen, this is the end of our Q3 conference call. Thank you very much for your participation and your questions. I hope to meet many of you in the upcoming investment conferences in Germany and also quite some abroad. A detailed overview of our IR activities can actually be found in the financial calendar on our websites. So thank you very much for your support and your interest in Elmos. Goodbye from Leverkusen. Take care and stay confident.