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Elmos Semiconductor SE
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Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE conference call regarding the results of the first quarter of 2021. [Operator Instructions] Let me now turn the floor over to your host, Dr. Arne Schneider, CEO.
Good morning, ladies and gentlemen. I would like to welcome you to our Q1 conference call. I'm very happy to present to you the highlights of a very strong and promising first quarter 2021. It was actually a record quarter in terms of sales. Never before in the company's history was sales higher than in this Q1. As usual, you have the opportunity to ask questions at the end of my presentation. Ladies and gentlemen, the start of the year was characterized by the ongoing COVID-19 pandemic and the high demand for semiconductors. Since the outbreak of the pandemic in January 2020, everyone at Elmos has complied with the extensive protective measures in a very disciplined manner. This has enabled us to maintain our own production and business operations until today without any noteworthy disruption. Now we are prepared to offer vaccination for our employees, which will be the next important milestone in the fight against the pandemic. We have been ready actually for some time. We are just waiting for vaccines and the official go from the authorities. The first month of '21 are characterized not only by high demand for vaccines, but also a very high demand for semiconductors across all industries. The increased demand has already started in Q4 of last year but has accelerated due to the faster-than-expected recovery of the automotive market and the ongoing boom of office and consumer electronic products. Increased demand, combined with limited global manufacturing capacities for semiconductors, led to the current allocation situation. The entire semiconductor supply chain, including wafer production, assembly and testing, is currently under great deal of pressure. In addition, many customers would like to see increased inventory levels. However with the current allocation situation, these wishes are, of course, are totally impossible to fulfill. And therefore, I see manufacturers have to prioritize their deliveries based on the real demand. Elmos is not the [ cause of lying ] down, so Elmos is certainly better than some others [ there ]. Elmos had a dynamic and successful start into the new year. Group sales increased significantly by 20.1% in the first 3 months of the year to EUR 77.1 million. As I mentioned, Q1 marks a new record in quarterly sales. EBIT rose to EUR 12.2 million in the first quarter based on higher volumes and positive cost effects. The EBIT margin improved significantly to 15.8% compared to 11% in the previous year. The EUR 5.7 million CapEx was more or less stable in Q1. Due to higher sales, the CapEx to sales ratio has declined. The investments in new machinery were mainly focused to increase the capacity and efficiency of wafer and final part testing at the Duisburg site and at our partner's site in East Asia. We will see very substantial investments in the course of the year as we prepare for this and next year's growth. The R&D expenses continue to remain on a high level, supporting the numerous serial launches and new development project. After 3 months, we are fully on track with our new design win activities and we were able to acquire new projects in all of our segments despite ongoing travel bans and limited customer meetings. The strong increase of the cash flow from operations in Q1 to EUR 29.4 million was mainly driven by the higher income and decreasing inventories. The higher operating cash flow combined with stable CapEx spending resulted in a significantly higher free cash flow of EUR 22.4 million. Our net cash position increased at the balance sheet date, March 31, to EUR 60.3 million due to the positive free cash flow. Based on the current order situation, we anticipate another successful quarter with further increases in sales and EBIT. For Q2 2021, we expect, as announced already on Tuesday, sales of EUR 79 million, plus or minus EUR 3 million; and an EBIT margin of 16%, plus or minus 1.5 percentage points. While a reliable forecast for the second half of the year is not possible at the present time, statements or forecasting institutions are still not stable, the further cause of the pandemic is unclear and the allocation situation cannot be precisely predicted, we do expect for fiscal year 2021 a very significant increase in sales and EBIT and think 2021 may well be, overall, a record year. So with that, thank you very much, and I'm opening the floor for questions. Operator, can you please open the line for questions, please?
[Operator Instructions] And the first question comes from Johannes Ries from Apus Capital.
Yes. This is Johannes Ries from Apus. Maybe a short explanation of how you achieved this growth and how much potential -- upside potential is it. If I listen to the calls of the large guys [indiscernible], they are all able to improve their own production in their own fabs, but they are very limited by the outsourcing because they don't get enough wafers from TSMC and other foundries. Is it also the case for you, for your internal production being the strongest growth driver? And how much foundry is a limited factor going forward of the year and maybe next year for you?
Yes, Johannes. We have 3 tailwinds. One is the increased number of cars that we see this year versus last year. The other is that we got a good performance in the [indiscernible] portfolio. We have RAMs, the products are developing nicely. And the third tailwind is our allocation situation where customers usually do not think twice about ordering but rather order. The allocation is of course -- or within the allocation, wafers are, of course, the limiting factor. We try to squeeze out a few wafers more a day out of our own facility, though that, as you know, has always been running stable at what can be called 100% and now if we go to 101 or so. It's a major achievement per se, but it's not going to turn the needle too much. We are, of course, relying also on TSMC and key foundry to deliver wafers for us, and we are discussing the real needs of our customers on a quite frequent basis with them such that -- I mean the same that's gone through from the past. We have not been -- the course of line down will also hold true for the future, that we will not be the cause of such things. And I believe this is the key of allocation management, that you only serve real demand, but every real demand, and this is what we -- with our foundry partners together try to achieve.
Therefore, had been the growth, in some regard, self-limited if I got it right? And can you tell us what is the split between own production and foundry production? And how has that changed maybe in the last 12 months?
Well, we had a certain reduction in foundry production over the course of the crisis, and that is going up again now. You are right in a way. In the very short term, the nonavailability or not free availability of processed wafers is limiting growth. However, we have to be careful because some of that growth would certainly go into the value chain and into safety stocks in the value chain, which are not bad. I'm not arguing against safety stock. I'm only saying that this would be quite a lot of growth at a certain time when we may have a time then later on where the safety stocks are very full and growth is more sluggish. And the allocation situation that we see today is, of course, at least acting against that cyclicality that might otherwise be a lot more pronounced.
So -- but you also see that maybe the cycle is prolonged in some regard by -- first as customers are not really able to fill up their inventories at the moment. And I heard even for Infineon [indiscernible] guys, their other mobile customers and the Tier 1s are maybe guiding or have the intention to increase their safety stocks after the crisis because they never want to come into the situations that may be as non-available of chips, limited production. And therefore, I heard for Infineon yesterday, maybe it will go from 12 months -- 12 weeks to 16 to 18 or 20. Can you confirm this? And is that also something which you see as -- which prolongs, the strong growth in the sector despite all the structural things which are also working there?
Well, I think, of course, now the #1 priority is to put out the fire that we currently see. But at the same time, people are, of course, thinking, how can we prevent future fires? And they -- all these elements that come into play like safety stocks, ordering time, ordering behavior, limits to order changes, you can find ways to prevent such rapid changes because chips are actually -- I mean it is possible to have some in inventory for quite some time. And I'm sure we will have a very positive discussion around that in the industry. And think about who should stock them for what amount of time, what is the safety stock looking like? There are also different practices today in the industry. We do have customers that keep for some months worth of production safety stocks and others don't. So maybe we'll find a new normal there.
But that is, at average, more positive for you and the whole semi industry?
Yes. That is a good development. It's -- I mean, it is per se good. It will in the short and medium term, of course, increase demand. And if we kind of get into a more stable production scenario, this is also good for us.
Okay. Maybe to finish this topic, but it's very often discussed now and important even, you said you have no real visibility towards the second half. Is it also depending on -- you have not a view how much wafer you will get from your foundry partners? Or you have a clear view how much maybe you get allocated?
Well, we have no complete visibility how this second half looks like. We are in negotiations, in discussions with foundry partners, with assembly partners, with customers. So this is a little bit fluid, still.
Okay. But nevertheless, despite maybe how strong it will be, like I said, a good year in '21 and most likely even a growth year in '22. Therefore, you are investing it seems.
Yes, yes, and we will heavily invest. This is absolutely rational to do. We are structurally growing very much. Now this growth may have very, very steep period, a bit less steep period. But overall, we think we are structurally growing very significantly. So we need to invest.
And you're investing in testing equipment, it seems like, I believe, right?
Yes.
Okay. Because that's a part you -- even if the foundries are delivering, you're fulfilling that, I thought...
We fulfill and we test. And the foundries do not test for us.
Okay. Last question from my side. On the design wins, how is the pipeline? How much you closed this year? And on the other side, how much new ramps you have in this year? How much the growth comes even from -- maybe you mentioned it, I've been 2 minutes late, from new ramps, new volume products, which are now going in higher number of pieces.
Yes. We have a really satisfying kind of portfolio performance on top of what we see as growth in the number of cars. So that is pretty much back on track. I mean, we had kind of a, in 2018, I believe, 13% or 14% growth versus the market, which was super high, and not so much growth versus the market last year that we were basically in line with the market. So this year, we will also see very decent growth on top of the number of cars. So these are little fluctuations, but what comes out is that we have a pretty solid product portfolio and as we do -- on top of the market and number of such developments to a very substantial growth.
Super. Finally, really, it's only a remark. Congratulations to maybe take Ralf Hoppe onboard. We know him very well and we think it's a good decision. Despite [ you're praying a little bit ], it was always a woman as the Head of Investor Relations. But welcome, Mr. Hoppe, and yes, looking forward to a creative communication and work together.
Mr. Ries, I can assure you he is smiling and he's listening to you right now, of course.
Thank you, Mr. Ries. Thank you. And I'll try to improve in terms of diversity. We'll see.
Also, I must be very honest. We hire and promote people based on skill and ability and not on other factors.
It seems that way, I think. Even though there's a successful woman, I support this man.
The next question comes from Stephane Houri from ODDO BHF.
I still have some questions remaining. And maybe let me try to phrase the question in another way about the second half. I know you don't have the full visibility, but is there a reason why the second half would not be at the level of the first half, given the visibility that you have now? You may have a visibility on Q3, given the lead time in the industry. There's probably some orders for Q4 already or even beyond. So yes, that's clearly my first question and I have some others.
Stephane, thank you for your question. The -- we will and have been selling a little bit out of inventory in the first half. So that might be one factor, a small factor, but still a little factor that leads to the second half being not exactly on level. The underlying dynamic is, however, we also see that fundamental market trend. We see the fundamental ramps in our product. They are just as valid for the second half, if not more. So the assumption that there is no real slump in the second half is certainly a good one. However, the assumption that we can now draw a straight line between Q1 and Q2 and -- by this means we find out all other quarters that are to come may also not be a really stable one.
Okay. Got it. Okay. So fundamentally, there is no reason, but as you sold some of the inventory during Q1 and maybe also during Q2, we should not maybe draw the line and say H2 at the same level of H1. Or not now for the moment, you don't have the full visibility to say that for now, right?
Yes. And I mean if you kind of had the tough continue the line 77, 79, and then it may not be as easy.
Yes. Okay. Got it. Now looking on the gross margin, when I look at my model from a historical standpoint, You have been much higher than where you are today. I see a quarter where you even reached 39%, which may have been very extreme level. But at 42.2%, do you see this gross margin level going back to the above 45% at least level in the short term?
Well, in the short term, this is always a little hard to predict. It depends on how our inventories develop, on how production runs. Generally production run smooth, but there are, in this allocation situation, sometimes, bumps. We sometimes get shipments a little late, then we can't use the machines and we are overloaded the next week. So it's all a little less smooth than it was 2 years ago. And I believe a little bit of that also makes its way to the gross margin. So structurally, I would say there is no reason why we should be worse off. However, in the short term, as in this allocation phase, we are in a very dynamic mode.
Yes. Got it. And yes, if I continue on the P&L, that would be my last question and I will leave the floor for others. Everybody is really increasing the OpEx drastically in the industry. We see that really everywhere. Are you on the same trend? Because Q1, for instance, R&D was lower than Q4. So there might have been an exceptional effect in Q4. But what's the trend for OpEx generally? And maybe your focus on R&D, which is very important for the design wins in the near future?
Yes. I think we should be not to lose on OpEx. I mean, I always like to spend on new product. At the same time, we have to keep our ratios somehow in check. And I believe a phase where you see strong growth is an ideal phase. Not to be super loose on the OpEx spending side because actually our structures do support higher revenues and can, with some efficiency gains, also supports very good new product development at this level. Usually, these OpEx numbers always edge up. This is basically clear. You have some hirings that are -- you just cannot do without and don't want to do without. You do have some wage increases, some cost increases at suppliers even. But overall, I think we shouldn't spend all the money we might have gained just because sales are a little higher now. We do have some OpEx efficiencies. I would like to keep that over time.
The next question comes from Malte Schaumann from Warburg Research.
I wanted to come back to the inventory, your inventory topic. You already touched on that. But I mean, it was quite a significant drop in inventories in the first quarter. Do you need kind of a similar development in the second quarter to support your expected sales volume? And then how long can inventories really go? I mean, should we then reach kind of a trough level than at the end of Q2 and then it will be very difficult to ship out of inventories any further?
Well, it is very hard to predict inventories, also their valuation on a quarterly level, but we are very lucky to have the level that we had going into this -- coming out of the crisis and going into the allocation crisis, which is a little crisis per se, with just reverse point. How low can this number theoretically go? I believe that there are peers and you do benchmarking, actually we did. They are the ones that are on top of the list of the nondelivery of chips companies now. So currently, we feel we would rather like to have more inventory than less and it will be better for our production sales, but it's just not to be had. So we are kind of prioritizing our deliveries. We are prioritizing getting the shifts to our customers on time. And then the inventory level is the result. It's -- you've seen the trend in Q1. At some point, of course, this needs to stabilize because there's -- we are going down too quickly, but there could even be another decrease. This is not impossible.
Yes. Okay. And is it any -- I mean, what your talks of online? I mean, do you get any visibility on volume increases from timing periods? I mean, is it rather on timing by quarter, earlier or later? Or what's the general -- I mean, that's the largest hurdle in the talks of really getting the volume you need.
Well, I believe that the whole industry is trying to prioritize the wafers now to the ones that really need it because otherwise car manufacturers line stops and really stops, not just people telling you it stops, but it's really stopping because there's no chip anymore. And this is what everyone tried to find out. So escalations are needed. If you want certain wafers in -- for certain supply chains to certain OEMs. And this is the discussion currently. If you can prove that -- if you don't get these wafers, you will most likely, proven by numbers, have an OEM line stoppage on the books, then people will find ways. If it's just convenience, very unlikely that people find ways to [ do what you do ].
Okay. So that makes visibility even less visibility further. Then on your customers' inventory, I mean, do you think that your customers are currently able to build safety stocks? Or would that be just something that will then come later than suppliers are -- will use?
I believe that you cannot avoid -- I mean, there is certainly not a zero safety stock building because you do not have perfect insight into what's happening at every customers in every value chain. And of course, the general tendency is average safety stocks that can be built, will be built. But within the allocation management, we, of course, try to reduce that in every way we can. So the answer will not be 0, but I don't think the answer is really a lot.
The next question comes from Christian Sandherr from Hauck & Aufhäuser.
And I would have one question left. Can you maybe talk a little bit about the development of wafer pricing? I mean, [ I think they ] have announced that they're going to be stepping up pricing by, I think, 15%, 20%. Do you guys feel this? Or can you mitigate these price hikes by just passing it on to your customers? And is this something that's going to affect margins for the second half? What's your impression?
Well, we -- I mean well, what we -- you read in the newspaper in that respect seems to be true. TSMC is charging extra on additional wafers. The definition of additional is a little arbitrary, but yes, that is true. It also extends to other foundries. Partly, it is a lot more pronounced at other foundries. We have to do some pain sharing with our customers there. And we, of course, have to ask them to cover some of the costs that are inflicted upon Elmos by this allocation situation. We see that some people have been traveling to Taiwan, and rightfully so, to tell the foundries you need to make it possible. You need to support the car industry no matter what cost. And now we just have to see that we find a fair split of the additional costs that are involved in this allocation, and we are discussing that.
Okay. So -- but I mean looking at your Q2 margin guidance it doesn't really look like it's much just an issue for right now. So probably more topic maybe for the second half, I guess?
Yes. Well, it is an issue, but -- I mean the -- it is more on the top of the second half, that is true, but it is also an issue for the Q2. But we have to see -- I mean, yes, if oil prices would be stable, we would be better in terms of our EBIT margin.
Okay. Good. And then maybe second question. You have a large cash pile on your balance sheet. In the past, we've been -- or you guys have been talking about potentially buying something smaller. Is there anything up and coming or not?
Well, we're always looking. We're always having long and short list. We are -- I mean, basically, every time I can remember, during any of the Q calls, we would have to report, yes, we are looking more briefly or more intensely at some or another target. That is true today as well. However, nothing is anything close to realization. It is -- I feel -- I mean, M&A is a little bit a tedious business. You have to do a lot of looking to, at some point, reach a target. And then you have to find an agreement, including pricing of that target, which proved in the past also to be not always easy. So I wouldn't expect to hear anything really soon. But I believe it's important to keep looking that when the right deal comes along, you actually identify it and you are ready.
And there is one more question from Mr. Ries from Apus Capital.
It's a definitely follow-on question to Mr. Sandherr's question, only to make it clear. In the past, you always learned that the contract prices with -- on the mobile industry are normally quite stable, even if you have bad times. So it was normally not a huge pressure from the price side. But now we discussed just before that prices are increasing for raw wafers, for substrates and also especially for wafer, finer wafers from TSMC. Therefore, how open are they, even if they're in the depressed situation from this point at the moment? So are the mobile -- as the Tier 1 customers to rediscuss prices and to increase prices, so we are really able to pass through this cost increases? To make it clear, is it possible that there are -- despite there have been stable prices in that time. So you -- in very good times for you, you are able to increase it in some regard whereas necessarily?
So what we are discussing with our customers is that we somehow share the burden of this allocation situation. And actually, most customers do understand that this is a burden. There are some that are very, very inflexible and then discussions are more difficult. However, of course, we do regard that also as a difficult behavior because we have to get through this together. And if we invest very substantial money to ensure supply, then we have to find solutions for that.
There's one more question from Robert Sanders from the Deutsche Bank.
I had a few. The first one is, just to feel -- philosophically, do you feel any slight regret about the whole Duisburg thing? I guess most companies we speak to in automotive feel they've over-indexed to foundry now and that it's not gross margin-accretive anymore to go to foundries. And the reason being is that the foundries basically see this as a new paradigm where they can answer the prepayments, non-cancellation terms, higher pricing, a complete philosophical change that they think is permanent. So did you see any different -- do you have any sense of regret about your increased outsourcing strategy given the crisis?
Well, actually, for a company of our size, our agility, our need for new technologies, I would say no. This may be different if you have a totally different position. Say, if you're a very huge player with a stable portfolio and a lot of own technology development. However, we, being who we are, we are agile. We do need new technologies for new cutting-edge products. We do have quick grants. The foundry model is a good one for us.
Got it. But is it as gross margin-accretive as you originally thought, given the crisis? I mean presumably, it's going to be harder to get the gross margin to improve using outsourcing.
Yes. This also depends a lot on the product that you actually view. I believe a lot of the gross margin in the short term is, of course, the question of terms that you have and find. However, the excellent chip design and big steps in innovation usually prove to be the real drivers of gross margin.
And then...
It is true. If you look over 3 months or 6 months, then the foundry prices and whether they go up or down, they, of course, are the direct driver of gross margin. But over a little longer period, this may actually not be completely true.
But do you see the foundries asking for more aggressive terms, including cancellation terms being much more aggressive?
Yes. We -- I would presume that we see that for the next year. This year, I believe, they would accept us canceling all of their volume with them. However, this is not a strategy that has any likelihood of happening because we desperately need the wafers, just like anyone else. So no, currently, we don't discuss cancellation terms. And for this year, I believe it would be a strange thing to do. Over the longer period of time, let's see what comes.
Okay. And then what is the industry chatter around when is the bottom for line downs? The reason I ask is because in Q1, we had this microcontroller disruption in Texas and in Japan, and that massively exacerbated the situation in microcontrollers, which is the key pinch point in auto at the moment, 14-nanometer. Even auto analysts were shocked when Ford guided down 35% production in Q2, even though that should be kind of self-evident. So I'm still a little bit surprised that there seems to be a slight disconnect between what people expect in the auto industry and what semiconductor guys are saying. So when do you expect the kind of bottom for line downs are in the industry? Because clearly, that is a key headline risk for the -- for any auto semi company.
Well, I believe gradually in the second half of the year, we should be out of the line down scenario. I wouldn't think this extends into next year in terms of really excessive line down. That would be surprising for me. In terms of how long general allocation is with us. This may take some quarters longer. So it may well reach way into '22, maybe even a substantial part of '22 may be characterized by allocation. It also depends on what the strategies within the value chain are regarding safety stock because, I mean, once you're out of line down, the question will be, can we now actually -- should we now actually build some safety stocks? And if you ask the people that are suffering line downs today, they would probably say, "Oh yes, we want that. Where can I sign?"Let's see whether that is still the idea when we reach that point and then people have to pay for it. But I would say this effect that it's not only stopping the line downs, but that is also getting back to healthy stock levels, even maybe really safety stock scenarios, this may take some time, and we'll boost this, of course.
Right. But I mean I think we should assume just in time as bed and safety stocks are here to stay. I mean, I guess I'm sure we discussed last time, General Motors talking about semico's needing 12 months of inventory going forward. I mean presumably, if you're seeing orders for 95 million to 100 million, which is what FTE and Infineon is saying, and the production is only 83 million according to your slides, there is safety set being built of every product on the planet, except the microcontroller and a few other small little products like sensors, which are in short supply. So presumably, the safety stock effect will affect you in 2021 and then it will be in microcontrollers in 2022. But presumably, the normalization for you will be in '22 and for the microcontroller guys in '23. Is that not -- I presume that's what...
If I only knew for sure. We are -- I mean, if I look to the year, we couldn't deliver to 100 million cars. We will deliver to very substantially, I mean, due to the equivalent of a lot of cars less. To get real, real clarity into all the value chains, that will not be possible for us. So it's a little bit like the question Mr. Sandherr asked, "Well, what is the safety level that is now happening?"Well, it's not 0, but I don't expect it to be huge because we are struggling to fulfill the real demand. And you cannot kind of cannot avoid that someone sneaks through the line and then has a little private safety stock, but kind of the large things, you can avoid and than we do avoid at this point in time.
Right. But you can see consignment stock. You can see -- you have some visibility into what's going on at your Tier 1s and your OEMs. And I know that they may pull it early, so you kind of lose visibility, but you have some clarity, I mean by just speaking to people. And you remember when the industry was doing 95 million, 10 million units, but that was not that long ago, right? I mean, it's I think the industry...
We [indiscernible]...
In 2018, the industry did 95 million, and '17 as well.
Yes. You try to kind of take the points that you have and make an informed guess what the situation that the relevant customers is, that is true.
I mean, I can only assume because you're being relatively opaque on second half, is that you are already quite concerned about that factor. I mean, that's what Alexis is saying, for example.
Actually, not too much. I'm not concerned about the second half actually at all. This is more related to our supply chain, whether everything is on time because -- I mean, we do not have the usual situation here where we have a production that is more or less or at least by and large decoupled from the supply chain, and whether it's revenue in the last few weeks of a year is not actually related to the wafer supply anymore. And that is -- we're tighter now. It's much more stringent. So whether you really get the wafers in time also means whether you get the revenue in time. And that is why it's really hard to predict these revenue numbers because a lot more than just the final steps in the supply chain now have influence. The wafers have influence today, which they did not have some time ago.
There are no further questions.
Perfect. So thank you very much for your participation and your interest in Elmos. I would like to mention that our AGM will be held as a virtual meeting on May 20. Despite the special circumstances due to the ongoing COVID-19 pandemic, we would like to encourage all of you, all of our shareholders, to register your shares at the AGM. If you have any questions, please do not hesitate to contact our IR team about it. I would also like to remind you that we will publish our Q2 results on August 4. And finally, I would like to wish you all the best. Stay healthy, stay confident and goodbye from Elmos.