Elmos Semiconductor SE

XETRA:ELG

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE Conference Call regarding the results for the first quarter 2022. [Operator Instructions] Let me now turn the floor over to your host, Dr. Arne Schneider, CEO.

[Arne Schneider, executive]

Good morning, ladies and gentlemen, and welcome to the Elmos Q1 Conference Call. I'm very happy to present to you today the financial highlights of another very successful quarter and a positive outlook for our future business. Although we are still operating in a very dynamic and challenging market and geopolitical environment, Elmos had a very successful start into the new year and recorded strong financial figures for the first 3 months of 2022. At the end of my presentation, you have the opportunity to ask questions, as you know and already expect.

So at the beginning, I would like to give you a short update about the status of the sale of our wafer fab to the MEMS Foundry Silex Microsystems AB. All organizational preparations and internal steps for the transfer and the closing are well on track and Silex, as the buyer, has filed all the required documents for approval at the beginning of this year. Now we are in close and constructive contact with the relevant authorities. So the status today, there is pretty much as expected. We are in the middle of the regulatory approval process.

Let me continue with a brief update about the current market environment. As we all know, the allocation is still ongoing, heavily impacting the entire supply chain for semiconductor since the end of 2020. In addition to the lack of wafer capacities, the ongoing pandemic, especially now in Asia, and supply chain shortages and logistical challenges due to the war in Ukraine have further intensified the already challenging situation. We currently believe that the tight supply chains will continue in this year and not all supply issues will be resolved in 2023 as well.

So far, we have been able to supply all our customers to such an extent that Elmos was not responsible for any line shutdowns at car OEMs. But this was only possible, thanks to a very close coordination and cooperation with our foundries and our customers. I have to highlight here once again that the entire Elmos team is doing an incredible job during this allocation. We continue to fight very hard for additional wafers from our foundry partners. We want to satisfy the high demand of our customers and ensure our delivery capability as best as possible.

Concerning the war in Ukraine, we do not directly ship any product to customers in Russia or Ukraine. So far, the supply from our foundries as well as the supply of materials and components for our own fab and testing are also not significantly impacted. However, we are in close contact with our main suppliers and have prepared contingency plans and the setup of alternative sources for special basis, for instance, and other supplies normally indirectly sourced from Russia.

For our dormant location, we have fixed the prices for natural gas and energy until the end of the year already some time ago. So we therefore do not expect major cost increases in 2022. Also, we have set up contingency plans in case of a relevant shortage of the supply of natural gas. We are unable to quantify, of course, the potential indirect efforts of the war to the global economy or to relevant markets. But we do not expect major cancellations by our customers as the demand for ICEs is still very high and the inventory levels in the supply chain and that our customers are still very low. So at this point in time, there is no need for us to adjust our outlook for 2022 due to the war. We stand firmly behind the guidance. I mean, we just increased the guidance 2 days ago.

What we do concerning Ukraine is that we are engaged in humanitarian support through the Elmos Foundation and this is important for us. As you know, the Elmos Foundation is a foundation linked to the Elmos Semiconductor SE and engages in public welfare projects. So we hope that this terrible war will end as soon as possible.

Let me now present the financial highlights of the first quarter. Thanks to the ongoing high demand for Elmos semiconductor in all of our product segments, group sales increased significantly by EUR 19.3 million or 25% to EUR 96.4 million in the first 3 months of 2022. Despite increasing material prices as well as allocation and pandemic-related effects, the gross profit margin remained on a good level at 45.6%. And EBIT increased further in the first quarter to EUR 19.5 million compared to EUR 12.2 million in the last year. The EBIT margin increased by 4.4 percentage points year-over-year to 20.2%. And reported and operating EBIT were virtually the same as in Q1 2022. So there were only minimal expenses in connection with the agreement on the sale of the wafer production in the first quarter. That is why there is no separate operating EBIT line in Q1.

Capital expenditures amounted to EUR 11.1 million or 11.5% of sales and were mainly spent for the planned expansion of our test capacities, especially in East Asia. At EUR 43.9 million, the cash flow from operations was very strong, supported by the high net result and positive impact from working capital as well as tax adjustments originating from our 2020 results, which were almost double-digit. However, please note that we expect tax payments in the second quarter due to tax alignments from the 2021 income, which will offset this effect again.

Despite our growth investments, we achieved an adjusted free cash flow of EUR 30.4 million, which was significantly above the comparable prior year figure. Due to the positive free cash flow, we recorded a net cash position of EUR 19 million at the end of the first quarter 2022.

Ladies and gentlemen, our order books are very well filled. And we were able to secure additional wafer capacities from our foundries. Therefore, we have further increased our already ambitious full year guidance 2 days ago. We now expect sales of more than EUR 400 million this year, an increase of almost 25% year-over-year. We have also increased our profit expectations, now forecasting an operating EBIT margin of 21%, plus or minus 2 percentage points of sales.

The expansion of our testing capacities will continue in the current year. And Elmos expects capital expenditures of now roughly 17% plus or minus 2 percentage points of sales. Now as you can also see, we need to prepare for more growth in the next year. For this year, we continue to expect the positive operating adjusted free cash flow above the previous year's level, which was EUR 11.1 million.

Ladies and gentlemen, Elmos innovative semiconductor solutions are playing a key role in the mobility of tomorrow. And we are benefiting significantly from the long-term positive trend of the semiconductor market. Combined with our successful operating model and our international setup, we are well on track for long-term growth. And we are also convinced we are well on track to generate shareholder value.

So thank you very much. I'm now opening the floor for questions.

[Operator]

[Operator Instructions] And the first question comes from Malte Schaumann.

[Malte Schaumann, analyst]

First question is on the guidance upgrade, which was quite significant at the current stage in the year. Could you maybe elaborate a bit on the moving parts? How much has this contributed to stronger pricing? Or is it just only higher wafer volumes you achieved from your wafer suppliers?

[Arne Schneider, executive]

Yes. When we initially gave the February guidance, there were still a lot of moving parts concerning wafers and this is actually the key contributor to the increased guidance. We see kind of short-lived shortages in the assembly area. We sometimes see very short-lived shortages in testing operations at our East Asian partners. But these are all not really gating for the revenue that we can make. It's the wafers that are gating our revenue. So there's the change, and that's the reason for the upgrade.

[Malte Schaumann, analyst]

Okay. And in the back end, is there any material exposure to China? So the current COVID lockdowns, is there risk for the coming weeks? Or is that mostly outside of China?

[Arne Schneider, executive]

We have that outside of China, and we only have a very limited China exposure there. We see that the most in freight rates and the route certain planes take. I mean, Shanghai as a hub has recently -- in recent weeks have decreased in importance. And I mean, I'm sure it will be back up again. But that's where a lot of COVID impact comes in, that you suddenly have to fly other routes and you lose days in readjusting, and that's happening.

[Malte Schaumann, analyst]

Okay. And do you see some customers, potentially Chinese ones, ordering less because they're not able to produce? Or due to the target that the customer takes everything you can get anyways and independent from actual production numbers?

[Arne Schneider, executive]

If they produce less, it doesn't reach us because -- I mean, and maybe justifiably because before they would actually cancel with us, they would rather put it into their stock. And I mean, we should rather think that if we have a customer that produces little less, that maybe we should reduce his allocation and ship it to other customers such that we avoid any kind of stocktaking. And -- but that is kind of the theory. I believe the practice is if you have a week or 2 where you produce less, you just try to get as much as you can.

[Malte Schaumann, analyst]

Yes. Right. Totally makes sense. Final question is on U.S. dollar exposure. If I recall correctly, you're short by 20% to 30% of sales approximately. Is that still the right figure?

[Arne Schneider, executive]

Well, currently, it's typical around -- we are typically short around 10% of sales. So we have sales 30% to 40% in dollar, and we have little more costs typically at least. So we are partly hedged -- actually mostly, partly mostly hedged for this year. If you look at the sales impact that you see on the Q1, for instance, and you look at that year-on-year, it's a 3% positive impact. If you look sequentially versus Q4, it's less than 1% actually positive. So the FX plays a role in our sales growth, but it's actually a relatively minor role.

[Malte Schaumann, analyst]

Okay. And you said 10% is approx, very roughly then the net exposure?

[Arne Schneider, executive]

Yes.

[Operator]

And the next question comes from Stephane Houri.

[Stephane Houri, analyst]

Yes. My question is around your order book and the visibility that you say that you have because you've said that you are preparing for more growth. Can you maybe give us some details about the maturity of the order book? If it's only confirmed orders? And the -- what is your view already on next year because you're talking about more growth?

[Arne Schneider, executive]

We are currently in negotiations -- early negotiations with the foundry concerning the wafer volume for next year. I guess this will drag over summer and partly into autumn. But we are starting on the first allocation scenarios, I would call them, and seeing -- and checking how this year 2023 might work out for us, our customers and so on. So it's way too early to come to conclusions there because the wafers are not all confirmed and are in heavy negotiations. So -- but this is a process that I believe will take place now over summer mostly and reaching into autumn. And it's -- as last year, it's a very intensive process because, of course, we cannot offer 100% of the demand to everyone. That is just not possible. So everyone gets less than 100%.

[Stephane Houri, analyst]

Okay. And can you talk about the design win activity at the moment? Are your customers still looking for new products? And if yes, where do you see more innovation? And yes, that would be interesting.

[Arne Schneider, executive]

We have an astonishingly good design win status. I mean, we just increased our target, kind of -- I mean, really in quite a significant way. And I believe we are set to overachieve it. And actually concerning design wins, we had a very good design win just as a single big design win. And I won't elaborate what it is and who it is. But we had it 2 days ago. So you find me in the best of moods concerning design wins.

[Stephane Houri, analyst]

Okay. And is it with one of your current customer, I would say? Or is it a new customer?

[Arne Schneider, executive]

Yes. That is I can't discuss. It's with one current customer.

[Operator]

Yes. The next question comes from Johannes Ries.

[Johannes Ries, analyst]

The question maybe it's a little bit boring, but if you listen to, say analysts, 2 groups, one who are really or maybe I believe, said it's a structural thing. And on the other side, there are a lot of analysts who are saying, something goes wrong in this automotive space, so a strong reduction in the numbers of cars, and it's a strong growth in the semi market. And they still believe there is a lot of inventory build in the channel.

Again, just question 2, you see anywhere in your own inventory and the Tier 1 sub suppliers, maybe in the OEM set, there is a huge real build of inventory or is it also misreading of some general figures as analysts do where they look only at the inventory of maybe the Tier 1s, but they also buy maybe metal, aluminum and other things, and there's also price increases which also maybe lead to a wrong reading of the inventory figures? So for -- what you're feeling if they were to receive the inventory side because that's a big elephant in the room always which is discussed on semis everywhere at the moment?

[Arne Schneider, executive]

Yes. When you -- I mean, I can give you 2 indications. For us, our inventory volume numbers are down and our euro numbers trend up. And this is on the costs that we have for the inventory, so the prices of the foundries and others. So there could indeed come a misreading out of that, that you think the euro number rises a little bit, so the inventory rises. No, the parts go down. That is -- we are really living from our hand directly to the mouth. And the other thing is when I look at our kind of day-to-day management of orders of customers, there's, of course, no real 100% truth in that discussions between the logistics people of our customers and our order management. But there is no kind of less tightness or less discussion going on. There are still a lot of day-to-day scheduling such that nothing bad happens. There's no one that we know of that has any significant inventory that exceeds immediate and direct operational demand. And I mean, if we would know, we would cut their allocation.

[Johannes Ries, analyst]

Okay. Super. And maybe on the wafer availability. What's the reason that you now get more wafers from your foundry partners? Is it lower demand in other areas or is this always a cautious message at the beginning of the year, say, over some reserves and now they give the reserves to you and other players?

[Arne Schneider, executive]

Well, you probably should ask them. As a first instance, I can only speculate about that topic. I believe fundamentally, we have ramping products that require and are not despicable. And there's just a lot of cars that would not be built if we would not get that additional allocation of wafers. And that is something, I believe, that you discuss issue after issue. And I believe we need to discuss that because we can't have thousands -- hundred thousands, millions of cars not being built because we do not listen to reason. And by and large, we all listen to reason, and we try to do the best possible. But that is a process that takes place. That is also not completely predictable. So everyone, I believe, tries their best that out of the scarce resources that we have, we have the least damage and then make the most of it.

[Johannes Ries, analyst]

And from other sources, maybe one of your competitors or say other big supplier in automobile car just recently told me that he expects a shortage in the foundry side. In these notes, you are active and the on automotive, fantastic space, from 40 up maybe to 110 or maybe 140 or something like this. So this will maybe stay around for the end of '23. Do you also see this?

[Arne Schneider, executive]

Well, you can find people that tell you this shortage will be there until '25. And you can find people that say, oh, it's all cyclicality, we've seen that before, this time is no different. It will be gone in a month or 2. And what I can tell you is that for 2023, wafers are not freely available, rather the opposite.

[Johannes Ries, analyst]

Okay. Super. And on the price point, again, can you give us any idea how much you have increased prices? When you have done it? And do you plan another round? So for -- how easy it is? At the moment, I think it's easier than in the past to give higher prices to your customers, which have -- on the other -- on the opposite in the past, it's known that it's going the other way around. This was also a discussion about decreasing prices.

[Arne Schneider, executive]

Well, we pass on the allocation-related and pandemic-related higher material costs. You can see that in a relatively stable gross margin. I mean, our gross margin is pretty much at the 10-year average, I would say, or I mean, 0 point something percentage points off maybe. But I mean, by and large, we -- you can see that we only pass on what is happening to us. So I believe we are very fair to our customers. But yes, of course, there are substantial price increases because the world of wafers and other semiconductor materials and services is getting more costly. So the inflation in that respect is there and very visible. In terms of our sales growth, there are the 2 main factors. It's both volume and it's pricing. And there's the third factor, which is FX, which is, as I explained, not really a super big factor.

[Johannes Ries, analyst]

All right. And finally, the split of maybe of what -- from your different offerings, is it still the case that all product groups growing nearly in the same amount? Or is it maybe one product group or one special product which is really maybe outperforming strongly because there's a huge demand for it?

[Arne Schneider, executive]

Well, there are, of course, some ramps. And ramps do not always happen at the same time. But this is kind of the second level effect. We see strong demand in all of our product segments. And then this is overlaid by some that grow even a little bit more, but in a planned fashion and known fashion and expected fashion, and it can't be different because when you have something completely new in a car and then it ramps okay, you grow more, but this is no kind of magic.

[Operator]

And the last question comes from Robert Sanders.

[Robert Sanders, analyst]

Rob here. I just had a question about the frequency of escalation calls. I was just wondering if that had gone up. That's what some of your peers are saying in the last 3 months. And then I have a follow-up.

[Arne Schneider, executive]

It is hard to tell because the frequency is already high. No, I wouldn't say it has gone up. It's a continued high level. And of course, you switch. And it's always the next things that people worry most about. It's always the current and the next quarter. And I guess -- I mean, the topic kind of -- it's moving forward off the topic. You always add some calendar weeks in the charts, you always add some calendar weeks or months in the discussion, and you discussed about January half a year ago, and now we are discussing about June and July. Now the intensity is the same. And it's -- also, the content is more or less the same.

[Robert Sanders, analyst]

The agreements you're signing, how should we think about that? I mean, we're seeing a lot more take-or-pay type agreements being signed, prepayments that just didn't exist in the last cycle. Like a foundry, like X-FAB is basically fully booked for 2024 with take-or-pay agreements. So what are you seeing? And are you protecting yourselves against a potential downturn or inventory correction? How are you correcting yourself -- protecting yourself?

[Arne Schneider, executive]

Yes. We are doing, I would say, adequate contractual arrangements with our customers. That also reflects the allocation situation. Because, I mean, in the end, we cannot offer full flexibility to our customers concerning changes in their allocation because if we take it or give it to one, we have to take it from another. And if we would see that one customer just says, well, I need full flexibility, I don't know whether I want the product, then, of course, this is hard to justify to another customer, to take share from him and give it to another guy that tells you, look, I'm not really sure whether I need it. So that, of course, leads us to maybe similar arrangements. So we try to be fair to all customers. And -- but we also need to reflect that we allocate and we need commitment from our customers, but this is usually not a big discussion or not a big issue.

[Robert Sanders, analyst]

And last question, just to be about single sourcing side. Can you just remind us what percent of your products are kind of single sourced? And I have just one last follow-up related to that question.

[Arne Schneider, executive]

In terms of number of products, it's not that many. In volume, it's a little bit more because it tends to be the larger volume ICs. But there's also a lot of single sourcing still going on.

[Robert Sanders, analyst]

Got it. And so would you say the shortage today, which used to be about micro-controllers and discrete is now more around sort of sub-$1, little sensors, little driver analog chips? Is that what the chip shortage is moved from, from kind of big chips to small chips? Is that fair?

[Arne Schneider, executive]

Well, I mean, our arena is the small chips. And there the allocation is still heavily ongoing. This is what I can confirm.

[Operator]

There are no more questions. [Operator Instructions] There are no more questions.

[Arne Schneider, executive]

So at the end, I would like to remind you that we will host our virtual AGM of the Elmos Semiconductor SE one week from now on May 11. And I hope that many of you have registered to our AGM and will support the proposals of management and Supervisory Board. The next regular quarterly reporting is scheduled for August 2, with the publication of our half year results. So for today, thank you very much for your participation and your interest in Elmos. Goodbye from Dortmund. Please take care, stay healthy and stay confident. Thank you.