Elmos Semiconductor SE

XETRA:ELG

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE analyst conference call regarding the Q1 2023 results. [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. Thank you very much for your participation and your interest in our company. I'm very happy to present to you today the highlights of another successful quarter and a positive outlook for our future business.I would like to remind you that all relevant figures can be found in our investor presentation, which is available on the Elmos website. And as usual, you have the opportunity to ask questions at the end of my presentation.Ladies and gentlemen, despite an ongoing challenging and dynamic market environment, Elmos has had a successful start into the first 3 months of the new year and is on track for another strong performance in 2023. We are continuing to execute on our profitable growth strategy and we are preparing for the upcoming product ramps in the second half of the year.Let me begin with a short status update regarding our activities to find a new solution for our wafer fab in Dortmund. As mentioned in our last call, we are exploring various alternatives for the fab and talking with interested parties, and we are confident to find a new long-term future perspective for the wafer fab. However, as you already know of course, we are not under any pressure here. We also already mentioned -- and I said so in our staff meeting most recently last week -- quality comes before speed.The Elmos wafer fab in Dortmund is still running at full capacity for several years. So there is really no hurry. We want the best solution for our employees, our customers and, of course, our shareholders. And as I said, it keeps us busy. We are working on it.Let me also now continue with an update about the current market environment. Although the allocation situation, especially on the wafer foundry and assembly side, has noticeably improved, the order levels of our customers remain very high. Therefore, securing our delivery capabilities continues to be our #1 priority, especially as we see some challenges in the second half of the year when we will ramp some new projects. We want to satisfy the high demand of our customers and continue to show an outstanding delivery performance. So that is what is keeping us also [ busy ].And now let me go to the standard part and present the financial highlights of the first quarter. We achieved another strong topline growth in Q1 2023, with a plus of 36% year-over-year and a plus 4% sequentially. But thanks to the ongoing high demand for Elmos semiconductors in all of our product segments, group sales increased significantly by EUR 34.6 million to EUR 130.9 million in the first 3 months of 2023.The main growth drivers for Elmos continued to be higher volumes and then also inflationary cost pass-ons, while FX had no major impact in the last quarter. At 45.3%, the gross margin in Q1 2023 was stable, impacted by both higher input costs and the corresponding pass-ons to our customers. So more or less flattish development of our gross margin compared to the longer term average reflects the fair pricing approach of Elmos.EBIT rose encouragingly to EUR 31.8 million in Q1 2023 compared to EUR 19.5 million one year ago. The higher volume and the under proportional increase of R&D and SG&A expenses contributed to this strong performance. The EBIT margin increased by 4.1 percentage points year-over-year to 24.3%. EBIT performance was in line with our expectations, reflecting the typical seasonality in the first quarter of the year when not all price adjustments, other adjustments are fully reflected at the beginning of the year.As a result of the ongoing expansion of our testing capacities, capital expenditures totaled EUR 15.2 million or 11.6% of sales in the first 3 months of the year. The investment program for the testing area with new testing cells being installed in Asia in particular will continue as we need the additional capacity for our future growth.Due to our strong topline growth combined with new record levels and design wins in the last 2 years, I see quantities are continuing to rise significantly, and we must ensure that we have enough capacity in wafer and final part testing. As I mentioned during the last conference calls, our bold CapEx plan for our back-end area, in our view, underlines our confidence in our future growth potential.Cash flow from operations was impacted by higher working capital as a result of the strong growth. We are preparing our supply chain for the upcoming product ramps. This enables us to secure our delivery and ramp-up schedule in the second half of the year.At minus EUR 18.7 million, the adjusted free cash flow in Q1 2023 was negative due to the higher working capital and the ongoing high investments. And due to the negative free cash flow, Elmos recorded a little net debt position of EUR 27.7 million at the end of the quarter.Ladies and gentlemen, let me finish my presentation with the outlook for the year. The global automotive market is expected to grow slightly by around 4% to 85 million new vehicles this year. However, the underlying growth of the automotive market is currently less important as the main growth driver is the increasing IC content in modern cars, fueled by structural trends such as more autonomous driving, more e-mobility, more comfort and more safety.Although the entire automotive segment represents only a relatively small share of the global semiconductor market, the automotive semiconductors are expected to grow much faster than other segments in the next 10 years. This structural trend, combined with our record level of new design wins, is in our view a very solid basis for the future. That's why we continue to invest in our capacities and in our ability to grow.For the current fiscal year, our promising outlook published in February remains unchanged. 2023 fiscal year will continue to be characterized by challenging economic and geopolitical conditions, and the demand for automotive semiconductors will remain high. So based on our current order book and the available capacities, we continue to expect full year sales in 2023 of more than EUR 560 million, representing a growth of more than 25% year-over-year. The EBIT margin is expected at 25% plus or minus 2 percentage points.As already mentioned, the expansion of our testing capacities will be continued this year and we are forecasting capital expenditures of around 17% plus or minus 2 percentage points. We also continue to forecast adjusted free cash flow in fiscal year 2023 at the level of the previous year, plus or minus EUR 10 million.Ladies and gentlemen, Elmos got off to a good start this year and is heading for another very successful business year. The further business development during the course of the year will be even more dynamic into the new product launches, enabling us to further expand our market position in our application fields.As an innovative and reliable semiconductor company in the automotive segment, Elmos is excellently positioned to participate in the structural trends for automotive semiconductors. This is a solid basis for long-term growth and a sustainable increase in shareholder value.So for now, thank you very much. I'm opening the floor for questions.

[Operator]

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

[Malte Schaumann, analyst]

A couple of questions on my side. First one is on -- you mentioned to expect some product ramps in the second half of the year. When should these actually kick in at your top line. Should you kind of -- are you expecting kind of gradual improvement of revenue growth going into the second quarter and then kind of more strong growth in the third quarter or how does this play out?

[Arne Schneider, executive]

Yes, the second quarter will have a little impact, but only a little, and most of it will be seen actually in the second half.

[Malte Schaumann, analyst]

Okay. Good. And then on the -- you mentioned that the supply situation is kind of improving. Could you remind us or could you provide a number which part of your business or which part of your products are kind of still supply constrained and which has more or less, don't know, already back to normal? And then secondly, do customers adjust their order behavior with respect to the kind of normalization you're seeing?

[Arne Schneider, executive]

Well, we are still in allocation for the full year. So we made an allocation to our customers for this year 2023. And this is generally what we can supply to them. Any short-term needs are generally not possible. And if we can find for little quantities, some sort of solutions by kind of bagging another customers to reduce a little to shift it to someone else, this is what we try to do to keep serious situations under control. And generally, there will be some sort of solution, but there's no such guarantee that anything can be done.

[Malte Schaumann, analyst]

Okay. And then do you expect these supply targets to also be in place in early 2024 or do you expect these to be solved by year-end?

[Arne Schneider, executive]

Well, we hope and I believe the whole industry hopes that things will improve in the course of this year and latest in 2024, which is, I believe, what we've been telling ourselves that in 12 months everything will be good since the start of the allocation. But of course, this time it's true and not like last time.

[Malte Schaumann, analyst]

Yes. Okay. And with respect to the still constraints being in place, so there's absolutely no headwind from negative price effects or something like that?

[Arne Schneider, executive]

Sorry, I haven't got your last -- negative price impact. No, we do not see that. I mean we do see that the steep increase in wafer prices is hopefully not repeated in 2024. It's a little bit early. So it's a little bit speculation what happens in 2024. But there's this one big foundry where you can read about in the press. And it's not the numbers we've seen in previous years. So actually, the inflationary cost pass-ons, they may still be present, but they may not be as pronounced or maybe we -- let's see what we can negotiate in the course of the year. At least I think they will not be as pronounced as in the last 2 years.

[Malte Schaumann, analyst]

Okay. So base case would be flat or slightly up, but a scenario of price downs is rather unlikely for next year?

[Arne Schneider, executive]

Yes. This seems rather unlikely. Exactly.

[Malte Schaumann, analyst]

Okay. And then my last question is on the design wins, maybe you comment –- quite a bit comment on how this developed in the early month of this year?

[Arne Schneider, executive]

You find us in good mood.

[Operator]

The next question comes from Johannes Ries, Apus Capital.

[Johannes Ries, analyst]

Also a couple of questions, also some follow-on on Malte's question maybe. But first another question regarding Asia and China. You had said the Chinese auto market has shown a slow start. It was also a discussion in the opinion call just ended before your call started. But you have over, I think, nearly 60% in Asia of your sales. Do you see any impact or any weakness coming from your direct Asian demand? And do you also like and can you expect an improvement in the Chinese auto market in the second half?

[Arne Schneider, executive]

Yes. I was just in China the week before last and they told me that likely the general market may pick up because they got a regulation change mid of the year, and their kind of -- some customers are reluctant to buy now and may wait out a little bit. And this is what the locals told me. So it's kind of secondhand knowledge. What we like about the Chinese market is the relatively quick shift towards the new energy vehicles because that's the shift where we see a positive impact on us. So that is very good for us. I also think that the Chinese market will be growing this year, maybe a little bit more in the second half, that is possible. So generally, we are in pretty good mood as the Chinese market is concerned.

[Johannes Ries, analyst]

Okay. So, do you see no weakness from your Asian business at all, yes?

[Arne Schneider, executive]

No. We think they're going to contribute quite a bit to this year's revenue.

[Johannes Ries, analyst]

Okay. And additional question to the pricing. You may also have talked about value pricing and that some customers also reserve capacity. You mentioned it also in former calls. Is that also helping you at the pricing side by going the same way like as big guys like Infineon are going?

[Arne Schneider, executive]

Well, I believe generally that pricing in the market is, of course, influenced by big players. It's influenced by big players on the foundry side because that has a strong influence on the cost base of everyone. It's influenced by the margin expectations of other players, and they may reflect in the pricing behavior. We are relatively a small player, but I believe we've got great and innovative products. So maybe that adds to the question of Mr. Schaumann, do we see kind of downward pricing. No, this is certainly not what we see.

[Johannes Ries, analyst]

Okay. And you mentioned also this increased wafer cost, but that is possible to pass it through to your customers here?

[Arne Schneider, executive]

We unfortunately have to.

[Johannes Ries, analyst]

Okay. Great. Another question regarding -- only clarification question. You had this very strong gross margin in Q4. There have been exceptional reasons. So remind us now because you mentioned gross margin is flat, comparable others seeing increasing gross margins. So for explain why maybe others are able to increase their gross margins, are more aggressive on pricing. And what -- remind us what was the impact versus over 15 Q4?

[Arne Schneider, executive]

Well, you always have a little special things in individual quarters. You've got NRE, so development money that comes in. You may have public money that adds a little bit. So there are always some special things. That's why we more like to look at kind of a little average out numbers. These days and in the last 2 years in particular, you had a certain pricing power that some people interpret it in different ways. And I believe we did a very fair, healthy, long-term and reliable interpretation, which is more the pass-on interpretation, and there are selected market participants who had a more short-term interpretation of pricing power.So let's see how these things play out over the mid-term. We are actually happy that we did not take short-term advantage of our customers because we do think this generally comes back, and it's generally not an appropriate behavior. I mean we regret that we have to pass on a higher cost base to our customers because it creates problems with them. But we need to do that. And this, I believe, has to be accepted by our customers and is generally accepted by our customers that we can't kind of act as a buffer for the substantially increased pricing and inflationary pressures. But we don't want to take advantage in a situation of need.

[Johannes Ries, analyst]

So for in your guidance is gross margin around 45% for the whole year, roughly or so something like this. Yes?

[Arne Schneider, executive]

Yes. We do not specifically guide to gross margin, but assuming a generally stable gross margin is a very good assumption.

[Johannes Ries, analyst]

Okay. Maybe also a follow on to this, still the demand is above the supply. Where is the bottleneck? Is the bottleneck -- you mentioned TSMC gives more capacity to automotive. So you mentioned in the conference call. Or is it a bottleneck more on your own capabilities in the testing or in the backend space?

[Arne Schneider, executive]

Well, we are currently very much ramping testing capacities. I mean you first have to get a hold on wafer and not everything is immediate, of course. I mean if everything would be immediate, we would have no bottlenecks. But I believe we are doing a good job in ramping our testing capacities this year. I mean you see that a little bit in the financials as well in CapEx numbers. And that is needed because we do need to deliver these products that will soon run over the testing machines that we buy today.

[Johannes Ries, analyst]

Okay. But the bottlenecks that the capacity is not enough to fulfill the demand. It's not your testing, it's overall. Despite you get more wafers from TSMC is not enough. Yes?

[Arne Schneider, executive]

You can -- you would need to look at it product by product and have a look what exactly is it that you cannot deliver everything someone wants this month. And then maybe you could deliver it in 6 months or 9 months' time when you debottleneck certain things. You really would have to take a lot more detailed look to discuss what is the situation in the relevant product area.

[Johannes Ries, analyst]

Okay. Two final questions. First, you talk about the acceleration in the second half. How I have to read this? Acceleration in the growth rate year-on-year? Acceleration in the sequential growth? How should I look -- if I look to your total guidance, I don't see the acceleration.

[Arne Schneider, executive]

Well, we look a little bit at the market and I believe there are relatively few people that guide 25% revenue growth. So there will -- I mean, if we make the same quarterly revenue in the remainder of the year versus Q1, obviously there is a certain gap. So there will be -- of course, there will be sequential growth.

[Johannes Ries, analyst]

Okay. So it's -- but an acceleration means some acceleration in the sequential growth over the year, I guess?

[Arne Schneider, executive]

Yes, yes. This would be consistent with our planning.

[Johannes Ries, analyst]

Great. Finally, the high working capital. You need it definitely to your growing, partly also to secure delivery to the customers. But could we expect somewhere maybe into '24 to come as this come down and could help the free cash flow?

[Arne Schneider, executive]

No, it's not -- I mean, '24 is, of course, a little bit of speculation, but it's not totally out of the question that may be route to proceed. It, of course, depends a lot on growth in '24. But it's not unlikely to assume that at some point, we proceed to an even more stringent working capital management. I mean, as all of you know, we've not been super stringent on working capital because we prioritize growth, we prioritize the rents. And we used to say, which is now wrong, that we have 0 interest rates. I mean a year ago, we were almost right with that. So now we do have interest again, which is, I believe, pointing towards the direction you mentioned.

[Johannes Ries, analyst]

Okay. Because that's what we call [ sets ] only point some guys who are looking critical on is sort of free cash flow. Now if you improve there, I think everything is fine. And yes, I go back --

[Ralf Hoppe, executive]

But Ries, this is Ralf speaking. This is what we've communicated since many, many quarters. We prepare our company for growth that will hurt free cash flow in terms of working capital but also in terms of investment because when you look at our guidance, it's still -- CapEx guidance is still 17% plus minus 2 percentage points of sales. So we continue to invest heavily in our back-end area to prepare our organization for the upcoming growth. And that's no change compared to our communication in the last quarter.

[Operator]

At the moment, there seems to be no further questions. [Operator Instructions] Mr. Schneider, there are no further questions.

[Arne Schneider, executive]

So ladies and gentlemen, thank you very much. At the end, I would like to remind you that we will host the Virtual Annual General Meeting of Elmos Semiconductor SE next week on May 10. The next regular quarterly reporting is scheduled for July 27 with the publication of our half year results. So thank you very much for your participation and your interest in Elmos. Goodbye from Dortmund. Take care and stay confident.