Elmos Semiconductor SE

XETRA:ELG

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE Conference Call regarding the Q1 Results 2024. [Operator Instructions] Let me now turn the floor over to your host, Dr. Arne Schneider, CEO. Please go ahead.

[Arne Schneider, executive]

Good morning, ladies and gentlemen, and welcome to the Elmos conference call for the first quarter 2024. Thank you very much for your participation and your interest in our company.Before I start, 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 of course, you have the opportunity to ask questions at the end of my presentation.Ladies and gentlemen, I'm pleased to report a solid start into the new fiscal year, fully in line with our expectations. The destocking by our customers is visible, but the reductions are also at a level that we have expected. All in all, we are on track for another very successful year despite ongoing geopolitical and economic uncertainties.Let me start with a short update about the current market environment. After 3 years of very dynamic growth, the automotive semiconductor market entered into a normalization phase, resulting in adjusted order levels and temporary inventory alignment. I have mentioned this last time already. This is not surprising as most customers no longer see any major supply risk for semiconductor products after the end of the allocation.Customers are, therefore, adjusting their orders temporarily to -- and taking advantage of the opportunity to focus a little bit more on working capital optimization. It is expected that most of the excess inventories will be digested at the end of the second quarter, and order levels in the second half of the year should be closer to the real production demand again. More importantly, the structural growth trend remains robust due to more smart electronics in modern cars.Let me now switch to the financial highlights of the first quarter. Our performance in the first 3 months of the year laid a solid foundation for the business development ahead and was, as I mentioned, in line with our expectations. With plus 4.5% year-on-year, we achieved a robust sales growth in Q1 2024 to EUR 136.8 million. Gross margin was 45.8% in Q1, slightly higher compared to the same period last year. EBIT rose to EUR 33.8 million in Q1 2021 compared to EUR 31.8 million 1 year ago. As a result of higher volumes and the under proportionate increase in R&D and SG&A expenses, the EBIT margin even increased slightly to 24.7%.At 14.8% of sales, the Q1 CapEx ratio decreased compared to the 2023 full year ratio of 20%. However, due to year-end carryover effects, CapEx were EUR 20.3 million, and therefore, still at the high end of our full year target.As you know, various projects to optimize machine utilization, machine uptimes and to improve testing times have been initiated. The expected improvements from these activities will help to further reduce investments in the course of the year and, of course, beyond in line with our guidance.After strong cash flow at the end of last year, the Q1 cash flow from operations was influenced by typical year-end effects, resulting in higher inventories and lower trade payables. Including investments, the free cash flow stood at minus EUR 48.9 million for the Q1.Ladies and gentlemen, let me finish my presentation with the market outlook and our unchanged guidance for fiscal year 2024. According to S&P Global, the latest global light vehicle production forecast show a total number of 90.3 million new cars, so slightly up versus the last forecast on par actually with the 2023 volumes. From a regional perspective, China and North America showed a positive trend. On the other hand, production volumes in Europe, Japan and South Korea are expected to decline slightly year-on-year.The global automotive semiconductor market is now expected to grow by around 3% in 2024. The lower growth compared to the previous forecast reflects the temporary destocking effect, as some pockets of semiconductor inventory building have been realized during the allocation. However, despite these temporary inventory adjustments, the structural trend based on more intelligent electronics and modern cars, and that's independent of the drivetrain concept remains solid. Higher IC content combined with our very successful new design wins over the last year is very promising, as a basis for our ongoing growth in the future.For the current fiscal year, we fully confirm our financial outlook published in February. We expect full year sales in 2024 of EUR 605 million, plus or minus EUR 25 million. This is a growth rate of 5% at the midpoint of our guidance, and therefore, slightly better than the expected market growth of 3%.We want to keep our strong profitability and expect an operating EBIT margin of 25%, plus or minus 2 percentage points for the full year 2024. And just as a reminder, the expected operating EBIT margin does, of course, not include any effects from the closing of the sale of the wafer fab to Littelfuse.Elmos expect lower CapEx in 2024 compared to the previous year. We are forecasting capital expenditures of around 12%, plus or minus 2 percentage points of sales compared to 20% CapEx ratio in 2023. And we also expect a better cash generation and project a positive operating adjusted free cash flow in the fiscal year 2024, again, without effect from the closing of the sale of the wafer fab.Ladies and gentlemen, our start in 2024 was very positive and in line with our forecast and strategic expectations. The solid performance in the first quarter is reflecting our commitment to operational excellence and profitable growth. We're now almost 40 years, full of dedication and passion to create innovative microelectronics, we will continue to expand our leading position in the automotive semiconductor industry.Thank you very much. I'm now opening the floor for questions.

[Operator]

[Operator Instructions] And the first question comes from Florian Sager from Stifel.

[Florian Sager, analyst]

Thanks for letting me on. The swing in working capital this year is larger than past year. Maybe could you elaborate a little bit on the huge swing in trade payables and also inventories? And then, do you reckon this will improve in Q2? And finally, what I'm trying to get there is for the free cash flow for the whole year, where we're ending up. Maybe could you give us the guidance here?

[Arne Schneider, executive]

Yes. Maybe taking the last question first. I mean, for the full year, we will be positive, and it will not look that bad. What you see here in Q1 is the other side of managing cash a little bit at the year-end of 2023. We spent quite some money on being able to deliver in the second half of 2023. This was a huge amount of CapEx. So we manage cash more at the end of the year than we would usually do. And this is why you see this swing also in the Q1.We actually, with cash management, it's a general topic, of course, but we do not tend to focus so much on individual quarters. We look a little bit at the year as a whole, since there are usually fluctuations within quarters anyhow. So in Q1 now you see the result of some active management. This, of course, will not be that pronounced or even visible in Q2.

[Florian Sager, analyst]

Okay. Understood. And then last one, do you still expect a recovery in H2, right, in the other markets when inventories are adjusted. Because right now, inventories at key customers, I would say, still looking at least on the -- what I'm seeing elevated, but you believe this will be digested when we go into H2?

[Arne Schneider, executive]

Well, our base assumption is that we will digest most of it in the first half, and then we return to more normal or more linked IC demand compared to the production volume of cars. I mean, now there's clearly a little [ dislink ] due to the fact that we have to eat through inventories. But at some point, we, of course, have to return to normal production demand.

[Operator]

And the next question comes from Tim Wunderlich from HAIB.

[Tim Wunderlich, analyst]

I was wondering about the pricing development that you've seen in Q1. Maybe you can give us a bit of color on this? And then looking ahead towards Q2, yes, not H2, but Q1 to Q2, would you say that you are expecting sequential growth? Maybe you commented on this, and I missed it. But just a shorter-term outlook Q1 to Q2. And then also in terms of -- that's my final question. In terms of competition, are you seeing intensifying competition, especially from Asian or Chinese companies?

[Arne Schneider, executive]

Mr. [ Wunderlich ], thank you for your questions. The -- I mean, usually, we don't give a guidance for the Q2, but yes, we do expect a sequential growth. It will not be huge. But I believe that year-on-year, it looks in Q2, more or less like a copy of Q1. I mean, it's not finished. So we can't really say. But this is -- if I would have to guess today, this would be pretty much it.Then you asked about Asia, and this is mostly I talk about China. We do see competition in China developing locally, but we will also be a lot more local in China. I've just recently been to China to open up our local for local outlet there. We think that China is a very important market. It will remain important. Currently, we have a very good presence in China. We like that we have exposure to a lot of Chinese EVs that we are sure will make their way not only in China, but will also make their way internationally. These are great cars. I was lucky enough to drive quite a few of them on my trip. So we are convinced these are great cars. They make their way. So an exposure to these cars is a good thing to have.Lastly, you asked about pricing. We see pricing generally as flattish. We see in the market that there are -- I mean, people talk about prices, most people make little or no concessions. So whether it's [ 0 ] or minus 1%, this can be debated somehow, and it for sure depends on the segment and a lot of other things. I mean, customers can get price concessions with us if they take significantly higher volume and make progress in their volume brackets. I mean, we normally do price volume tables for our pricing. If you just disregard these effects, it's a flattish development.

[Operator]

And the next question comes from Lukas Spang from Tigris Capital.

[Lukas Spang, analyst]

Just a clarification question on the working capital. So -- we now saw the increase, which was related to the negative operating cash flow. And now in Q2, you expect a reverse, which will be more or less stable for the rest of the year?

[Arne Schneider, executive]

Well, we see the Q4 and the Q1, I believe, where you see that effect of deviating a little bit from a normal level to a more actively managed level and then back again. I believe if you look at the Q1 and Q2, this at least kind of from a very superficial perspective, these look like very similar quarters.

[Lukas Spang, analyst]

Okay. Because I think in the last meeting, you said that working capital or yes, these inventory levels should go down until the first half of the year or [ was that an misunderstand ]...

[Arne Schneider, executive]

We do see inventory levels in the market going down right now. We also will see a normalization of inventory levels at Elmos. However, this will also take part in the first half, but this will also take part in the second half. So this is a gradual progress.

[Operator]

And the next question comes from Malte Schaumann from Warburg Research.

[Malte Schaumann, analyst]

My first question is on the visibility you have for the second half. Your guidance midpoint -- guidance midpoint implies kind of quite significant growth in the second half of the year just as in last year, when we had one of your competitors saying last week that they see actually an improving demand at some customers, you had another competitor today, cutting its guidance a bit more strongly than expected. So what's your take on the current environment and visibility you have at customer behavior that would support such sequential growth expected for the second half?

[Arne Schneider, executive]

Yes. The thing is, I believe we are back to where we were 5 years ago or so where we kind of can see a quarter and the rest, we can see a little bit. And then we have some hypothesis. But it's not that we are fully booked or there would be like in the last 2 years or 3 years that there would be contracts until the end of the year or even beyond. So we see that Q3 is filling up as expected, which is good and reassuring.We cannot see too much about Q4 filling because most of -- I mean, customers just do not have to order. And they never did that in the past when we were not in allocation, and they are not doing it today. So this is kind of -- I mean, we have to emotionally get used to that because we adjust now back to the normal world back from the allocation times, but fundamentally, we are not in bad spirits.

[Malte Schaumann, analyst]

Okay. So there are no indications that the environment is deviating significantly from your expectations you had earlier in the year?

[Arne Schneider, executive]

No.

[Malte Schaumann, analyst]

No. Okay. Then on design wins, maybe comment on how design wins are progressing this year and maybe also especially in China as there is ongoing discussion about development in China?

[Arne Schneider, executive]

Well, we -- I mean, I always look at the end of April, of course. I want to see at least [ 4.12 ] of the yearly target. We are well above [ 4.12 ]. So I'm happy. And the sales guys do not enjoy the pleasure of seeing me every day and asking again what's wrong. So nothing seems to be wrong. It looks like a very solid year. We are very much on track. I mean, last year was the second best year in company history concerning design wins. The year before, actually, with a lot of extraordinary effect, it was a super great year and the absolute record. I don't know whether we can reach that again in the foreseeable future. But design wins are good.I mean, if we look at China, we perceive it is increasingly important to have some sort of localization strategy, and we have that in place. So that is for sure, good. We see -- and I mean, China is -- China is, as a whole, very dynamic. There are kind of market shifts within China from the more Western dominated companies to the more local companies, of course, but China as a whole is developing very nicely as a market.

[Operator]

So we didn't receive any further questions. [Operator Instructions] And we have another question that comes from Robert Sanders from Deutsche Bank.

[Robert Sanders, analyst]

I was just wondering if you could just look back to 2019, you used to have EUR 300 million of revenue, now you have EUR 600 million. When you look at that sort of 5-year gap, how much of that gap was driven by pricing? And how much was kind of volume or just greater attach rate of your products? Because I'm just -- what I'm trying to get to is, in the past, you used to say content growth used to be 2% to 4% above units for cars. I just want to try to sort of understand and parse out how much has been sort of driven by extraordinary pricing gains?

[Arne Schneider, executive]

Yes. I mean, we had some 2 years or 2.5 years with pricing increases actually, and they were kind of overall slightly double digit, just double digit, I would say. So yes, part of it is pricing, but it's actually -- it's not the major part that is pricing. We also saw significant volume gains. And by the way, I mean, the question is always what is the baseline if you model it? Is the baseline minus 2%, 3%, 4% in pricing and then you have a new reality, then of course, the pricing effect always gets bigger.But of course, over that time period, we have seen significant volume gains, also because we were able to deliver very well in the allocation. So we had of course, a priority on existing customers and not to stop a line at existing customers. But whatever we could do on top of that, and there were numerous situations, where we were approached. And in some situations, we could not help. But in a lot of situations, actually, we could help to compensate for what one or another competitor was not able or willing to deliver. So that certainly helped us with a push of extraordinary growth.

[Robert Sanders, analyst]

And then just looking back to the rest this year, it sounds like since CES that there was a huge destocking wave. Have you seen that slowdown that effect since March? Because obviously, after Infineon today seeing another major cut you guys haven't, I was just wondering if you've seen a sort of slowing down of the impact. Yes, I'd just be interested [ to know in ] your thoughts since March.

[Arne Schneider, executive]

I think it's a little bit too early for that. I mean, we do see -- it's not a full transparency situation. So you take individual examples and then you kind of try to scale that to the rest of the market. I mean, we actually see a quite diverse market in terms of destocking. We look at China and there's quite a lot of destocking. We look at Europe and America, and they are kind of in the middle.And then on the other end of the spectrum, we look at Korea or even on the very far end of the spectrum, Japan. We do not see a destocking in Japan, for instance, maybe because they always had certain buffer stocks and the fear of not having parts was not very pronounced because they always had parts, and it was clear that they will always have parts. So I think this -- there's quite some regional development in that destocking. And of course, there's different customer behavior as well.

[Robert Sanders, analyst]

But is that not just a reflection of different attitudes to supply chain management? I mean, Infineon mentioned on their call that Tier 1s and OEMs are kind of in disagreement about where the inventory should be held, and that's driving a lot of their destocking. I mean, isn't that just a function of that? Or do you think it's perhaps something different?

[Arne Schneider, executive]

That is -- I mean, that is exactly the case. You see China with a very entrepreneurial culture, with a very short-term oriented culture at least in terms of stock management and flow of parts. And then you see Japan, on the other end of the spectrum, where we, I believe, have a philosophy in the production system that everything should be controlled, should be smooth such that you can optimize a lot of other things, but it shouldn't be the available of relatively small parts that you desperately need. So yes, they do have a different philosophy. They think optimization is best done on a very stable and controlled supply chain, where others have a much more entrepreneurial and kind of short-term orientation, maybe short-term market-linked orientation, there are substantially different philosophies. That is right.

[Robert Sanders, analyst]

Just last question. You mentioned that lead times have normalized and you're back to the old way of working. So in a given quarter, let's see your backlog today, how much does that cover of this quarter's revenue next quarter's revenue and then the one-off, just so we have an idea of -- remind us of the old normal.

[Arne Schneider, executive]

Well, I mean for order [indiscernible] for kind of Q4 or so, it would be substantially less than half filled at this point of the year. Q3 is, of course, substantially more than half filled. And with the Q2 add that's a little bit going forward with short-term needs in chaos, but fundamentally, Q2 at this time of the year is mostly done.

[Operator]

Okay. Since we didn't receive any further questions, let me hand back over to Mr. Schneider for some closing remarks.

[Arne Schneider, executive]

So at the end, I would like to remind you that we will host the AGM of Elmos Semiconductor SE next week on May 15th. And of course, I hope that many of you have registered for our AGM and will support the proposals of the Supervisory and the Management Board. The next regular quarterly reporting is scheduled for August 1, 2024, with the publication of our half year results. For now, thank you very much for your participation and your interest in Elmos. Goodbye from Dortmund. Take care and stay confident.