Elmos Semiconductor SE
XETRA:ELG
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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 second quarter 2023. [Operator Instructions]
Let me now turn the floor over to your host, Dr. Arne Schneider, CEO.
Good morning, ladies and gentlemen. I'd like to welcome all of you to the Elmos Q2 Conference Call. Thank you very much for your participation and your interest in our company.
During the second quarter, we once again delivered an outstanding performance. We continued to record strong sales growth combined with an improved profitability. We invested record levels in future growth. Moreover, we have set the course for the successful transformation of Elmos into a fabless company.
So today, I'm very happy to present to you the highlights of another successful quarter and the positive outlook for our future business. As always, 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.
First, on the sale of the wafer fab. So besides the strong operational performance, the highlight of the second quarter was the agreement with the U.S. technology company, Littelfuse, to sell the Dortmund wafer fab for a purchase price of around EUR 93 million. We have found a sustainable and long-term perspective for the Dortmund wafer fab and can now implement the important structural transformation into a fabless company, as planned.
After the disappointing provision at the end of last year, we have worked very hard and diligently to find a new solution for the wafer production in Dortmund. To find a very good new deal within such a short period of time underlines the execution capability of the entire Elmos team. We do not allow ourselves to be distracted by setbacks or roadblocks, and continue to pursue our strategic path with high focus and perseverance. And as a fabless company, we are convinced that we will become even more innovative, even faster and even more efficient.
Before I'm going to present the financial highlights of Q2, let me quickly summarize the transaction with our new U.S. partner, Littelfuse. Elmos has agreed to sell the wafer fab at a net purchase price of approximately EUR 93 million to Littelfuse, who would acquire the Dortmund wafer fab with approximately 225 employees. All other activities, including testing operations, will remain with Elmos.
In acquiring the Dortmund wafer fab, Littelfuse enhances its capabilities and powers semiconductors for power conversion applications like renewables, energy storage and e-mobility charging infrastructure. We have also agreed to enter into a long-term supply agreement until at least 2029. So the supply of sufficient wafers from Dortmund will continue to be secured without interruption for a very long time.
The closing of the transaction is expected to be effective December 31, 2024, and it's subject to certain closing conditions and regulatory approvals, among them, the investment control procedure under foreign trade law conducted by the German Federal Ministry for Economic Affairs and Climate Action.
Following regulatory approvals, Littelfuse will make a payment of EUR 37 million. The remainder of the purchase price will be paid at the final closing. Elmos will remain the owner of the building and will rent out the clean room under a long-term lease. In addition, Elmos will provide the necessary infrastructure and certain services on the basis of separate lease and service agreements.
This agreement is a milestone for semiconductor production in Dortmund, and it will strengthen Germany's standing as a high-tech location. Elmos, on the other hand, will use the advanced technologies from our foundry partners best suited for sustained innovation and product performance. We will be able to continue to deliver groundbreaking innovation in mixed-signal automotive semiconductors for a sustainable future growth of the company.
So let me continue with an update about the current market environment. The allocation situation, as you know, has further improved. So we expect a path towards normalization as we are heading into 2024. We are also working harder to prepare our supply chain for the upcoming ramps in the second half of this year. The demand for Elmos' innovation continues to be very strong, and we are very happy with the progression of our new design wins so far, acquiring many attractive projects in all of our segments, from existing and actually also from interesting new customers.
For this reason, we have accelerated our investment once again in order to be prepared for the increasing order volumes. Our mixed-signal applications address key mobility trends and offer additional value to customers and end users. And our innovative solutions, combined with the structural trends for more electronics and modern cars, are, as we think, a very solid basis for the future development of Elmos.
On Q2, so once again, we, as you have seen, achieved another strong top line growth in Q2, the 10th consecutive quarterly sales record. Group sales increased significantly by EUR 30.2 million to EUR 136 million in Q2. This is a plus of 29% year-over-year and a plus of 4% sequentially. The main growth drivers for Elmos continue to be higher volumes in all of our product segments and some inflationary cost [ problems ], while FX actually had no major impact on the reporting quarter.
Impacted by both higher input costs from suppliers and the corresponding [ platforms ] to our customers, gross profit margin improved to 48.9% in Q2 2023. EBIT rose by 35% to EUR 34.1 million in Q2 2023 compared to EUR 25.2 million 1 year ago. The higher volume with a high gross margin and the under-proportional increase in R&D expenses contributed to this strong performance. The EBIT margin further increased by 1.3 percentage points year-over-year to 25.1%, in line with our expectations.
As already mentioned, we have decided to once again step up our investments for future growth. We see an encouraging level of new orders and new design wins, and we are not hesitating to secure these attractive volumes for the coming years. Although our back-end investment initiative affects cash flow, we will not limit our future growth potential by insufficient testing capacity. The opposite is true, we have invested a record level of EUR 42.4 million in the last quarter, mainly for the further expansion of our testing areas.
In addition to the high CapEx level, adjusted free cash flow was impacted by higher working capital as a result of our preparations for the upcoming product ramps and totaled minus EUR 36.7 million in Q2. Due to the negative free cash flow, Elmos recorded a net debt position of EUR 77.4 million at the end of the second quarter.
Ladies and gentlemen, at the end of my presentation, I will highlight our outlook for 2023. The global automotive market is expected to grow slightly by around 5% to 86.7 million new vehicles this year. According to the latest industry forecast, the overall global semiconductor market will shrink by 10% in 2023, while the automotive semiconductor market is expected to grow by 14% this year. The main growth driver is the increasing IC content in modern cars, fueled by structural trends such as more autonomous driving, e-mobility, comfort and safety.
For the current fiscal year, we confirm our guidance as of June 28 despite challenging and uncertain economic and geopolitical conditions. Based on our current order book and the available capacity, we continue to expect full year sales this year of more than EUR 560 million, representing a strong growth of more than 25% year-over-year.
The full year EBIT margin in 2023 is expected at 25%, plus or minus 2 percentage points. Elmos also continues to increase its efforts to expand testing capacities for future growth. We are forecasting capital expenditures of approximately 19%, plus or minus 2 percentage points of sales in 2023. And as a result, we expect a negative operating free cash flow this year.
Ladies and gentlemen, Q2 was a very successful quarter, and we are looking forward to another promising second half of the year. So thank you very much. I'm now opening the floor for questions.
[Operator Instructions] And the first question comes from Johannes Ries, Apus.
First, again, congratulations for this great deal with Littelfuse. Like always, some questions, first to your wording regarding the second half. If I remember right, after Q1, you said you expect an acceleration because of the ramp-up of designs in the second half. Now you said you still expect a strong second half. Is it only a wording without maybe a deeper reason -- concrete reason behind? Or did you get, given the generally more weaker economic environment, a little bit more cautious regarding the second half?
No, this is -- I mean, first, thank you for your congrats on the deal. On the second half, we could have chosen the same wording, but we just exchanged the words for, I don't know, for variety's sake, I guess. There's no deeper meaning.
Okay. There are analysts and investors who look at every word and the formulation of wordings. If it's -- thanks for this clarification. That helps a lot.
Maybe second point, inventories, you have increased your inventories because of the ramp, therefore, maybe no reason for concerns. But how you see the inventories in the value chain, in the supply chain, at the Tier 1s, at the OEMs? Is there any signs that inventories have risen strongly or maybe there is a risk of an inventory correction where still some analysts see also coming in the automotive space?
Or is it very different because you mentioned the structural growth drivers, and therefore, the demand is nothing -- not so much coupled like you can see with this chart about semi market and the auto market? On the number of cars, it's more -- has a much higher percentage or a much higher content of semis. But on the inventory, it's heavily discussed in the analyst space, therefore, what do you see from your perspective?
Well, I do think there will be a normalization of the supply situation. I mean we are still working through our allocation lots this year. But generally, we will be able to offer customers kind of a lead time-based approach, maybe not the short lead times that we have seen in the past and kind of 5 or 10 years ago. But we go back to a reasonable lead time-based approach for the majority of all things. There are still some pockets where capacities are so tight that we will remain in a little allocation mode. But for important growth projects on newer technologies, we will go back to a normalized world.
I believe the general fear in the market of massive undersupply, as we have seen it kind of 2 years ago or 1.5 years ago, this is slowly going away because I believe, generally, you get by with what you get in terms of chips, maybe not every single subsegment. But by and large, you can kind of reduce the number of people you have on your chip shortage task force, whether Tier 1 or OEM. So I do think -- or at least we expect some normalization effects, but this is also what we expected at the beginning of the year. So this is all within what we think is and should be reasonably happening.
The question, how much inventory exactly is out there? I can't tell you. You only know when you have the super-tight escalations where all involved parties along the value chain come together to try to avoid line downs. And I mean we've not been responsible for any line down at the OEM during all this horrible allocation period. And yes, we have some escalations, but we manage them, I believe, well so that our customers could rely on us.
Apart from these rare moments of extremely clear visibility, that there is no such thing as a complete transparency on inventory. I think we are very much in a structural growth mode. There are a lot of design wins of the last years that come online and go into production. So generally, the world is not too bad.
Okay. And there have been double orders, definitely. You have seen maybe one other cancellation because supply topic has normal -- or it is on the way to normalize. But you are still -- you have not published the order situation or the order book, but that's why we're still very healthy, I think.
Yes. Well, we have a very healthy order book. And I mean normalization is actually good for a lot of people. You can tell your IC supplier again, look, I need a little less and others can come and say, look, I need a little more, and you can actually balance these things again or at least this is how we wish 2024 to look like. I mean compared to a year ago, we could only say no, no to the one, no to the other. I mean the decrease never happened and the increase couldn't happen. So it was a very inflexible kind of situation where we found ourselves in. And this allocation, I mean, operationally, it's not fun.
So I believe it is good that we go back to a pathway where you could actually adjust to demand shifts. Some OEMs, they may take less, while others have a higher share. The general number of cars is healthy and not particularly high, I would say, at some 86 million or so this year. So there's -- that we do not have so much fear that the car market -- I believe it's in the right direction globally, at least.
Great. Also on the pricing, I've been just in the ST call, and they said they see at least stable pricing. I don't know, because always another discussion is automotive customers are very price sensitive. And if the supply, maybe shortage goes a little bit away, they will start to make pressure on prices. Do you share the opinion of ST that is not to see at the moment?
Well, I believe generally, input costs rarely go down in these inflationary times. And I mean we do want to offer fair pricing to our customers. On the other hand, what we all in the value chain must accept that we do have had and, I mean, maybe a little less pronounced, but in some respects, we still have higher input costs as far as wages are concerned, as far as chemicals are concerned, as far as spare parts are concerned. And in a lot of areas, we do see higher input costs. We may be able to deliver a little bit of efficiency, but this is not in the magnitude that we see as the general inflation. So we do not see a decrease in pricing.
Okay. Super. On your huge CapEx, first, you don't do it if you don't are optimistic even for the following years because it's tested with them. You now buy -- it's not for primarily for the second half, it's more for '24 and '25. Is that maybe the right assumption?
And what could we expect going forward because investors and analysts are always a little bit concerned if they see that the cash flow is negative and so working capital then is growing. Could we see some easing going forward that maybe at least that the supply situation is getting a little bit eased, so working capital comes down and you could return next year to at least maybe a slight positive or at least neutral cash flow?
Well, I think that we shouldn't kind of over-pronounce this single quarter. If you do the simple math and take the year's expectation for CapEx, then 4x the current Q2 or even adding 2x this Q2 leads to hugely more than we expect. But yes, we need it now, and we need to get our value chain ready. We do that on purpose. I mean I do love the machines, but not so much that I would buy them if we had no need. So it's -- we actually do it on purpose. In the second half, on average, it will be a little less. But you also have lead times on these things before they get really productive.
On the next year, I think if I look at the capacity that we have built this year and that we actually will have ready at the end of Q4, this is a pretty good run rate. So I wouldn't be too pessimistic about the cash flow next year. I mean it's way too early. It's pure speculation. But in my kind of emotional state, I would say I wouldn't be too pessimistic. We did invest a lot this year. We have some working capital buildup, which also made a lot of sense, but this is not necessary to do the same thing in 2024 again.
Great. Very briefly, and I have finished with a lot of questions, but so final -- so design wins, you mentioned the strength was in the past, therefore, you build now capacity. But if I understand it right, also in the first half year, your strengths and the design wins has gone on. Is that right?
That is right. No, no, I mean maybe I did not say that correctly. We had an excellent first half in terms of design wins. This is also what -- I mean we are happy about it. It's not immediate revenue, but it makes us very confident that we do have the right products and the right features that people really like. So this is good.
At the moment, we have no further questions. [Operator Instructions] And we have one more question coming from Robert Sanders, Deutsche Bank.
Sorry, I joined the call a bit late. I just wanted to ask about your design wins and how you're feeling about next year. And in particular, how your -- the route to market for your design wins is changing. How much is today an OEM decision? How much is a reference design with a platform partner like a Qualcomm? And how much is via a sale to a Tier 1? I was just interested if you've seen that evolve given what's happening in the assisted driving domain.
Yes, I believe -- I mean, first of all, we are extremely happy with our design wins in the first half of the year. On the structural shift, of course, we see that we continue to have strong Asia demand, also strong Asia design wins, not only from China, also from other parts of Asia. And we do have that situation, particularly in the ADAS domain, not so much in the other domains -- or a bit, but not as pronounced in the other domains, that the OEMs want to get involved, want to understand. And if they developed an idea of what the right chip is and knowing that there is no real alternatives, that they are willing to just specify that chip in.
That is something that we do see in some cases. I cannot give you a percentage number, to be honest, because we are happy in the cases where we have that, but we also win a lot of other cases. It's not that we would depend on that to win business. It's just nice to kind of be in such a situation, and it underlines our strength.
Got it. And then just on Ultrasonic, obviously, one of your biggest customers -- former biggest customers dropped using Ultrasonic. Have you seen that being sustained? Any change there? Obviously, there are trade-offs. And have you seen any other customers following suit?
Yes, I believe you're referring to the Tesla stopped the Ultrasonic use in their cars. And they were actually not the biggest customer by far. So yes, we noticed, but you will not see a bump in our growth lines due to that fact. So I mean our market position in Ultrasonic is extremely strong globally. And we continue to see excellent growth there, even without the Californian one, of this Californian one.
Got it. And just last question, on China, what are you seeing competitively in the domestic domain? And do you agree with people like Melexis when they're saying, basically, China is quite a few years ahead of Western OEMs when it comes to electrification? Would you agree? And are there domestic players starting to pop up that may be an issue for you? That's it.
Well, issue sounds negative. Yes, we do see domestic players pop up. We love all of our customers. The U.S. ones, the Japanese ones, the Chinese ones, the new ones and the old ones, and the new ones are also among our beloved customers, where we're happy to support the growth of these newer OEMs or of the -- I mean some of them are now very established. I mean it's, some say, it's a Tesla-BYD race. But there are others, and they will also be successful. You've seen the recent news out of the Volkswagen Group. We are happy to supply to all of them. So we are a little bit bystanders and support any customer.
Right. But you don't see any domestic China in, for example, micro-controllers and power discretes, there are Chinese players in semiconductors that are...
This is what you're referring to?
Yes. I was just wondering if you started to see the sensor industry starting to see some players pop up.
We start to see activity. Most of them have a limited kind of readiness to supply today. I would guess that within the next 5 years that we do see Chinese local competition.
[Operator Instructions] There are no more questions from the audience.
So at the end, I would like to remind you that the Q3 reporting is scheduled for November 8, 2023. Thank you very much for your participation today and your interest in Elmos. We look very much forward to meeting any of you at the various investment conferences and road shows in fall. For now, goodbye from Dortmund. Take care, stay confident, and see you soon.