Elmos Semiconductor SE

XETRA:ELG

Earnings Call Analysis

Elmos Semiconductor’s Steady Growth Despite Market Challenges

Elmos Semiconductor reported Q2 2024 sales of €142 million, a 4.4% year-over-year growth despite customer inventory adjustments. The gross margin was 45.2%. EBIT increased to €35 million with a 25.3% EBIT margin due to lower R&D and SG&A expenses. The company advanced to the TecDAX Index and received accolades for its investor relations. For FY 2024, Elmos reaffirmed its guidance with expected sales of €605 million and an EBIT margin of 25%. Inventory normalization is progressing, and CapEx is forecasted to drop significantly. Elmos remains optimistic about future growth driven by strong design wins and market demand.

Positive Market Positioning

In the second quarter of 2024, Elmos Semiconductor SE reported solid financial performance despite challenging market conditions. The automotive semiconductor market continues to adjust post-pandemic, with inventory corrections affecting customer orders. While the overall situation remains diverse regionally, there are signs of improvement, with some customers nearing their desired inventory levels. Elmos recorded group sales of EUR 142 million, reflecting a growth of 4.4% year-over-year, demonstrating resilience even amid these market dynamics.

Revenue and Profitability Insights

For Q2 2024, Elmos achieved a gross margin of 45.2%, slightly lower than the 48.9% margin recorded in Q2 2023, which was boosted by a one-time energy price compensation. Despite the margin drop, operating income (EBIT) rose to EUR 35 million, up from EUR 33.1 million, improving the EBIT margin to 25.3% due to reduced R&D and administrative expenses. This is a positive indicator of the company's operational efficiency amidst fluctuating demand.

Outlook for Future Growth

Looking ahead, Elmos affirmed its full-year revenue guidance for 2024, projecting sales of EUR 605 million, with a possible variance of +/- EUR 25 million. The company anticipates maintaining a strong EBIT margin of around 25% (+/- 2 percentage points). The anticipated reduction in capital expenditures to around 12% of sales is a noteworthy shift from the previous year's rate of 20%, indicating strategic financial management aimed at enhancing profitability.

Inventory Correction and Market Trends

The company is currently navigating a prolonged inventory destocking phase. It is estimated that the majority of customers will have adjusted their inventories by the end of 2024. This prolonged cycle is expected to allow for a gradual return to normal order levels, signaling potential improvements in order volumes as consumer demand stabilizes. Elmos is strategically positioned to leverage this transition with its innovative semiconductor solutions geared towards the growth of intelligent electronics in modern vehicles.

Strategic Movements and Localization Initiatives

Elmos is expanding its operations in Asia, particularly in China, by enhancing localization efforts. The company has begun modest assembly operations and is developing new products utilizing local foundries. This strategy not only addresses regional market demands but also positions Elmos advantageously in a competitive landscape increasingly focused on local sourcing and manufacturing.

Focus on Cash Flow and Working Capital

Elmos aims to improve its cash flow performance in 2024, targeting positive operating adjusted free cash flow while managing working capital more effectively. The company recognizes the need for continued focus on cash generation, especially following a period of elevated working capital levels. As the market normalizes, Elmos expects to drive efficiencies that will reinforce its commitment to operational excellence and profitability.

Conclusion: Navigating Challenges with Growth Potential

In summary, Elmos Semiconductor SE is navigating a complex market landscape with a balanced approach that emphasizes financial stability, operational efficiency, and growth potential. With firm revenue projections, strategic cost management, and an expanding presence in Asia, the company appears well-positioned to capitalize on the ongoing evolution of the automotive semiconductor industry, as long-term demand for intelligent vehicle technologies remains robust.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE Analyst Conference Call regarding the Q2 results. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation.

Let me now turn the floor over to your host, Dr. Arne Schneider, CEO.

[Arne Schneider, executive]

Good morning, ladies and gentlemen. I would like to welcome all of you to our conference call for the second quarter 2024. Thank you very much for your participation and your interest in our company. 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, Elmos was able to continue its positive financial performance in the second quarter despite ongoing challenging market condition, and we are on track for another successful year.

Let me start with a short update about the current market environment. The effects of the normalization phase in the automotive semiconductor market are ongoing and inventory corrections by some of our direct customers are still visible. The destocking period will most likely extend into the second half but the level of inventory reduction has decelerated in the last 3 months. Some of our customers have already achieved their desired inventory target, and we are shipping to them based on their real demand. Other customers are continuing to adjust their orders temporarily and still focus on working capital optimization.

So we have, overall, a quite diverse picture here, which differs from a regional and a customer perspective. This is a typical phenomenon after the end of a high-growth allocation period. As you know, it's also a short-term temporary supply chain effect and order levels will return more and more to real production demands.

The new forecast for the global automotive market has been adjusted slightly and 2024 production volumes are now expected at around 89 million units compared to 90 million units last year. More important, the structural growth trend for automotive semiconductors remains intact. More intelligent electronics and modern cars combined with our innovative product portfolio offer for us an excellent basis for future growth.

Beyond that, we received great news from the German Stock Exchange in June. Elmos has advanced to the TecDAX Index, making our company one of the 30 largest listed technology companies in Germany based on free float market capitalization. Of course, you all know that. What you may not know, we are also very proud that Elmos' Investor Relations activities are highly recognized by investors and analysts and our Head of IR, Ralf Hoppe, was awarded the third place out of 70 companies in the category best IR work of an IR professional in the SDAX at the German Investor Relations Award 2024.

So I would like to congrats Ralf and his team for their outstanding work. The promotion to the TecDAX and the IR awards confirm the successful development of Elmos on the capital market and at the same time, are for us a motivation to continue to improve the high standard of our IR communication and to further increase the enterprise value of our company.

Let me now present the financial highlights of the second quarter. Elmos continued its positive business performance in the second quarter of 2024, generating group sales of EUR 142 million. This is a solid growth of 4.4% year-over-year despite ongoing inventory adjustments by our customers. The Q2 gross margin was 45.2%, also in line with our expectations. Please remember that the gross margin in Q2 2023, which was actually 48.9% was positively impacted by a onetime effect such as the energy price compensation by the German government.

EBIT further increased to EUR 35 million in Q2 2024 compared to EUR 33.1 million last year. Despite the lower gross margin, the EBIT margin increased slightly year-over-year to 25.3% due to lower R&D and SG&A expenses. After the high investments in the course of 2023, the CapEx ratio in Q2 '24 was further reduced to 10.1% of sales, in line with our guided CapEx levels.

We have initiated various projects to reduce our CapEx and that's the optimization of testing, machine utilization and machine uptimes as well as improved testing times. Although the cash flow from operations improved year-over-year as well as sequentially, it is still influenced by higher working capital. Including investments, we achieved a positive adjusted free cash flow of EUR 1.7 million in the second quarter of 2024.

Ladies and gentlemen, let me finish my presentation with the outlook for the running year. The latest global light vehicle production forecast by S&P shows a total number of 88.7 million new cars, slightly lower compared to the previous forecast and also down by minus 2% versus 2023 volumes. The adjusted forecast reflects the longer-than-originally-expected destocking and business cycle effects.

Based on the solid financial performance in the first 6 months, we are confirming our guidance for fiscal year 2024, published in February. We expect full year sales in 2024 of EUR 605 million, plus or minus EUR 25 million. We want to maintain our strong profitability and expect an operating EBIT margin of 25%, plus or minus 2 percentage points for the full year '24.

Just as a reminder, the expected operating EBIT margin does not include any effect from the closing of the sale of the Elmos wafer fab to Littelfuse, which, as you know, will be very positive. We also continue to 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 the 20% CapEx ratio in 2023. And we also expect a better cash generation and projected positive operating adjusted free cash flow in fiscal year '24 without effect from the closing of the sale of the wafer fab, which will, of course, add to cash flow.

Ladies and gentlemen, the positive performance in the second quarter and the first 6 months of 2024 is reflecting our commitment to operational excellence and profitable growth. The temporary inventory reduction by our customers will most likely take a little bit longer than expected. But we are more and more shipping towards the real demand. The solid growth rate despite these challenging market and also geopolitical conditions underline the high potential of innovative product portfolio. Thank you very much. I'm now opening the floor for questions.

[Operator]

[Operator Instructions] The first question comes from Florian Sager, Stifel.

[Florian Sager, analyst]

I got two questions. The first one would be -- I mean, you talked about the inventory correction. Do you have an idea how long exactly it is going to last? And I'll ask the second one after this.

[Arne Schneider, executive]

Well, what we already see that we are more and more shipping towards real demand, but there are also some customers who are still in the process of digesting their inventory. Finding a complete endpoint is a hard thing as kind of this will, I think, have more of an S shape with a long, long tail that will be barely recognizable. So I guess, I mean, most should be through their inventory by more than half or substantially more than half having digested now. So the peak is over. Now it's going to get better and better probably through the rest of the year.

[Florian Sager, analyst]

Okay. And the second one would be on Q4. How is -- I mean, you confirmed your guidance. I'm assuming Q4 is looking quite positive for you. And then I know you won't give me guidance for next year. But still what do you see after Q4, any hints you could give us of what you see there?

[Arne Schneider, executive]

This is 2 tough questions kind of in a row. I mean, let's first start with Q3, where we know a little better because I mean, currently, customers order most often weeks, something like 6, 8, 10 weeks in advance. And some notable exceptions, say, from Japan or so. But the Q4 visibility is still very, very limited, actually. In Q3, we again see growth both sequentially and year-over-year. How much, I can't tell you yet because, I mean, there is still some way to go.

But Q3 looks like a reasonable quarter. And Q4 is, of course, a lot more difficult to predict because there are orders missing, but we also had that in Q1, Q2 and so it's kind of the normal course of business now that you do not have all orders half a year in advance. Given the design wins we had in the last years, we are not structurally negative on next year, but it's too early to give a concrete guidance how growth will develop.

[Operator]

And the next question comes from Finn Kemper, HAIB.

[Finn Kemper, analyst]

First of all, congratulations to the great results. I also have 2 questions. One, is it possible for you to give a recent flavor on what the share of growth comes -- what share of growth comes from design wins compared to overall volume and then could you also say a few words on pricing also into 2025? Because in case this normalization period is taking now longer than expected, could there be a risk that then the oversupply could lead to pricing pressure?

[Arne Schneider, executive]

So firstly, I mean, there is little these days that comes out of car volume. So with the 90 million cars we had last year was a little less, but honestly, I don't even really see whether we noticed the 1 million cars kind of immediately, I mean, theoretically, and for sure, we will, but it's not that we can track every single car there. There's basically a flat line in terms of what is driven out of car volume. So the rest comes out of design wins to actually attribute that towards what is new applications, what is share gain, what is generally increasing growth in an application, this is a very hard thing to do, actually. But we see this structural growth even in this very difficult year with a lot of headwind despite the fact that the car volume is flat.

So I think generally, this should put us in a really positive mood. Then you asked about pricing. I mean, we haven't negotiated pricing. And I think for next year, pricing will be a very kind of individual discussion because I don't see that there will be huge developments in pricing. Maybe we can offer a little bit and share a little bit of efficiency gain, but we still have to prove that in a lot of cases. So it will be a very kind of a discussion customer by customer, where volume and new business will play an essential role for the pricing discussion I would foresee.

[Operator]

And the next question comes from Johannes Ries, Apus Capital.

[Johannes Ries, analyst]

Maybe first, a more general question. Why are you seeing maybe you develop better and more optimistic for the second half compared to other bigger players in the market. Is it that you've less legacy, more new products? Or is it a less depend on the engine and therefore, less on the weakness of [indiscernible] market. What's your reading that you're outperforming maybe most of your peers?

[Arne Schneider, executive]

If we only know for sure, but some things, we do have good indications. I mean we are a very agile company these days. We took share in the allocation period and we promised to deliver, and we still kind of prioritize growth very much. You can see that we spend a lot in CapEx that we are willing to go into working capital not forever. But in this period of change where you get chances and you've got a lot of chances in the last years, if you were really, really prioritizing your customers, we did prioritize customers. We did prioritize our ability to deliver. Above everything else, above financial optimization or short-run financial optimization.

So I believe this does pay off, and we are small enough that we can do such shifts in direction and such investments, such decisions to prioritize growth, maybe a lot quicker and a lot more brutal than other big competitors can actually do that with very, very big organizations that if you have to write a course with a lot of bands in between. It's just more discount if you're a bigger ship.

But it's also true that we do not depend that much on the rise of electromobility as some others. And I believe some others, particularly in power semi, they will inevitably benefit at some point in the future, but that point is more in the future than everyone thought. But this is not of our concern. So we are not that dependent on that shift towards an electrified drivetrain. And that is good.

[Johannes Ries, analyst]

Great answer. Second question, can you maybe explain a little bit [indiscernible] development in different regions. We see that China, Chinese and partly Koreans are developing better than European automobile producer. Is it also you are facing and because you're also comparatively strong in Asia, how much you benefit from your position here?

[Arne Schneider, executive]

We are strong in Asia, and we want to be strong in Asia and in all key Asian market, be it China, Japan and Korea. We are very committed to our customers in Japan and have very positive long-standing relationship with a lot of these customers. And we try to adapt very much to their needs, we had a great time together in the allocation and helped each other out. So this is a very positive thing and I believe in a good relationship, it usually means good things for both. It means growth for us. It means an excellent supply for them. So this is a very good relationship, and we continue to invest in it. In China, of course, we have a lot more diverse market, a lot more dynamic market. But we actively cater to the needs of the market. We will be a lot more local. We will offer a lot more local content in China also to our local subsidiary that we founded at the beginning of the year. So localization is a key thing that we will strive for in China to be even better able to cater for the needs of the China market.

[Johannes Ries, analyst]

Third point, design wins. You mentioned a great design wins of years before we are benefiting now and also in the coming years, how has been the design win development this year?

[Arne Schneider, executive]

I mean we are in the middle of the year now, and we are very confident to reach our targets. We could even say we are very confident to overachieve our targets. I mean, let's not say it's a great day before the evening comes as we will say it, but you find us in the best [indiscernible].

[Johannes Ries, analyst]

Great. Finally, working capital, you said it will not stay forever such high because it's still higher than in the past and comparably high, absolutely. So, could we expect in the foreseeable future that you are able to reduce working capital because it's maybe not the same shortage in the value chain and therefore producing even better free cash flow than you have now in the first half, which was also a clear improvement but compared to the EBIT there's still room of improvement, honestly.

[Arne Schneider, executive]

There's a lot of room in improvement, and we are very aware that there is that room for improvement. I mean, now I believe to capture chances it's not as important as it was to deprioritize working capital and prioritize growth. I believe now this -- in an allocation, you have to push for the material to be able to deliver. And now things are a lot more structured. So we will be able to reduce over the next year or two quite substantially our working capital. It's a normal thing after the end of an allocation, but it's also a focus topic of ours. We already went down slightly. So the peak you may have already seen and now the development is at least for us internally, it's pretty clear. Going to go down more towards normal levels that we see in other places in the industry.

[Operator]

And the next question comes from Malte Schaumann Warburg Research.

[Malte Schaumann, analyst]

Let me just follow up on Johannes' question on working capital, free cash flow. I mean you're guiding for an improvement versus last year. Does that imply would you target a positive free cash flow? I mean, even if the balance is slightly negative, free cash flow would be a significant improvement with last year. So what's your thoughts on that?

[Arne Schneider, executive]

Well, we think it should be positive, so above 0. This is what we strive for this year. And yes, even a little negative would be a significant improvement over last year. As you know, cash is the priority these days, and we are having various projects to improve cash not only in the cyclical nature, but also structurally. Having to do with uptime of machines, having to do with test times, having to do with working capital of the various sorts inventory as well as accounts payable and receivable.

So we think that if we look at our peers, if we look at us, that this is actually one of the key items that we can improve upon, and it just needs hard work and focus to get some improvements done. So we think it's a great focus these days. Also, taxes are an interesting variant. I believe I have forgotten. We are also not really competitive in terms of our tax position and also something you think about, very hard, which we're doing.

[Malte Schaumann, analyst]

So yes, somewhat positive this year and then maybe substantially more positive next year with the matters you're focusing on.

[Arne Schneider, executive]

Yes. I know you're trying to adjust the model to [indiscernible]. But yes. And I can't give you the 5-year line, but yes, this is -- the general development is effective.

[Malte Schaumann, analyst]

And then on the currency growth into the current fourth quarter. I mean part of that is probably ramp up, such as we have seen in the last year. Do these come as planned? So I mean, you should have at least quite some good visibility on the planned ramp-ups in the second half of the year. And maybe some insecurity regarding the inventory situation, especially for Q4.

[Arne Schneider, executive]

The ramp-ups are on track. That is clear. So that is also why I'm confident that we will again grow in Q3. The big chunk of running business is, of course, on more short notice than the ramp-ups because, of course, the ramp-ups, you know a lot, you talk every week, these are a lot more known. We know them well into the next year because we have to prepare. We have to fill the value chain. This is kind of always a special process to get something into running series. But for the running series, the visibility is not as great as it was a year or 2 ago.

[Malte Schaumann, analyst]

Now regarding the customers that are still in inventory correction mode. Do you expect that the majority of these will be through by the end of the year or will that drag on in '25. Do you have any visibility on that?

[Arne Schneider, executive]

I mean if there are kind of 1 or 2 that drag on maybe, but the relevant part that you can also see in numbers in the end should be through by the end of the year latest.

[Malte Schaumann, analyst]

So even from the cyclical part so to speak, there should be some sequential growth from Q3 into Q4 as more and more customers have finished that process.

[Arne Schneider, executive]

That is true. And we believe that cyclicality. I mean this is part of our plan that we had a little cyclical boost that we have our ramps and then everything should be fine.

[Operator]

And we have another question coming from Florian Sager, Stifel.

[Florian Sager, analyst]

I just had a follow-up on one of Mr. Ries' questions. And when you said that you're thinking about moving production to China or having a more localized supply chain. Has that already happened? Or what exactly would your time line be here to actually take advantage of the foundries that are coming online in China?

[Arne Schneider, executive]

Very good question. I believe localization in China is, of course, going to be a step by step localization. We already do a little -- very little, but a little assembly there. We may consider doing some testing and more assembly, we have the first product in development with the local Chinese foundry. And market facing, we have our -- an additional China entity within the group, which is the center of the local for local activities. By the way, it's called [indiscernible].

And as all of you probably know, that speak fluent Mandarin. This is making something big out of something small and a joint prosperous path. This is kind of a key meaning and it's all local brands. So we will start delivering ICs out of the local brand this year. Some ICs, not really a lot, but we still think we are progressing in that activity with China speed. So there's quick progress, and that is good.

[Florian Sager, analyst]

You're not actually using -- you're still using the foundries in Taiwan, I'm assuming, right?

[Arne Schneider, executive]

And Korea and Germany. I mean, to get a new product, it's not just that you can take your product and go to a foundry and tell them, please make this. You have to develop product in the technology foundry office. So you have a 2-, 3-plus year lead time anyhow before you can actually get wafers and ship them to the market out of a local foundry. But we are in the process. And that is, I believe, the very important thing that localization is on a very good track.

[Operator]

At the moment, there seem to be no further questions. [Operator Instructions] There are no more questions from the audience.

[Arne Schneider, executive]

Just let me remind you the next regular quarterly reporting is scheduled for November 6, 2024, with the publication of our Q3 results. For today, thank you very much for your participation and your interest in Elmos. Goodbye from Dortmund, take care and stay confident.