Elmos Semiconductor SE (ELG) Earnings Call Transcript & Summary

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

Good morning, ladies and gentlemen. Welcome to our virtual analyst conference and earnings call for the fiscal year 2022. I'm very happy to present to you the highlights and preliminary financial results of another very successful and eventful year. As usual, you have the opportunity to ask questions at the end of my presentation. For all of you who are relatively new to Elmos, let me start with a brief overview of our company, shown on Page 2 of the presentation, which is available in the IR section of our website. For almost 40 years, Elmos has been developing cutting-edge semiconductors for the automotive industry. We are one of the leading and one of the most experienced companies for analog mixed signal semiconductors globally. With our innovative solutions, we have established #1 position in multiple application fields in the car industry and continuously developing the next innovation that provide added value for our customers and end users. We estimate that, on average, 7 Elmos ICs are installed in every newly produced car worldwide in 2022. However, as you can easily imagine, the content of Elmos ICs and a fully equipped premium model or a modern EV is much higher. Our roots and headquarters are located in Dortmund in the western part of Germany, but we have continuously expanded our international presence. The 1,200 Elmos team members in our 15 locations worldwide support our design, product engineering and sales activities as we serve all relevant regions always close to our customers. Six R&D centers worldwide and more than 350 experienced engineers turn our deep understanding of our customers' needs and future trends into innovative microelectronics, helping to shape the mobility of the future. We have 6 main product segments, which all support the global automotive megatrends and offer very attractive growth potential. Our sales are mainly generated in Europe and Asia, where the majority of our direct customers' factories are located. You know that in our global value chain, the destination of the product can actually be quite different from the location where a car is built are ultimately used. Our automotive ICs are installed in cars all over the world. We have a strong relationship with our direct customers, the global leading automotive Tier 1s, but also with traditional OEMs as well as EV start-ups from China or start-ups or not so start-ups from the U.S. in the EV space. Our deep understanding of the application needs of our customers is one of the biggest assets of Elmos. We understand what our customers need and offer them smart solutions. Elmos SE support driver assistance systems and autonomous driving as well as electric drive concepts for more safety, better comfort, higher efficiency and fewer emissions. Let me give you just a few examples. Elmos ultrasonic ICs provide a precise 360-degree detection of the environment and are a crucial part of the sensor fusion in modern driver assistance systems or for more or less autonomous driving. Ultrasonic systems are extremely reliable, independent of light or weather conditions, very flexible and cost effective. Elmos ultrasonic ICs enable stress-free or fully automated parking in the smallest parking spaces. Ultrasonic sensors detect fixed or moving obstacles around the vehicle extremely quickly and very accurately and support the emergency brake assist system to avoid collisions. Another example. Up to now, interior lighting has mostly served to illuminate the interior of a car in a beautiful and very energy-efficient way. The most recent generation of our dynamic ambient lighting concept not only create an individual field good atmosphere in the interior of the car. They also visually worn the driver of potential hazards. In the LED rear light segment, which has been growing strongly for many years, Elmos Semiconductors set new standards for very bright and constant light intensity with very low energy consumption at the same time, and I do think they offer a great choice of design options. The next example, and keep going, this is the last example. The range of applications for small electric motors and cars is growing steadily, especially in modern vehicles, several dozen of these little help us, enables the electrical and automatic adjustment of numerous systems. Elmos motor control ICs convinced with high performance and low power consumption as well as precise and almost silent operation, especially in the field of thermal management for electric and hybrid vehicles. The engine electric drive and battery, of course, must be controlled effectively and precisely. Elmos motor control ICs and sensor ICs ensure an optimal operating temperature of all these components, increasing efficiency and range which is, of course, the key thing these days and reducing energy consumption. With an ongoing high level of R&D activities in our -- and our unparalleled innovative spirit, we were able to achieve a record volume of attractive new design wins in all our application fields in 2022. Combined with the ramp-up of our successful running programs, the new business provides a strong basis for the further expansion of our market position and are a solid foundation for our future growth. Let me now move to Page 4 of the presentation. In an eventful and challenging year, Elmos once again performed extremely well. The past fiscal year was characterized by a challenging environment with geopolitical and economic uncertainties, regional effects from the corona pandemic still present and the ongoing allocation for automotive semiconductors. The war in Ukraine, economic sanctions, supply bottlenecks as well as the high inflation affected the global economic development. Prices for material, energy and labor increased substantially and, of course, also for us. The semiconductor market showed an ongoing high demand for automotive semiconductors and, at the same time, a weakening in other IC segments like consumer electronics, smartphones or office PCs. The order levels of our customers remain high and are still exceeding the available capacities. As far as we can tell, we do not see a major inventory buildup within the automotive supply chain. Although foundry capacities have gradually improved, mainly because of lower demand in other segments, as I mentioned, automotive-specific 8-inch technologies remain tight. We expect that the imbalance may not be fully resolved in 2023, but we do think things may get a little better. Therefore, the supply and demand mismatches for now continuing, less pronounced than last year. Since the beginning of the allocation, our focus has been on delivering the real demands of our customers and securing our delivery obligations. In the long term, the demand for automotive semiconductors will continue to be high. We are very much sure of that due to the increasing digitalization and electrification of all systems and functions in vehicles. As one of the leading suppliers of mixed-signal semiconductors, we will participate substantially in the structural growth of the automotive IC market. Last year, we have also successfully executed important strategic projects. We prepared our organization for a promising future and strengthened our leading position. One important element is our future growth strategy concerning the expansion of testing capacities, mostly at our partner sites in East Asia. In order to have sufficient testing capacities available in preparation for our growth, we have once again invested significantly in 2022, and we will continue to expand our testing capabilities this year. Another focus was the strengthening of our software competence and the expansion of our software organization as new applications require a stronger link between hardware and software. We will further enrich our ICs with additional software functionalities. Our customers very much like us to do that. So we think we are on the right track here. We have also made a lot of progress in our ESG activities and ESG reporting. As some of you may have noticed, we have realigned our ESG strategy and identified key topics along the value chain, and we are preparing for upcoming ESG regulations and working, of course, on an improvement of our various ESG ratings. The approval of the sale of our wafer fab to Silex Microsystems was regrettedly prohibited by the federal government at the beginning of November 2022, as reported by our top statement and press release at that time. The Elmos wafer fab is still running at full capacity for several years, and therefore, we do not expect any operational impact by this decision in the short term. We are; however, of course, exploring various alternatives, as you know, for the fab, and we are confident to find a new long-term future perspective for the wafer fab and all. So by the way, if anyone of you always wanted to own a fab make haste as we are, of course, talking to other prospective fab owners as well. Let me now comment on the key financial highlights of last year, shown on Page 5 to 9 of the presentation. As I said in the beginning, it was another record year for Elmos. Thanks to the high demand for our semiconductors with positive volume and pricing effects and also a little bit due to positive FX. The Elmos Group sales increased by more than 122 -- more than -- by more than EUR 125 million or 39% to a new record level of EUR 447.2 million. Compared to the pandemic impacted year 2020, Elmos almost doubled its top line within 2 years, while the global automotive production volume only grew by 10% at the same time. In fiscal year 2022, all regions were able to record significantly higher sales than in the previous year. Especially sales growth in the Asia Pacific region was once again significantly high. It now represents the largest regional share and continues to show a very high growth dynamic. The full year gross margin increased to 46.4%, driven by high utilization rates and efficiency but also impacted by inflation-related effects such as higher prices from foundries, higher costs for material, energy and labor. In Q4, the gross profit was additionally impacted by typical onetime effects at year-end, such as [ NIE ] reimbursements and the adjustment of provisions. As you know, we generally pass on the higher input prices to our customers, but we aim for fair solutions as we are looking for a trusting and long-term partnership with customers. That is the reason why our gross margin is only stable compared to our long-term average. Earnings before interest and taxes, EBIT also rose to a new record level. In 2022, Elmos achieved an EBIT of EUR 110.1 million compared to EUR 60 million in 2021. The full year EBIT margin rose significantly to 24.6% and came in at the upper end of our full year guidance. CapEx totaled EUR 73 million or 16.3% of sales in 2022 and reflect the ongoing capacity expansion in the testing area, especially at our external testing partners in East Asia. R&D expenses continue to remain on a high level. However, due to the sharp sales increase, the R&D ratio actually decreased to 12.4%. In absolute numbers, R&D expenses increased by EUR 7 million or 14% last year. The cash flow from operations increased significantly to EUR 98.6 million, mainly due to higher earnings, net of higher working capital as a result of our strong growth. Despite the higher CapEx spending, the adjusted free cash flow increased from EUR 11.1 million to EUR 14.9 million last year. At year-end, working capital stood at EUR 140.2 million. The increase was mainly due to higher trade receivables and higher inventory valuation net of higher trade payables. At December 31, 2022, Elmos recorded a small net debt position of EUR 8.9 million. Turning to Page 10 and our forecast. So with the global production volume of 82 million vehicles, the automotive market has somewhat recovered in 2022. And IHS is forecasting another small growth of 4% for this year. However, these volumes are still significantly lower than pre-pandemic, where production levels reached 95 million cars in 2017 or almost 90 million in 2019. The industry experts estimate that the pent-up demand also caused by supply chain shortages has accumulated to almost 25 million vehicles in the last 3 years. You have heard this in numerous occasions. The underlying growth of the automotive market becomes a little less relevant as the main growth driver now is the increasing IC content in modern cars. This structural trend, combined with our record levels of new design wins in the last 2 years is a very promising basis for ongoing growth in the future. When we look at the current forecast for the semiconductor market, we see a clear difference between the automotive and other segments. The overall semiconductor market is actually forecasted to contract by 4% in 2023, while the automotive semiconductor market could grow by 14% year-on-year according to IHS driven by higher IC content in new cars. At the end of my presentation on Page 11, I would like to give you our outlook for this year as disclosed by our top notification the day before yesterday. The current year will continue to be characterized by challenging economic and geopolitical conditions. Demand for automotive semiconductors, we believe, will remain high and exceeds the available capacities. Therefore, our focus will again be on securing our ability to deliver to our customers. Based on the current order book and the available capacities we expect full year sales in 2023 of more than EUR 560 million and an EBIT margin of 25%, plus or minus 2 percentage points. The expansion of test capacities will be continued in 2023, and we are forecasting CapEx of around 17% plus or minus 2 percentage points of sales. Despite the high level of CapEx and R&D expenses for future growth, Elmos expects to generate an adjusted free cash flow in fiscal year '23 at the level of the previous year, which was EUR 14.9 million, plus or minus [ EUR 10 million. ] Ladies and gentlemen, the fiscal year 2022 marked another record for our company, and we showed an exceptional performance with very strong financial results. The entire Elmos team once again did an outstanding job. The excellent positioning of Elmos with innovative products and a strong competitive position, combined with a solid financial foundation, forms a promising basis for the future development of the Elmos Group. Thank you very much. I'm now opening the floor for questions.

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

My first question is on your midterm guidance. I mean you're officially guiding for midterm EBIT margin for 20% of sales. Do you still think that this level makes sense or when might be a good point in time to potentially reassess that target and update that guidance?

Yes. That's a very good question. We've been thinking about it lately. I mean, as you can see, currently, we reached a much higher profitability. I would say we will gradually review that. However, as you know, with Elmos and our targets, we usually aim at meeting our targets or even going a little bit or substantially beyond our targets. So in terms of steering the company is actually not really necessary to adjust it. maybe it would be more of a communication issue. So it's not super high on our agenda. This is more kind of delivering and delivering the growth now this year, but it's certainly a valid point.

Okay. Good. Then regarding the shortage -- supply shortage, do you think that by the end of the year that the imbalance will -- yes, that the situation will be more balanced? Or do you expect that the shortage will carry on into early '24?

I do believe there may be niches less where the shortage carries on. But I think overall, we are making some progress. So I wouldn't be surprised if '24 would see some IC companies returning to a normal or normalized levels of lead times or to at least partly non-allocation situations. I mean it's a little bit reading in the glass bowl. But I do feel it's -- the allocation is getting less pronounced.

Yes. Okay. And what do you think that -- I mean, we had pretty -- obviously, you've seen pretty strong pricing trends over the past 2 years and also this year that the industry then reverts back to -- so what's your take on pricing then when the situation is more balanced?

Well, I think pricing is -- has a lot to do with the macroeconomic development. I believe that in an inflationary development with, say, 8% or 10% inflation, make your pick. We will not see decreasing prices. This is totally unrealistic. We will see rising prices. We also see that the demand for automotive semiconductors remains very high. I could imagine a world where inflation is gone again, maybe not in the very short or midterm. And we make progress in terms of efficiency. And then yes, we could see decreasing prices again. However, that world is most likely not today or tomorrow.

Yes. Right. Understood. Okay. Then lastly, quickly on the gross margin, you indicated that there have been some positive one-off effects. Are you able to quantify these in the fourth quarter?

Yes. But they are not that large. It's kind of in the low or mid million euro. It's what usually happens in the last quarter. For whatever reason, [ NIE, ] for instance, always comes in at the end of the year. I don't know why. I believe it has to do a little with budgeting and with everyone wanted to close the year. But there is these kind of very mild seasonalities that can happen. It's not really super big.

The next question comes from Johannes Ries, Apus Capital.

Yes. Normally, I don't do this, but at this time, I can really say, congratulations for the great results. First question to your strong growth. Even there is forecast, are there auto players in the automobile marketing also a strong growth? But how much you would say is your growth coming from the overall market? How much from your own success, maybe market share wins based on great design wins you have even in the years before?

I believe, generally, the price component is, of course, a component from the overall market. Everyone had to raise prices. We do face higher input costs. And we shouldn't bear these higher costs alone. This is just not adequate. And so this is something, I believe, that, by and large, is the same or very similar for everyone in the industry. We; however, at Elmos had also a solid amount of success in terms of new project wins. So there are ramp-ups, there are new projects that are older that are; however, also ramping this year. So we have very high demand for our semiconductors. And this is maybe a little -- I mean, you could say this is a share gain. Yes, sometimes it's share gains. Sometimes it's just the right segment. But if you're successful in one, and you do not lose anything else, and then you're successful in the next and the next. So all segments actually contribute. This is bound to be a very successful year.

Maybe on this year, we're hearing more and more that [ China's ] picking up, and maybe there's also expectations that the government in China maybe would further try to increase the growth rate again. Could it also help you given your strong business in Asia and China? Is China come stronger back than maybe generally expected? Or have you already included in your guidance a strong recovery of this business?

We are generally conservative with the numbers we kind of have as a basis for our allocation to our customers. So we do not even fully believe the IHS vehicle forecast. So if the Chinese actually have an additional business cycle increase and everything -- we will see how much we can support. We will do our very best. We can promise nothing, but we will do our very best to deliver more.

Okay. Maybe on the cost side, you have a strong decrease of the rate of R&D leverage as a margin improvement comes from OpEx leverage. As the figures we are seeing now, for example, for R&D coming down from [ 20 ] to [ 12], other figures, we expect also for the future? Or is it -- will you maybe start to invest more in R&D and the quota maybe could go up going forward?

I think the quota now actually is a little bit lower than it may be in a kind of normalized development. This is due to actually 2 reasons. One is that you shouldn't hire just anyone that you find on the street. We want to hire the right people. So it takes actually sales growth more dynamically than you can do the hiring. Hiring takes more time. And the second reason is that we also wanted to be a little bit careful. I mean, people and markets keep telling us that our business cycle is over, actually, for now, a year or 1.5 years or so. People tell us, be careful, there are dark clouds. You don't see them yet, but they are there, and they will hit you badly. And we don't see it, but we still think when so many people tell you there are dark clouds, you should be careful. And so we are trying to find a middle way there between hiring, investing in our growth, but still making commitments to new people. We add to the Elmos team, I mean, we make commitments that we should keep. So that's kind of these 2 aspects in there.

But definitely, the OpEx, given the higher volume -- clear higher sales volume, there will -- most of the development we have seen in the OpEx reduction percentage wise will stay in the future, even in SG&A and R&D mainly in health care. Another point -- yes?

We like to have good ratios, but not all of it will stay, but some of it will stay.

Okay. On your working capital, yes, a strong increase in working capital, do you expect with a higher delivery you get now from your partners that the working capital could somewhat in some regard could come down going forward? Or will it stay at a higher level because of the higher business volume?

Well, I believe that, that in the midterm, we may put more focus on working capital and kind of having that more stringently. However, in the short term, this year, probably also next, our key focus is on ensuring our ability to deliver. And if we have another EUR 5 million or EUR 10 million working capital, we -- it doesn't matter so much. Also, the working capital kind of goes up automatically without even increasing the numbers of ICs because all the things that we buy get so much more expensive so -- or not expensive, so much more valuable, I should say. So this is also reflected then in the accounts.

No, it's fair point, fair point. Going forward, maybe the only slight disappointment is the one other seen in your figures are that the free cash flow is not a lot, a little bit stronger, yes, made this huge investment in testing. I think that's also a sign that you believe in further growth. But nevertheless, could we expect going forward, maybe even some higher percentage of free cash flow, which could be earned? Or will you stay at this high testing levels? And like I said, maybe the chance that working capital comes a little bit -- could also help you a little bit here.

I mean, then we will, in the midterm, focus more on cash. However, this year is so strong growth that we really have to see that we get all the ICs through our value chain. I mean if we continue to exhibit such high growth, it is hard to promise more cash. But kind of over the next 5 years or so, there may be -- I don't know whether we can do an average of 25% plus growth every year. Let's find out together. But I mean if we do, the world is still good. We will, for sure, need a lot of CapEx this year. So this will weigh on free cash flow.

And on the CapEx, is test CapEx capabilities you are investing now, it's not necessary to fulfill the demand for this year that for the future...

Yes, this is also looking ahead. I mean, it's always not only this year. It's also what we see for the next year. And we need to prepare.

Very clear. So your plan -- you prepare for potential further growth for next year, definitely.

Yes.

Finally, on the sale of on the negotiations, can you give us a feeling maybe about potential maybe timing of this, how long maybe this could go on? And how sure you are that this time, there will be no problems from the political side?

Well, the first part is hard to answer. As all kind of M&A like processes, it is hard to predict. The second part is a little bit easier. I think we will -- or we have excluded all buyers from countries that are not in favor of our political elite. So I do not see that, that will be a problem should we close with one of the people that we are talking to now.

Okay. That's the safe side.

The next question comes from Lucas [indiscernible] capital.

My first question would also relate to the free cash flow topic. You talked about in your stories because if I take your midpoint outlook in terms of margin and CapEx. So we see around EUR 30 million more in EBIT this year. So at the end in the midpoint, you just expect the same free cash flow for this year compared to last year. So whether you lose this to reach just a free cash flow level of last year.

Well, I believe the key question is why do we believe to invest so much?

Yes. But your investment is not that much higher than last year. It's ...

It is, it is higher.

By absolute numbers, it is, yes.

Yes, also in percentage. We were quite something below 17 last year.

We expect, based on the midterm, this is Ralf from the IR department. We expect -- if you just do the same math with the EBIT, 25% times EUR 560 million is, you're right, EUR 30 million more EBIT. But on the other hand, 17% investment on EUR 560 million. This is our guidance is also a EUR 20 million more CapEx in absolute terms. So our guidance for free cash flow, same level, plus or minus EUR 10 million. So I think it's in the right ballpark.

So on the different sort of the smaller gap then is working capital?

We will, for sure, need a little more working capital this year as we expand.

Okay. And then on the margin side, we now saw that you were able to reach a higher margin from quarter-to-quarter. So what is your expectation for -- if you can say this for this year, can we start in Q1 from this high level we saw in Q4? Or where would you see to start the quarter or that just the year and then going forward?

Well, we do not guide individual quarters right now, but I wouldn't expect kind of a very, very pronounced seasonality. I mean usually, it gets a little better over the year as we grow over the year. So this is somehow to be expected. On the other hand, we do have a little bit more margin or we expect a little bit more margin in the current year than in the last. So this will also help.

So you see the margin more on a more similar level during the year compared to last year?

Well, as I said, we won't guide individual quarters. But if you look at the past 10 years, usually, the margin had a positive trend over the year. So there's no reason to believe that, that is not happening. I wouldn't expect it to be super pronounced. But I think generally, when -- this is what we can learn from the past that it will be slight and positive.

And this is Ralf again. And you know Q4 margins is same as Arne said in the gross profit area is always impacted for -- with the typical year-end extraordinary items, basically.

Thank you for your questions, Mr. [indiscernible].

[Operator Instructions] And there seems to be one follow-up question from Johannes Ries.

Yes. Sorry, to come even back with this, you mentioned it already in the presentation, but maybe it's nevertheless, worse to have some further words. Like you said, there are some skeptical guys who are saying, yes, the new car sales in Europe and Germany and China are weak and so on. And they've seen increasing inventories. You mentioned you can't see it not at the OEMs, not distributors, not by yourself. Therefore, you don't see any weakness in the demand so far. And I'm not ...

As far as the IC value chain is concerned, we do not see an inventory buildup. I mean what I read in the [indiscernible] is that Volkswagen and Toyota and some others complain that they don't have enough chips, and that's why they're building less cars, which is not due to us, but I mean, generally, I believe what's written there.

Okay. Okay. You have still [indiscernible] maybe with the guys from your OEMs, which are asking you to deliver further faster or more -- maybe less than last year, but there are still [indiscernible].

We are doing that, yes.

So there are no further questions. Thank you very much. I would like to hand back to you, Mr. Schneider.

So at the end, I would like to remind you that we published our final results and our annual report on March 16. The conference call for the Q1 is scheduled for May 4, and the AGM will be held as a virtual event on May 10. Thank you very much for your participation and your interest in Elmos. Goodbye from Dortmund, take care, and stay confident.