Elmos Semiconductor SE ($ELG)

Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE conference call regarding the Q1 2026 results. [Operator Instructions]. Let me now turn the floor over to your host, Dr. Arne Schneider, CEO.

Ladies and gentlemen, good morning, everyone, and welcome to the Elmos Conference Call for the First Quarter 2026. Thank you very much for your participation and your interest in our company. . Ladies and gentlemen, Elmos had an impressive start into the new year with strong sales, improved profitability and significantly higher free cash flow. In fact, as reflected in last night's adhoc announcement, we have raised our full year 2026 guidance, driven by strong first quarter performance and sustained high demand for Elmos products. The impact that may come from the allocation are not yet fully reflected. We will incorporate that piece of good news as it materializes step by step. Our strong operational execution since many quarters significantly improved cash generation and enhanced capital allocation, combined with more transparency at our successful Capital Markets Day in February this year, have driven a sustained increase of the Elmos share price in recent months. Year-to-date, the share price is up around 90%, bringing the company's market capitalization to nearly EUR 3.3 billion. Based on this strong momentum, Elmos could potentially even qualify for inclusion in, Germany's mid-cap index, potentially even at the next review in early June. If we were to make it, this would be a great achievement given that only free float market cap counts for the index ranking. And as all of you know, free float is something we can always have more of. This is a great success story, and it is especially rewarding to know that many of you have been supporting us on this exciting journey for such a long time. Let me come to the market update. I would like to briefly comment on the last threat by the U.S. government to impose 25% tariffs on all EU cars exported to the United States. So if a consumer -- a U.S. consumer chooses a U.S.-made car, for example, a GM or a Ford instead of an imported car, say, from Europe, this decision would actually have no major impact on Elmos, as RICs are included in almost all brands and models globally. And that, of course, includes U.S. models manufactured locally in the U.S. So as long as the Americans continue to buy new cars, we will be okay. More generally, destocking effects have more or less subsided. Inventory levels have largely normalized and in certain areas are now even below optimal levels. Customers have returned to order patterns that closely reflect the underlying structural demand, signaling a healthy end market. While some customers continue to order with shorter lead times and it is our distinct advice not to do that, the overall visibility has improved and the demand environment remains solid. So our business is gaining further traction with improving momentum. Also important, the long-term growth trajectory for Elmos is firmly intact and highly attractive. We have highlighted these trends in detail at our Capital Markets Day end of February. The semiconductor content per vehicle continues to increase at a strong pace, underpinned by powerful megatrends, including electrification, increasing ADAS penetration up to autonomous driving and the transition to software-defined vehicles. In this favorable environment, the analog mixed signal semiconductor market offers attractive and sustained growth opportunities. With its strong positioning, innovation capabilities and agility as a leading fabless player, Elmos is very well positioned to capture this upside and deliver attractive long-term value. We are progressing also very well with the adoption of our China organization towards a full function entity. We have transitioned to a buy and sell model starting this year with China revenues being invoiced and shipped through our China organization. Our new local footprint strengthens customer proximity, enhances resilience and creates strategic optionality in China. The acquisition of new projects continues to develop very positively with promising new design wins in all regions and across all segments. Year-to-date, we already have captured around [indiscernible]% of new businesses as targets for the full year. While we see an ongoing strong demand for analog mixed signal automotive semiconductors, we anticipate a potential shortage in 8-inch wafer capacity. Power chips for AI data centers are manufactured mainly on 8-inch wafers, so are all of the Elmos products. Due to the ongoing AI boom, foundries and also OSATs are prioritizing more and more these AI applications. This may very likely constrain automotive capacities and would lead to higher wafer and higher OSAT costs. We will closely monitor this situation, and we will pass on allocation-related cost increases to our customers in a fair way as we did in the past. We think it is not unlikely that prices may go up in the second half of the year. You have seen the recent announcement by various semi players to raise prices in 2026, some as early as April. Based on our experience in the last allocation cycle 2021 to 2023, we see limited risk for Elmos and view this as a potential upside from selective pricing actions and maybe even further share gain. Let me now continue with the financial highlights of the first quarter of 2026. Sales reached EUR 152.5 million in the first quarter, growing by 20% year-over-year. Compared to the first quarter of last year, the weaker U.S. dollar had a negative impact on our Q1 sales by around 7 percentage points. So FX adjusted Q1 sales in 2026 would have been 27% higher than last year. Gross margin was 46.4% in Q1 2026, improving by 3 percentage points year-over-year. The increase is mainly due to the higher volume and cost improvement. Like in the previous quarters, gross profit was impacted by higher gold prices in assembly. However, despite the further price hike in 2026 compared to the average price of last year, we do not expect incremental cost impacts in 2026, as the higher price is compensated by our mitigation measures and selective hedging activities for both. At 24.7% of sales, Q1 OpEx were on par with Q1 2025, but somewhat higher than the full year 2025 ratio, mainly due to higher personnel costs. Furthermore, in Q1 2026, we got no material R&D run while we ramped our new Bruno and Shanghai R&D locations, which added some extra OpEx burden. EBIT improved to EUR 36.2 million in Q1 2026 compared to EUR 25.6 million in Q1 of last year, mainly due to the higher gross profits, net of higher OpEx. As a result, the EBIT margin reached 23.8% in Q1 2026, almost 4 percentage points higher than last year. After 3 months, CapEx amounted to only EUR 2.7 million or 1.8% of sales. Despite the higher volume, we still have sufficient testing capacity available after our successful efficiency optimization and test time reduction programs. Due to low investments and the reduction in working capital, adjusted free cash flow climbed to a strong EUR 40.7 million in the first quarter or 26.7% of sales. Another significant improvement, reinforcing our confidence that we are well on track to deliver even stronger cash performance than originally planned for 2026. Ladies and gentlemen, let me finish my presentation with the market outlook and our guidance for the fiscal year 2026. S&P projects in its April forecast, global production volume of 91.4 million new vehicles, down around 2% versus 2025. However, as we have highlighted many times in the past, growth in the automotive semiconductor market is largely decoupled from the underlying vehicle products. Instead, it is driven by powerful structural megatrends that continue to increase semiconductor content per vehicle in new cars. And in addition to these secular tailwinds, Elmos is also benefiting from a strong track record of design wins in recent years, which is supporting our continued outperformance relative to peers and securing our ambitious growth tariffs. As reported in the top announcement last night, we have raised our guidance for the 2026 fiscal year based on the very strong performance in the first 3 months and the continued high demand for Elmos products. With order momentum further improving, we now expect sales growth of 12% plus or minus 2 percentage points. So we have narrowed our guidance range, as you see, and raised the midpoint of our sales expectations. Based on the higher sales as well as further optimization measures and improved operating EBIT margin of 23% to 26% of sales is now anticipated. In line with our updated sales guidance, we have tightened the range by raising the lower end and increasing the midpoint of our operating EBIT margin guidance. Despite the growth, capital expenditures less capitalized development expenses remain at a low level and are expected to amount to around 5% of sales, just as we said before. In addition, an even stronger cash performance is now expected with an operating adjusted free cash flow of 19% of sales, plus or minus 2 percentage points. Let me also briefly explain why we now base our EBIT and free cash flow guidance on operating performance indicators. We announced early April that we will cancel most of our treasury shares to have maximum flexibility regarding potential future share buybacks. As you may know, under German law, companies are limited to hold, this is the first thing, or to buy back only up to 10% of their share capital. So it's not having more than 10% and not buying back more than 10%. It's a double threshold concerning treasury shares. So following the cancellation of our existing treasury shares, 3% about, after the AGM end of May, we will regain full flexibility within this 10% limit. As a result, the stock-based compensation must now be settled in cash until further notice. And the resulting accounting effects will not be recognized in operating results. We want to present a clear view of our underlying operating performance. Accordingly, our guidance for EBIT margin and adjusted free cash flow will be based on operational performance. So let me summarize. As promised on our Capital Markets Day in February, the year 2026 marks a turning point for Elmos. The headwinds from destocking are fading, and we are returning to normal structural growth rates with improved profitability and higher cash flows. Elmos has delivered an outstanding start to the year with strong growth across sales and EBIT and a particularly impressive improvement of the free cash flow, significantly above prior year level. Based on this excellent first quarter performance and continued robust demand for our semiconductor solutions, we were able to further raise our already very positive outlook for this year. Ladies and gentlemen, electrification, ADAS, zonal architectures and software-defined vehicles are, of course, not just short-term effect, this is a long-term structural growth phase with significant opportunities ahead based on a strong market position and innovative mixed signal solutions. As we continue to execute, convert design wins into profitable revenue and deliver consistent strong cash, we are confident that our shareholders will also acknowledge the strength of our underlying fundamentals. So thank you very much for listening and your interest. I would like to open now the floor for questions.

[Operator Instructions] The first question is from Malte Schaumann from Warburg Research.

First question is on the potential 8-inch wafer shortage. Could you provide a timing perspective? When do you expect the potential shortage to kick in? And what that means for potential price impacts that you might pass on to customers? Will that affect already this quarter or the second half of the year and is such a move already baked into your new guidance? Or would that provide kind of additional upside?

Yes. So we see a gradually increasing tightness throughout the value chain at the wafer foundries and also add the OSATs. We have seen some competitors react to that tightness and also to raising prices. Some started as early as April. Some started at the end of April or beginning of May. I think, usually, the practice is adhered to that to give kind of a month notice before the prices really go up. So I think for Elmos, there won't be a lot of impact in Q2. But, of course, we now have to look at the second half. As far as our guidance is concerned, we haven't baked too much into that guidance. Also, the guidance increase, we still think we should gain a little bit more clarity on the amount. You've seen kind of a little step. I mean, we don't want to hold back, but we will gain a lot more clarity and then kind of the other part of the good news. Once we are clear, we will also report on it.

Okay. Understood. Then on some P&L items. On the gross margin, R&D, there has been no reclassification say, development expenses covered the customers so that have been reclassified from cost of goods sold to R&D. So will that could vary that gross margin?

Very insignificant. You see R&D actually jumping a little bit in Q1. I think this is what you are asking, why is R&D so high? Yes. Well, 2 major things where we actually invest in. We invest in the Bruno site, which is a great team of very accomplished engineers that joined us from a direct competitor. And, of course, this is now coming in the Q1 into the first quarter of kind of full personnel and also other cost effects. The other thing is that we are building our China R&D center. The effect is even a little bit larger than the Bruno effect. And then the third thing is that we have no material contribution of any government or state money in R&D. And usually, we have with all these European programs, the upside, for instance, we have significant contributions. So all that taken together, R&D is a little up. That is true. However, this will not be the run rate for the year.

Okay. Good. And then on G&A, maybe a comment that was also a bit of the -- could be a bit on the high side, EUR 11 million in G&A costs in the first quarter of the year, anything extraordinarily included here?

No, there's nothing too much extraordinary. Also, the run rate, I think, if I look at kind of the Q1 versus our internal projection for the year, our year production is below. Yes. So basically, when you combine SG&A and R&D for the full year run rate, it will be in line with our general, let's say, guidance of around 20% total OpEx below gross profit. So, yes, nothing spectacular going forward for the full year ratio.

Okay. Good. And back to the shortage in the supply chain, is there any part of the supply chain that cause -- could cause trouble for you because of limited production?

Good cost trouble is kind of a -- trouble good or trouble bad. So let's see what comes out of that. No, I mean, trouble, of course, but we think that usually automotive in the end has a high priority and other parts of the semiconductor and electronics world should be cut off first because autos, of course, are very high-value products and semiconductors are, of course, key and in a lot of places, we are, of course, single source. So up to now, there are no major issues, but we will work ourselves through any shortages. And if the time '21 to '23 is any guide or any example, things can be very excellent for us.

Next question is from Abed Jarad, mwb Research.

I have just 1 question regarding the gross margin in Q1. Can we take this as a run rate? And how much was of this 3 percentage point effect from the cost optimization and efficiency program?

Yes. It's an interesting question. I think it's a little bit above the run rate, as I would expected. However, with allocation coming, it -- this would not be included in my run rate considerations. So kind of -- it's above the baseline run rate. But who knows what happens in a more and more allocation scenario where usually also gross margins not explode, but kind of etch up -- edge up a little bit. So we have higher volume. That, of course, helps the gross margin. We also have cost improvements. We ran a cost program last year. We shed some staff, and this is, of course, reflected in that situation.

But also here, if I can add to that, for the full year, and I think we will be also will be back to our general, let's say, operating model, 45%, give or take, gross profit.

But why is this? Can you quantify the moving parts here? Because you also reported like cost inflation, but still came in with like really impressive gross margins. So I -- just trying to understand the moving parts here.

Yes. I mean, we have our cost program. And of course, that helps, and it helps particularly when you get into your full year effects and everything is kind of done. Over last year, we first -- I mean, once you decide for a cost program, it has quite a time lag to actually get people off your payroll. And that takes basically a year. And in Q4, we finally got people off our payroll, such that you now see results that are not too bad.

[Operator Instructions] Next in line Johannes Ries from Apus Capital GmbH.

Big surprise on the line. Maybe 3 short questions from my side. I have to dial in, therefore, maybe I have not everything with the discussion with, therefore, if I maybe ask a question which was already answered, I apologise. Maybe first on the cash flow, how -- what development we can expect for CapEx and working capital, especially going forward? Is there a further reduction in working capital possible? Or was it a big step in the first quarter?

Yes. I mean, the first quarter is in 2 respects, a little kind of off center in terms of what we expect for the year. I mean, we expect 90% free cash flow as a percent of revenue. Now, we are at 26% and a little bit. Two effects, you see very low CapEx. We expect CapEx to be at around 5%. So we're kind of 3 points below that full year expectation. So of course, that helps a little bit in the cash flow. The other thing is that we also see a working capital decrease versus the end of the year 2025. I think working capital is going to be interesting this year. We manage it down. We want to manage it down further. But I can't really tell you what happens, say, in Q4, which is, of course, also an interesting part of the year given this allocation potential constraints. So we may see a more drastic drop in working capital if some wafers are so constrained that we go below desired inventory. We may see a little bit more if we somehow get some wafers and decide to take them regardless whether we need them now or only in 2 months' time. So I think in Q4, it's particularly hard to predict this year. I mean, cash will turn out brilliantly this year. That is clear already. But the working capital part could still go either way or it could be rational and positive for us either way. We have -- we cannot really say how the second half and particularly Q4 working capital will develop.

Very clear answer and explains the guidance you have done on cash flow. Very helpful. Second question, on your clarification question. You said you have 40% of what you are targeting on the sign wins if I got it right in. And I remember what you said you have the majority of the design wins you had already seen at the end of last year for your 2030 target. How much of the -- maybe the part which was left at the beginning of the year, it's now already came in, and how much you need on additional design wins to have maybe everything in your books with all maybe cautious regarding especially Chinese orders to achieve this 2030 target.

Yes, we have kind of 15% that's left for '27 following. We wanted to win 10% of what's left. So 25% is left in total, 15% will be left for the next years if we kind of follow our plans. 10% we need to win this year. Of that 10%, we won 40%. So I think we are on a reasonable track to get that 10% in this year.

And this is also -- it maybe more comes in, especially in which could partly get even revenues maybe in '29 or 2030, is that this is ice on the cake.

That is, of course, upside. That is true, then maybe we will reach our target a little earlier. I don't think we'll reach some years earlier, then it's just a little earlier. But that is, of course, true. There's potentially more to be had.

Clear. On the pricing component, as the area surprising is going like crazy. I saw semiconductors, the growth was 79% year-over-year for the whole. Definitely, the memory is the biggest driver on the pricing. But could be more pronounced upside? Or is it a little bit different in automotive where you said, we have partners, and we don't -- maybe are unfair in both directions.

Well, I think that for this year, most people are still single digits, some may go into double digits, but mostly with all the incomplete information there is, I would read a single digit into the market. but potentially adding something next year, which would then be very, very likely. Things like the numbers you mentioned, kind of 80% or doubling or so, I don't think so. I mean we've seen in the past allocation if that can be any guide to the future. That companies behave differently. And some, actually most shows a very partnership informed approach that you passed on cost that you kind of made a lot of effort to make things possible for customers. And yes, this does not lead to you taking a financial hit, but you were also not kind of taking real advantage of your customers. There were a few exceptions. And maybe this time, there will also be a few exceptions. I think, however, that the general market will maybe, again, follow that partnership approach where you don't take advantage, but you'd rather see that the world goes on in a positive manner for everyone.

That's clear. Finally, on new end markets and new products, how had the things developed maybe in the recent weeks on the topic of robotics. We hear from the 1 other also very positive, maybe expectations from customers like you also talked with your customer? And the second is on the group, though ships is very small group, quant-based codership. Any maybe update you have, one, on innovation price? How is the interest of customers for that?

Yes. Well, this is -- so on the robotics actually, there's nothing in terms of big news to report since the CMD. It's a dynamic field, but it's not that dynamic that we have news kind of every month that are worth reporting. But we like where this thing is going. . Yes, on the QRNG, so the quantum number generated. We won that innovation price. We actually won 3 innovation prices, I believe, in total over the last week. This is a beautiful little device. Of course, quantum computing is not big today, right? But it's kind of up and coming. So there's a lot of interest to discuss that device and to see where it could add layers of security that is actually quantum safe. However, there's no big serious ramp, so I think we are at the forefront of innovation. We are not in kind of these ramps this year. These things are, of course, quick because protrography is a dynamic field. However, I cannot report any quick revenue or design win right now. It's a developing field.

But again, it's not in the 2030 target...

No, no, none of it, none of it. I mean, we want now -- of course, not because it's not running serious and it's no design win. So by definition, it can't be in, and we would always be conservative. If we win something that is on top, and I mean we -- since doing something on top is kind of allowed we think, we are very much running to customers and explaining why this is the best chip ever. But we wouldn't include it in our targets yet.

And finally, you are showing this product not only to your traditional customers because it could be also very interesting and valuable for other sectors.

We are very open to -- with whom we speak.

[Operator Instructions] There are a few more questions in coming. The first one is from Robert Sanders, Deutsche Bank.

This is Rob. Can you hear me? .

We can hear you well. We are looking forward to your questions.

Great. Yes, it was just on the foundry tightness. There have been some reports about lagging edge foundries raising prices by 10% starting in June. Is that what you see? And is the idea then that into next year, you could see corresponding price rises as you saw in 2022 and 2021? Or is this -- is the dynamic a little bit different to when we were in '21, '22?

No. We can debate the details now on different months or exact numbers, but this is the general direction that we see. We've already seen some competitors raising prices. April was, I believe, the first incident. And then, there were quite some others. So I believe it's not exactly the way it was in '21. I mean, in '21, we had this huge swing into consumer first, and then, we had this V-shaped recovery in the car industry. So I personally feel that '21 was a lot more brutal in the swing, and it was a lot more unexpected. Now that AI demand just creeps up, and it's tight and it's really tight. And everyone kind of already learned something, I believe, from the '21 to '23 period. We slide into allocation and tightness. But I think, overall, the industry will better manage and at least, let's knock on wood, this is likely to happen. Yes, I believe the price increases should somehow reflect the increased cost throughout the value chain. We already discussed whether some people go in a less or more partnership like weigh on that. But I think it's a good rule of thumb.

And back in '22, you saw your competitors doing LTAs. I think you were a bit more reluctant to lock yourself into a certain price because then you would end up taking on some risk, whether it's foundry costs or other kinds of cost. What is your thought process this time around regarding LTAs?

Yes. We are always a little bit opportunistic, and there's no clear right or wrong on an LTA. In certain business situation, it does make sense. In others, it's actually not needed. I mean, if you win over a complete new business and you are the new sole source, and everything, yes, maybe you want to be that for some years such that all the efforts and all the prioritization makes sense. Today, at this stage, I can't tell you whether there will be a lot of LTAs. Given where we are now in this cycle, I would doubt it. But honestly, whether that is still true in 3 months or 6 months, I can't tell you.

Next question is from [ Alexander Lucas ] from [ GS&PKAGFA ].

I have a follow-up question on your share buyback potential. So during Capital Markets Day, you've stated that you do not want to intend or do you not want to build up a large cash buyback, now you are considering buying back 10% of the share capital. Would this mean that you would also like to relever the company?

Yes, this is one option that would go in with such a step. However, it would still be very moderate leverage, of course. .

And in the past, you've been quite opportunistic and price sensitive when it comes to share buybacks. Do you still apply some kind of a valuation framework?

Yes, of course, we do. But I think 1 change 1 thing really changed versus the past. I mean, in the past, we had a very moderate cash flow generation. So we had to be a lot more kind of opportunistic in buying back shares. Yes, there was money, but mostly from transactions like selling SMI or selling the fab. And this situation is, of course, a little different from a capital allocation strategy that is a lot more structural. If you're structurally generating quite interesting amounts of cash, you have to -- and you don't want to build a cash pile, you have to think about buybacks a little bit in a different way. If you don't want to shift 100% to dividends, but I think this is kind of also a little bit off center to shift 100% to dividends. So if you want to combine buybacks and dividends in a maximum structural way, you are in a little different situation given the new ability to generate cash.

Okay. And given that you also mentioned that inclusion is a topic. How do you think about the balance between free float and share buyback?

Yes. Of course, we would love more free float. This helps for Amdocs. I believe it helps the stock itself. There is no structural reasons why 56% or 58% is a great number. I believe stability and long-term orientation is in line with much lower numbers of anchor shareholding. This is all debatable. For now, if we look at smaller buybacks, like the buybacks we've done at the beginning of this year, this does not change the structural kind of shareholder pie charts so much. So that -- I mean, we can continue doing buybacks with 0.5% or so for quite some time until something really structural changes. I mean, more free float is, in essence, a decision of the anchor shareholder family.

So they could also sell via share buyback, for example.

Well, I mean, if you own shares, you can sell whatever you like, I think. I mean, if you're in the Supervisory Board, potentially not in a closed period or so. But -- I mean, this is the benefits of ownership. You can essentially do what you want.

Thanks a lot also from my side. Dear ladies and gentlemen, as there are no more questions in the queue, with that, I'm closing the Q&A session and handing the floor back over to the host.

So this is then the end of our Q1 conference call. Thank you very much for your participation and all your great questions. I hope to meet many of you in our upcoming roadshows and investment conferences in London, Germany and the U.S. So for now, thank you very much for your support.