Elmos Semiconductor SE (ELG) Earnings Call Transcript & Summary

Gentlemen, and welcome to the Elmos Semiconductor SE Conference Call regarding the results of Q2 2026. The conference will be recorded. [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 covering our results for the second quarter and first half of 2026. Thank you very much for joining us today and for your continued interest in Elmos. Following an outstanding start to the year, we continued our strong operational execution in the second quarter. We again delivered profitable growth, further improved our operating profitability and generated significantly higher cash flows compared with the previous year. These ongoing positive achievements are the results of the strength of our business model, our excellent strategic positioning and our disciplined execution. And with a very successful first half behind us, we fully confirm our ambitious guidance for the full year 2026. Our consistent operational execution continues to be recognized by the capital markets. Despite elevated AI-related volatility across the semiconductor sector in recent weeks, the Elmos share price has increased by around 50% year-to-date, resulting in our inclusion in the German Mid-Cap Index, MDAX in June. This marks another important milestone in the company's development and will further increase our visibility among international institutional investors. So let me start with an update about the current semiconductor market. Demand for our innovative analog mixed signal semiconductor solution continues at a high level. China remains a growth driver, while product ramps in Japan, Korea and a slightly better demand across Europe and America further support our business. Importantly, our growth continues to be driven by structural trends rather than short-term fluctuations in global vehicle production. Electrification, ADAS, software-defined vehicles and increasingly intelligent vehicle architectures continue to increase semiconductor content per vehicle. These trends create an attractive long-term growth environment for us. At the same time, we continue to monitor foundry capacity and the evolving semiconductor supply chain very closely. While demand for our analog mixed signal automotive semiconductors continues to be robust, we see clear signs of tighter 8-inch wafer capacity. AI-driven power semiconductors for data centers are also processed at least partly on the same wafer size as our Elmos products. And as foundries and OSATs increasingly prioritize fast-growing AI applications, automotive capacity is expected to become more constrained, resulting in higher wafer and assembly costs. We have successfully managed similar situations before. As in the past, we expect that allocation-related cost increases will be passed to customers in a disciplined and balanced way. Recent pricing actions announced across the semiconductor industry reinforce our view that pricing may strengthen in the second half of the year. Based on our experience during the 2021 to '23 allocation cycle, we believe Elmos is very well-positioned. Our fabless business model, diversified manufacturing partnerships and long-standing foundry as well as customer relationships position Elmos well to navigate this environment. Therefore, we see limited downside risk and potential upside from selective pricing actions as well as opportunities to further strengthen our market position. Our product pipeline remains very encouraging, and we continue to win excellent new business across regions and applications. Year-to-date, we have successfully acquired new projects with a lifetime volume of more than EUR 400 million, around 6% of our annual target. As these design wins convert into serial production programs over the coming years, they provide excellent visibility for future growth. In addition, robotics is developing into an increasingly attractive opportunity for Elmos. We continue to expand our customer base, deepen relationships with leading robotics players globally. Although the business, of course, as you all know, is still at an early stage, the progress we have made in the recent quarters reinforces our confidence that robotics can become an attractive additional growth pillar for Elmos over time. Let me now continue with the financial highlights of the first half and the second quarter of 2026. Sales increased by more than 15% year-on-year to EUR 314.5 million during the first half, reflecting continued strong customer demand and successful product launches. Sales in the second quarter continued to increase as planned by more than 6% sequentially or 11% year-on-year to EUR 162 million. We are also confident about the second half of the year. Based on the midpoint of our full year guidance, we expect H2 sales of approximately EUR 338 million. In addition, selective pricing action driven by the current allocation environment could provide some upside. While it is still too early to quantify the potential impact, this represents for sure an opportunity for the second half. Gross margin in the first half was 45.2%, improving by 3 percentage points year-over-year. The increase is mainly due to the higher volume and cost improvements. Like in the previous quarters, gross profit was impacted by higher gold prices in assembly as well as higher foundry and OSAT costs. At 27.5% of sales, OpEx in H1 was higher due to the onetime expense in G&A of around EUR 12 million, resulting from the fair value revaluation of the share-based compensation. As we have already announced in May, the stock-based compensation will be settled in cash for the time being instead of equity, meaning transfer of shares due to the almost complete cancellation of the company's treasury shares. The underlying incentive plans or the number of shares that may be granted, of course, remain unchanged. The only change is the settlement mechanism. Under IFRS, the change from equity to cash settled triggers a different accounting treatment. So please note that the EUR 12.1 million P&L onetime impact in Q2 are also based on a share price of EUR 180. If I look today, this is not the case. But if we look at the end of the quarter, this was the case. So at a share price of, say, around EUR 150, the P&L impact would be a lot lower. It would be half or less of the EUR 12 million. So going forward, these noncash accounting effects will move up or down with the share price each quarter. Since they are purely valuation-driven and unrelated to the underlying operating performance of the business, they are excluded from our financial guidance, which shows the operational performance of our company. We think this is reasonable, and this is, by the way, also what almost all other companies that run such programs do. Since 2020, share-based incentive plans have been granted to approximately 20 senior executives, including members of the Management Board. At the time of grant, these plans had a total value of EUR 5.4 million, and are linked to the share price performance until the end of 2035. So this is when the longest running program actually runs out. So since the first LTI programs were granted in October 2020, the company's value has increased by almost tenfold as of the valuation date end of the quarter 2. So this higher share price, of course, benefits shareholders while naturally also increases the value of the long-term incentive programs. Returning to the business. Operating EBIT increased to EUR 75.8 million, corresponding to an operating margin of 24.1%. This is an improvement of nearly 4 percentage points year-over-year. This outstanding development highlights the strength of our business model and our continued focus on profitable growth and operational excellence. Including the mentioned IFRS accounting effect, the reported EBIT reached EUR 63.7 million in the first half of the year. So even including the nonoperational effects, the EBIT is well above the prior year level. Capital expenditures remained very disciplined at only 2.8% of sales in H1 despite continued growth. Our previous investments in manufacturing efficiency and test optimization enable us to support higher volumes while maintaining a lean capital base. One of the most encouraging developments is our ongoing improvement in cash generation. Operating adjusted free cash flow reached EUR 55 million or 17.7% of sales during the first 6 months, an increase of around 150% compared to last year. This underlines the successful transformation of Elmos towards a business with significantly stronger cash conversion and higher capital returns. 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 latest July forecast a global production volume of 91.1 million new vehicles. This is down around 2% versus 2025. As we have, however, highlighted consistently, growth in the automotive semiconductor market is not only driven by the underlying vehicle production. Instead, it is fueled by powerful trends that continue to drive semiconductor content per vehicle higher. On top of these structural tailwinds, Elmos is benefiting from the many design wins secured in recent years. Together, these factors position us to continue outperforming both the automotive semiconductor market and our peers while providing a solid foundation for achieving our long-term growth objectives. Based on the strong first half execution performance, the continued high demand for our product and the visibility provided by our product pipeline, we fully confirm our ambitious guidance for the fiscal year 2026. We had upgraded in May a little bit. So we continue to expect sales growth of 12%, plus or minus 2 percentage points, supported by an operating EBIT margin of 23% to 26%. Despite our strong growth trajectory, capital expenditures are expected to remain low at around 5% of sales, underscoring the attractive scalability of our business model. We also continue to expect excellent cash generation with an operating adjusted free cash flow margin of 19%, plus or minus 2 percentage points, and our guidance assumes a euro to U.S. exchange rate of $1.15. Ladies and gentlemen, the first half of '26 confirms that Elmos has entered into a new phase of profitable growth and sustainably improved cash generation. We combine structural market growth with innovation, operational excellence and disciplined capital allocation. As a result, we are creating increasing shareholder value while maintaining an attractive financial [indiscernible]. Looking ahead, we remain excited about the opportunities created by automotive megatrends and increasingly intelligent automotive electronics. Supported by a strong pipeline of design wins and efficient fabless business model and a highly committed global team, we believe Elmos is exceptionally well-positioned for sustainable long-term success. Also looking beyond automotive, we are excited by the opportunities emerging in humanoid robotics. Leveraging our proven mixed signal semiconductor expertise, we are building a strong position in what we believe could become one of the most attractive growth opportunities for the semiconductor industry over the coming decade. Thank you very much for your continued trust and support. I would now like to open the floor for your questions.

[Operator Instructions] First question comes from Veysel Taze from Metzler.

Just on your full year outlook, can you give a little bit more details how you think about the quarters for the second half in terms of revenue and margin development? You stated also during your prepared remarks that pricing could be an upside to this. What is your -- I mean, we are now in August. So what is happening on the pricing front at Elmos? Some bigger peers already announced this year 2x price increases. And yes, so what are your expectations there for your company?

Maybe I was -- so first of all, thank you for your question. Maybe I was a little bit too timid in commenting on the pricing. Of course, prices go up. This is the reality of allocation. This is on a very good way with our customers. Most customers accept that, of course, you have to adjust to the market situation. And as chips are becoming a little bit tighter and shorter again, it may actually be a good idea to go through that together and to put a focus on securing supply, which I think is key in this situation. Yes, consensus, I believe, is already a little bit above the midpoint of the guidance. You can -- I mean, the good thing about the guidance range is that you only have to adjust your guidance when you are over the upper end of the guidance range. So if we look at H2, we are pretty confident that we've got very good times ahead.

Got it. And regarding the allocation topic, I mean, entering 2026, the situation was, yes, inventory is not a headwind anymore, but then we got the Iran war auto cycle improving, et cetera. Now it looks like increasingly a situation where your customers have need to think about securing maybe their allocations in advance the volumes they need. So my question is, are you already seeing customers refilling their inventories, willing to take higher inventory levels or accept the higher inventory levels than 2, 3 quarters ago where they really placed orders on short notice. What is the customer thinking right now? Are we shifting to really building inventories again and strategically maybe a bit more than historically seen?

For the time being, I don't think so. But there -- we're in the process of reacting to allocation so that we would actually see a rising inventory level. I don't think so for now. But if we look at, say, the end of the year or maybe the first half of next year, I'm not so sure what the reaction is. I mean we have a pretty good track record of what the run rates at the different customers is, which is good because then you can assess what they should need. For now, I think it's -- we're still in adjustment mode.

And the next questioner is Johannes Ries from Apus Capital.

First, congratulations to the strong performance compared to your direct competitors. Maybe let's start with this. What product groups has maybe been the strongest driver, which gives you compared to most other players in the automotive space, the stronger performance?

Well, we see that ADAS is actually a thing that gets more and more real. I mean that is real in China, that gets even more real in China, and that gets more real in other parts of the world increasingly as well. We also ramp airbag products this year, which are just -- you put so much R&D effort into them over the years. And now they finally ramped. So this is also nice. And if you see the illumination on the outside of cars, think of us, we like to help to make these things possible. So we think we've got very kind of positive segments that are really part of the automotive future.

If I see illuminated cars, I think on Elmos. Maybe -- can you repeat, maybe I didn't get it right about the design wins in the first, how much you catch it. Maybe I didn't -- maybe one other maybe they don't get it, maybe can you repeat it? Maybe how the design?

So it's EUR 400 million lifetime value. This is about 60%. This is maybe the more intuitive number. It's about 60% of what we should have done for the year. Now we're kind of at half year, and we're 60% done. So one reaction would be, let's lean back. The sales bonuses are all secured. Yes. But the thing is we don't cap them when it comes to design wins. So don't lean back. It could be a very good year.

Okay. No, I think the pipeline for the second half for design wins looks also good.

There is no structural change whatsoever. This is running at an excellent speed.

Okay. Maybe a little bit more on robotics. It's a hot topic, although your direct competitor from Belgium said, yes, it's an interesting part. But even next year, it's not a very strong contribution to sales. Is it also the case for Elmos -- or could we also see maybe a meaningful contribution to sales starting next year?

No. This will not have a meaningful contribution next year. I mean, any change in a big segment that goes from EUR 150 million kind of 10% or 20% up will have a much higher magnitude in terms of growth contribution than the robotics. And this is the nature of the small emerging things that first, they seem small, but then they compound. And only with this compounding, but it's not that robotics is a growth driver for next year. This -- I mean, it will for sure grow, but it's not a growth driver. Next year, we ramp ADAS as a big U.S. OEM, which will be a growth driver. We have an eFuse ramp. So it's more of the very advanced car things that make us, we think, grow next year if we look into our books.

But if we got it right, in your 2030 ambition of EUR 1 billion, there have been no robotics in at this time you made this figure.

No. This is just because we are -- I mean, if something doubles every year, it also means that kind of the statistical estimation range that you would have to give is that's why we wanted to be clean. We just give nothing and everything comes on top. It's clear. So if it comes and maybe it gets really meaningful towards the end of the decade, its ice on the top.

Yes. Exactly.

Was also my takeaway. On cash flow, if I'm looking in the past, the second half was most times stronger at the cash flow side than the first half. Could it be the same this year or is it -- there's no rule on this maybe that the second half is normally better on the cash flow side?

No, no. This is exactly right. I mean Q2 is always burdened by seasonal effects. So I mean, all bonus payments, for instance, happen after the AGM. Some other things happened in Q2. So Q2 is always -- and then Q3 with rising revenue, usually a little bit rising profitability. Then I mean we -- you observed rightly. There is this little seasonality in this cash flow thing, and it's nice in the second half.

Last question, you mentioned with maybe some, I guess, maybe the problem set is you compete with AI on 8-inch wafer that maybe there is some shortness and you think you could win market shares. You did it in the past. Is it that you maybe secured more delivery on the wafer side already. So you think because you are more ready to deliver and fulfill the requirements of your customers that you could win market shares like in the past?

Let me postpone that question a little bit. It's a little sensitive at this time. I think we are very well-positioned in this allocation. We got good relationships with the foundries. We have reasonable discussions what our customers need and where we can help the industry in general. I think we all don't want to push senseless inventories. We want to secure the ongoing demand, and we're having very, very positive discussions at this point in time and very responsible discussions overall. However, there is tightness, and we'll have to manage through that. But if you do it for the second time, it's a lot less scary than if you do it for the first time. And last time, we hugely benefited. So we are in a positive mood.

Hopefully, that was my follow-on in the last.