Elmos Semiconductor SE (ELTTF) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and a warm welcome to the Elmos Semiconductor SE conference call regarding the results of Q2 2025. [Operator Instructions] Let me now turn the floor over to your host, Dr. Arne Schneider, CEO.

Ladies and gentlemen, good morning from Leverkusen, and welcome to the Elmos conference call for the second quarter 2025. Thank you very much for your participation and your interest in our company. Today, I would like to welcome our new analyst, Veysel Taze from Metzler, who has started to cover Elmos since June. We already know the name, but the company is new, and we very much appreciate the uptake of coverage. Ladies and gentlemen, we can report an encouraging revenue growth for the second quarter, although we continue to face ongoing geopolitical challenges and quite dynamic markets. So let me start with an update about the current market environment. The destocking activities in the automotive semiconductor market are slowly but steadily decreasing. Our customers are now increasingly returning to normal order levels as they continue to reach their desired inventory. Nevertheless, visibility remains low and some of our customers still order on a very short notice. We also do see an increasing amount of rush orders where people exceed the level that they actually planned for this year. The economic and geopolitical environment remains challenging. In particular, the Chinese automotive market has recently shown an even more dynamic growth momentum than in the past, but there is also increasing competition among Chinese OEMs, especially in the field of electric vehicles, so the new energy vehicles. This fierce competition leads to faster innovation cycles, increasing price pressure and ultimately will result in consolidation among the automotive OEMs in China. And of course, everyone desires local chips. We have adapted to these latest developments very quickly and are going to realign our Chinese footprint even faster and more consequently than originally planned. We will further expand our organization in China and establish a fully functional local company with all relevant business processes, including the development of ICs for the local market. The entire Elmos China business will then be handled fully locally. The new structure offers the flexibility needed to deal with future market developments and geopolitical scenarios. We want to continue our great success in the Chinese market and secure our strong position. To do this, we build a local and agile organization in China, and we do that at China speed. Before we talk about the second quarter results, I would like to comment on the latest tariff deal between the EU and the United States. According to the EU, there will be a basic tariff of 15% for the majority of EU exports going into the U.S. This rate applies across most sectors, including cars and semiconductors. This is all we know so far because all relevant details will be finalized only in the coming months. So it is still not possible for us to quantify the potential direct and indirect effects of the new tariff on cars, automotive components or semiconductors. We also do not yet know whether analog mixed signal semiconductors will actually be included and what will be the basis for the tariff as the majority actually of the value added of Elmos chips is generated outside the EU. However, let's assume the worst if Elmos Semiconductors were included in the new tariffs, the direct impact on Elmos would be very limited as we only ship 2% of our products directly to customers located in the United States. And I have serious doubts that they wouldn't need to pay the tariffs that we pay and reimburse us. Lastly, I would like to inform that we have successfully transferred our SAP R/3 system to S/4HANA. After more than 30 months of intense project work, the go-live of the new system took place in the early morning hours of July 7. So far, the new system is running a great success for the entire project team, which includes more than 200 internal and external experts. However, we, of course, have to monitor the performance of the new system very carefully, at least until the end of September. This is called Hypercare phase, where the system is stabilized and any defects will be fixed. We budgeted some money for it. So let's see whether we budgeted enough. So the SAP transfer has and will continue to impact our financial results, and we hope that everything will run as smoothly as possible. We saw some impact on Q2, and I'll actually comment on that a little later. So let me now continue with the financial highlights of the second quarter 2025. Our Q2 sales developed better than expected driven by a strong demand for our innovative ICs. Compared to the previous year, sales increased by almost 3% to EUR 145.7 million and almost by 15% sequentially. The strong sales performance is mostly driven by our Asian customers, whereas Europe and the U.S. are still lacking in terms of growth. The weaker U.S. dollar had a negative impact on our Q2 sales almost 3 percentage points. So FX adjusted, Q2 sales growth would have been even higher with around 5% year-on-year and almost 20% versus Q1 2025. The gross margin was 41.2% in Q2, slightly lower than Q1, impacted by fixed cost effects and higher material costs, including higher gold prices in assembly. EBIT was EUR 30.1 million in Q2 compared to EUR 35.9 million 1 year ago. In addition to the effects of the cost of goods sold, EBIT was impacted by special costs for the SAP transfer, consulting costs for the expanded China strategy as well as negative FX effects. As a result, the EBIT margin reached 20.6% in Q2 2025. Just as a side note, without the negative FX effect, the EBIT margin would have been around 24% in Q2. So we are responding to these developments with consistent cost-cutting measures and selective price increases to pass on higher material costs to our customers. I mentioned the gold issue, for instance. Our cost optimization program will lead to noticeable reductions in personnel and material costs in the coming quarters. At EUR 4.6 million or 3.2% of sales, the Q2 CapEx decreased significantly. At 6.6% of sales after 6 months, we are in line with our full year CapEx expectation. And please keep in mind, we bought the building in Q1, which was quite an expense. The transfer of our SAP system has not only impacted our P&L, but also a noticeable effect on cash flow at the end of Q2. In preparation for the go-live, we had to freeze the system before the cutoff, resulting in higher working capital at the reporting date. So while we had pretty good cash flow in April and May, we estimate the special impact in June at around EUR 15 million. Despite the lower free cash flow of EUR 0.5 million in Q2 then overall, we are still on a very good track for a sustainable improvement this year with a free cash flow of EUR 22 million or 8.1% of sales after 6 months, and that includes, of course, the negative effects of the SAP changeover, which are only temporary, of course. Ladies and gentlemen, let me finish my presentation with the market outlook and our guidance for the fiscal year 2025. According to S&P Global, the latest global light vehicle production forecast shows a total number of 89.9 million new cars, a slight increase versus the last forecast, still virtually unchanged versus 2024. S&P expects plus 4% increase in China and minus 3% in Europe as well as minus 4% in the U.S., which is mainly a result of potential new tariffs on cars and automotive components. The good news is that S&P has upgraded its forecast in the right direction. Still, we think markets are volatile and visibility is, of course, more limited than it was before. Regarding our outlook for the year 2025, please note that the potential impact of the new tariffs and increasing trade conflicts with U.S. or a global recession, of course, cannot be estimated and therefore, are not included in our outlook. Currently, I believe a lot of people are in a positive mood concerning U.S. trade policy, but you never know, right? We will, of course, give you an update should this become necessary in the future. Our full year guidance from February 2025 has been adjusted regarding the U.S. dollar exchange rate. Previously, it was based on a ForEx rate of EUR 1.05 to the U.S. dollar. And now we base it on EUR 1.15. However, Elmos continues to expect sales of EUR 580 million, plus or minus EUR 30 million for the fiscal year 2025, and that despite the new exchange rate assumption, which would imply a negative impact on sales of around EUR 25 million. So for the mathematically inclined, you could say that we just increased our sales guidance by EUR 25 million. We also continue to expect an EBIT margin of 23%, plus or minus 3 percentage points of revenue. However, based on the EBIT performance since the beginning of the year and in particular due to onetime effects mentioned above, we think it's currently more likely that we may achieve the lower half of the forecast range for the full year. Overall, our full year guidance would be a better performance than most of our closest peers, of course, you know, which expect a high single-digit sales decline on average in 2025 and a much more significant drop in profitability versus last year. Investments in new machinery will be limited as we continue our successful OEE optimization as well as test time reductions, and we expect CapEx in 2025 to be around 7%, plus or minus 2 points of sales. Based on a solid cash performance in H1, we are forecasting a positive adjusted free cash flow for 2025 of 7%, plus or minus 2 percentage points of sales and the CapEx and cash guidance is, of course, unchanged. So let me summarize. In an ongoing challenging environment, we have achieved a strong top line performance in Q2. We are confident that the inventory adjustments will continue to subside and order levels will continue to improve. However, we have to manage significant market and geopolitical dynamics, leaving some traces on profitability in the short term and forcing us to react. Ladies and gentlemen, we are convinced of our operating model and strategic positioning, and we are confident that we will be able to achieve our ambitious targets in 2025 and beyond. Our approach focusing on profitable growth, cost discipline and operational efficiency, combined with a clear focus on a better cash generation will continue to increase the valuation of our company and create attractive opportunities for capital allocation. So for now, thank you very much. I would like to open the floor for questions.

[Operator Instructions] And we have the first question already in coming. It is from Johannes Ries of Apus Capital.

Congratulations to good top line development. A couple of short questions. I will try to be fast to let open the call for the other participants. First, maybe on this onetime effect on the margin, do I got it right that the strongest onetime effect is the FX effect? Like you mentioned, the margin effect in Q3 was that you would have achieved 24% without the FX effect. And what are the other onetime effects? Is it also the SAP transformation or anything else?

Yes, you're right. FX is big. SAP is also very noticeable. We also spent more on gold than we did in the past. And we are still working on some compensatory measures. We spent some consulting costs on our new China setup, which we also want to kind of get forward at China speed. So this is one item and the rest, I believe, is smaller.

And also maybe a clarification. There is some speculation that maybe there's more price pressure or margin pressure in China because of the competition between the players and overcapacity and so on. How is your -- what is your situation and what you are facing in China on the margin and pricing side to make this clarification.

I mean China has always been a very tough environment, but they also value innovation and the best product. China, I believe, is the market that can be described in their buying behavior as making a list of who's #1, #2 and #3 in the market and then just talking to these. And then, of course, it's also a question of price once you settled on the engineering issues. So yes, China is a tough environment. But you can see that we are excessively successful in China because this is really a big source of growth. If now and then we have to make a little compromise, we do. But generally, we steer our course.

Okay. To make it very clear that not the speculation in the market, your lower margin guidance has nothing to do with margin pressure or price pressure from China. There are the other reasons you mentioned before as the main reason for this?

Well, if -- I mean, having -- we fight in all regions to kind of extend our share and to be successful. So it would be completely wrong to say our lower margin guidance is mostly linked to China. China has an influence. The rest of the world has an influence. The onetime effects I mentioned have the most influence of all. So it would be a little short to say the pricing environment in China because then you want to explain 100% and then you only -- I mean, this is what you can explain not a lot with. So no, it's -- this would be the wrong connotation.

Great, super. And on cash flow, you mentioned this special effect in receivables also this -- that you bought a building, which was although in the free cash flow. Therefore, as this was onetime effects in Q2, and I think the receivables now may be coming to a lower level in the second half as the system is up and running. There maybe the free cash flow in Q2 will be an exception and will be definitely the lowest maybe free cash flow in the quarters in this year.

This is very likely. I mean the thing is we bought the building, by the way, in Q1 already. But due to the SAP changeover, we paid some guys that we wouldn't usually have paid. But the thing is if you -- yes, but it's quite complicated to migrate all that data. And then for a week, you can do manual payments, but nothing system-based. So there is a strong rationale to pay a lot of people before you change over, even if it's a little early, even if that hurts cash flow in Q2 because you need a smooth cutover. And you do that with the minimum amount of data that is critical payment data. So if you kind of pay some people even before it's due, it's a clever strategy. And of course, this is not structural. This only affects one quarter then you have little problems with incoming payments in this cutover phase. So the assumption that the Q2 is the worst cash performance is very justified.

Super. Two very quick final questions. First, design wins in the first half and the second quarter, you have nothing said to this, maybe an update on this point because it's a longer-term future and very helpful regarding your 2030 targets you have commented to the market.

Well, if -- let me put it that way. If the second half develops exactly as the first half, everyone on the call is invited to join for a little bottle in Leverkusen or Dortmund. But it's too early to say, right, because I don't know about the second half. But we are in -- there are a lot of things you should be cautious about, but this is something we may open a bottle on.

Super. Finally, Melexis yesterday has a special chart on the topic of robotics that could be also a very interesting opportunity maybe in the mid- to longer term to their business, okay, they are more in the sensor business, but partly I could maybe imagine that's going to be also an interesting opportunity outside the automobile space. So is it maybe different because they are in a -- have a different angle in their product range.

No, no, no, not at all. We only wanted to tell people about robotics later. Well, I can do it now. We think robotics is a super interesting field because what currently happens in China with human robots is great. And we saw a lot of these robots on the Shanghai Auto Show already. And if you go more towards the robot people, you will see more and more of them. They will be at an attractive price point. I think they will have huge market success. I mean, not next quarter, but I mean, China speed is quick. So expect a lot to come. So we are talking with various potential customers. But today, of course, there is no volume because today, everyone is developing. And so the robotic sales of Elmos in Q3 2025 will be very limited, if anything at all. But let's see where that goes. We are -- we just don't want to hype the topic so much because it's not short term. But in the mid and long term, this is a super interesting topic. And we are actually working -- we were putting quite a lot of effort into that topic.

Super. Is robotics in any kind included in your 2030 ambition?

Not formally. But currently, it looks like that it may well contribute something.

Okay. It could be another words ice on the cake.

Yes. I mean it was not kind of part -- we -- it was not so big when we first told you about our 2030 ambition. But I think it's a super interesting field. And by 2030, it should contribute.

So moving on to the next question. The next question comes from Malte Schaumann of Warburg Research.

First question is also on the gross margin. I mean you mentioned rising input costs and then referred to gold. Is gold the only factor that is leading to rising input costs? Are you seeing other cost inflation, wafer pricing, other stuff? And then a follow-on question would be, how are you able to mitigate these effects to potentially pass it on to the customers, replace gold with copper and products, et cetera, which might take a longer time. So what are your thoughts around that?

Yes. Gold is actually about half of the issue. So the other things are small things that add up. So gold is a major issue for us. We still have a lot of old gold products and we're in the process -- we already started in Q3 last year to transfer some of these. It takes some time. Gradually, they are moving to copper, which is, of course, a lot less expensive. While the gold price keeps rising and rising, I mean we look at $3,300 today. Wow, this is a lot. We've been as high as $3,450 recently. So this is really something where we suffer a little bit. The discussion -- I mean, we are currently in the discussions to pass on some of that burden because we really dislike it. And it's not our fault. So -- let's see. These discussions now start.

Okay. And what should be the expectation then for the second half? So probably you will benefit from rising volumes. So do you expect gross margins to go back to the Q1 level, potentially even higher mid-40s? Should we expect something rather in the lower 40s. So what's then the expectation seeing all that moving parts for the second half of the year?

It is so hard to predict because there are a lot of moving parts these days. I think if we take the first half, this is not a bad indication per se because actually a good part of the first half was impacted by higher gold and higher material costs. Some of our measures concerning cost cutting only get online or get visible in Q3 or even Q4. So I think kind of -- there are so many moving parts that it's really hard to predict, especially if you want kind of in the 1% range, and we are talking very low percentages here, right, that we want to predict. So we currently think that the first half may be the best indication we have. Rising volume will help. Some cost measures will help. But still, we also may face additional headwinds out of volatile markets. So since so much is happening short term these days, also in terms of sales development, it's particularly hard to predict. Our portfolio changes. We even now, for the Q3, do not have a complete view on the portfolio. You see that our book-to-bill is a little bit below 1, okay, you could round that to 1. But still, there are a lot of short-term orders. And it depends on what products are ordered, whether there's a margin impact on one or the other side. So I would love to know it, but it was a long answer for a very concrete question, but it's really hard to predict. I'm sorry.

Okay. Would you say that you have seen the trough in terms of gross margin in the second quarter?

Again, this would mean that we would kind of guess the gross margins. I mean, we certainly see some upside with the measures that are currently running. So we shouldn't kind of put our -- I don't know whether English say that, put our heads in the sand. So within all the volatility that we have, there is also a fair chance that there's some upside.