Hello, ladies and gentlemen, and welcome to the Extraordinary Conference call of Elmos Semiconductor SE. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Dr. Arne Schneider, CEO. Please go ahead.
Ladies and gentlemen, welcome to this extraordinary conference call, and thank you very much for participating on such short notice. The wait has finally come to an end, and I'm very happy to present very good news to you today. We have signed a contract, actually early this morning, with a publicly listed U.S. technology corporation, Littelfuse, for the sale of our wafer fab, and have agreed on a long-term supply agreement at least until the year 2029. We are very happy that we now have a new and strong partner on board, who will secure and expand wafer production in Dortmund in the long term. After the very disappointing prohibition in November last year, we have now found a very good new solution in a short period of time.
With today's agreement, Elmos can now implement the important structural transformation into a fabless company as planned. It also provides a sustainable and long-term perspective for the Dortmund wafer fab and all of its employees. Before we go into the details of the transaction, let me briefly recap why we have decided to sell our fab and become a fabless company. At the Elmos wafer fab in Dortmund, semiconductors are manufactured in the long-time proven 350 nanometer technology, primarily for automotive customers. In the coming years, the demand for these Elmos 350 nanometer products will shrink, because new and more powerful products, successor products, partly, with a higher performance, are designed in newer or smaller technology nodes, and these we cannot manufacture at the Elmos wafer fab.
This development would have led to a critical underutilization of the fab in the medium or long term. The associated fixed cost burden would have led to a considerable product cost increase and a significant competitive disadvantage for Elmos. In the final consequence, when the load is virtually completely gone, this would have resulted in the closure of the fab and the loss of jobs, including considerable restructuring costs. Therefore, the sale of the fab to a leading corporation capable of enabling high capacity utilization with new technologies and products, is the best option to secure the Dortmund location and the jobs in the long term. Let me summarize this important transaction and give you some information about our new partner.
Elmos Semiconductor SE and the German subsidiary of Littelfuse signed an SPA for the sale of the Dortmund wafer fab for a net purchase price of EUR 93 million. A payment of around EUR 37 million, 40%, will be transferred after regulatory approvals are ready, and the rest of the purchase price is due at the final closing. In addition, Elmos and Littelfuse have agreed to enter into a long-term supply agreement until 2029, with Elmos buying a certain volume of the processed wafers produced at the Dortmund fab. The share of our product is higher in the beginning and has a tail, of course, towards 2029, and maybe we even continue something beyond 2029. The supply of sufficient wafers from Dortmund is therefore secured without interruption for a very long time.
Initially, for the first years, Elmos will take virtually all of the capacity. This is the reason why we have also agreed with Littelfuse that the closing is expected to be effective on December 31st, 2024, so in one and a half years from now. With the planned closing only towards the end of 2024, Elmos retains full operational control of the wafer fab for the time being. At the same time, Littelfuse will have sufficient time to prepare the transformation of the fab with new technologies and products. The closing of the transaction is subject to certain closing conditions and regulatory approvals, among them, the foreign trade clearance by the German Ministry for the Economy and Climate Action. As Littelfuse, the U.S. parent of the actual acquiring entity, is a non-EU cooperation.
However, we do not expect headwinds from politics or the ministry in Berlin. The sale to a technology leader from the United States opens up new prospects for the wafer fab, with power semiconductors for climate technology and renewable energies, and it secures semiconductor production in Dortmund and the associated jobs in the long term. At closing, the German subsidiary of Littelfuse will take over 100% of the shares in the Dortmund Semiconductor GmbH, which is, as you will for sure know, the carve-out entity of the Elmos wafer fab, including the direct and indirect personnel. Littelfuse will acquire the wafer front and processes only. Elmos will continue to conduct all testing activities, wafer testing, and final part testing in-house and in cooperation with our external testing partners in East Asia.
The transaction will have no material effect on the EBIT in the fiscal year 2023, since closing is not expected, as I told you, to be effective until December 31, 2024. The current forecast for our EBIT margin in the year 2023 is unchanged at 25%, plus or minus 2 percentage points. The cash flow in fiscal year 2023 will be positively impacted, likely by the payment of around EUR 37 million after regulatory approvals. Independent of this transaction, we have also reviewed the guidance and decided to intensify once again, the expansion of test capacities for our future growth.
We now expect capital expenditures of around 19%, plus or minus 2 percentage points of sales for the fiscal year 2023. Previously, just as a reminder, it was 17%, ± 2. As a result, Elmos now expects a negative operating free cash flow and operating, meaning, without effects from the transaction in 2023. Ladies and gentlemen, we are now able to transform Elmos into an even more agile fabless company. We will be fully flexible to access a wide range of state-of-the-art wafer technologies, and we can continue to focus on utilizing our strong growth potential with highly innovative automotive IC applications.
We can continue to build on our core strengths of IC design and systems and software understanding, and we'll be able to tap into new fields of growth. I think we will be more innovative, we will be faster, we will be more efficient. Who is the owner of the Dortmund wafer fab? Founded in 1927, I mean, 1927, just to, you know. Littelfuse is a global leading U.S. tech corporation today, headquartered in Chicago. Littelfuse develops, manufactures, and sells circuit protection, power control, and sensing products, and operates in the electronics, transportation, and industrial segments. In 2022, Littelfuse generated group revenues of approximately $2.5 billion . Littelfuse shares are listed on the NASDAQ.
The shareholder structure is very broadly diversified, also with no known significant shareholders from China or other critical countries. I guess this is an important information, at least we hope we are. In Germany, Littelfuse operates in several R&D, sales, and manufacturing locations already, including a six-inch wafer fab in Lampertheim, near Frankfurt am Main. With the acquisition of the Elmos fab, Littelfuse invests in the expansion of the existing manufacturing network in Germany, and in the expansion of capabilities and capacities for power semiconductors for industrial applications, especially in the area of climate technology, renewable energies, and electromobility. The Elmos fab is an important milestone in their strategy, as they need additional capacity to realize the growth potential in power semiconductors, and also it's an 8-inch facility, which is good and adds to their portfolio.
In the first years, the Dortmund fab is still very well utilized with the traditional Elmos products. With a gradual phase out of these products, Littelfuse will realign and structurally develop the fab. The existing CMOS manufacturing technology will be replaced. The power semiconductors produced in the Dortmund fab will be used primarily in the industrial applications in fields like renewable energy and electromobility, as I mentioned. This will give the semiconductor location in Dortmund an even more important role in digitization and energy transition in the future. Ladies and gentlemen, this transaction and our new partnership with Littelfuse is a major milestone for Elmos, our employees, customers, and investors. We have found a new partner for our fab in Dortmund and secured the supply of our 350nm products for a long period of time.
Today marks the start of an excellent foundation for an even more successful future for Elmos and all of our employees. Thank you very much for your attention, and I'm now looking forward to your questions.
Ladies and gentlemen, if you would like to ask a question, please press nine and the star key on your telephone keypad. In case you wish to cancel your question, press nine and the star key again. Please press nine and the star key now to state your question. The first question comes from Malte Schaumann. Please go ahead.
Hello. Congratulations to the deal. My first question is, are there further material conditions that have to be met to each conclusion by the end of next year, or is it just the timing component and then kind of an automated process?
Well, we do have [crosstalk] conditions. Mr. Schaumann, thank you for your question. We do have typical closing conditions, but these are in the hands of the parties. The key external things, if I remember correctly, are on the one hand, FDI, so clearance from the Bundeswirtschaftsministerium, and Kartellrecht. Then there's customary others, but we actually do not perceive that there is a huge risk in that.
Right. likely the final approval appears to be very high.
Well, I mean, this is a deal that is very good for Dortmund, for Germany, for technology coming into Germany a little bit again. It is a deal where technology comes to Dortmund. A bunch of technology comes to Dortmund. There is no intention to use the existing 350nm technology. Unsurprisingly, of course, this is not of interest. Of interest is the capacity, of interest is our highly experienced team. Of interest is not the technology of Elmos. There is gonna be a technology inflow and an inspiration and a shift of focus, of course. We do mixed signal semiconductors. It's gonna be power semiconductors. These are, of course, very different in the future. Luckily, they are largely compatible in production.
The switch over, can happen over a certain period of time. This is really good.
Yeah. Okay. Next question is on margin impact. I think with the Silex here, you said that you expect the transaction to be more or less neutral to your margin levels. Is this still valid, and also for the year with Littelfuse?
Yeah, this is again true. I mean, We will only see, of course, the margin impact after closing or anything significant after closing, then there won't be too much.
You have all agreed on the price, the wafer, for the part you buy from them until 2029?
Well, we agreed on a price-finding mechanism.
Yeah. Yeah. Okay. On current trading, I mean, you can maybe comment on current trading, has there been a change in the demand pattern? Secondly, to the increased CapEx, is that coming from higher volumes you're seeing maybe then towards 2024? What is the reason for stepping up?
The CapEx is actually mostly linked to next year, because anything that we newly decide to acquire as machines only has a very limited impact on this year. We see good momentum generally, and that is why it is necessary to step up our investment in testers.
Right. This momentum is kind of accelerated, because you had to raise your investment levels. Would that be true?
I mean, whenever something changes, you have to adjust to it. We do feel a very strong obligation to deliver to our customers what they really need. That, of course, may at some point in time require more test machines.
Okay. Maybe, can you comment on, in discussion about, inventories, the supply chain, what's your view?
Well, I believe we are we're in the normalization phase. People cannot buy everything they want and everything immediately, but it's not as bad as it was. I believe that in 2024, we'll be out of the woods from, for quite a number of products and segments. At least if there are no kind of big Rams or big kind of new requirements that also sometimes happens. Generally, I believe we are on our way towards normalization.
Yeah. Okay, good. Many thanks.
Thank you, Mr. Schaumann.
Ladies and gentlemen, at the moment, we have no further questions. If you want to state another question, please press nine and the star key again on your telephone. The next question comes from Robert Sanders. Please go ahead.
Yeah. Hi, it's Rob from Deutsche Bank. Thanks for the time. Thanks for the call. I just had a first question. Just can you remind us how much of the cost of goods sold or how much of your foundry supply, so your manufacturing supply comes from the Dortmund fab? I've got a couple of follow-ups.
It's somewhere around a third.
Got it.
Rob, first, thank you for your question. It's somewhere around a third.
Okay. Just remind me, the mechanism when this thing comes off the balance sheet, there's no depreciation to come off, but you will have to pay a cost-plus kind of setup. Is that right?
Yes.
So I'm just trying to work through the mechanics on the PNL.
Could you just be a bit more detailed about that gross margin, EBIT margin, et cetera?
Yeah, I mean, we will, of course, only see that in 2025, just to remind everyone of this, at least the schedule for closing. What will happen? We see less assets, we see less depreciation, we see more buying. We see more third party. We see less personnel costs because that goes into the wafers that we buy. You're right, we are kind of., o ur price-finding mechanism, it could resemble a model that you would use within a group for cost-plus pricing, and it's reasonably similar.
Let's say it's cost plus 25%, how would that compare to market pricing for 0.35 micron, foundry wafers? Cost plus 25% sounds wrong.
We can't really tell you the number, the number 25 sounds outrageous. This is, I cannot afford such things. No, we still want to buy them at. We have reasonable arrangements. One other thing that, of course, happens when we have closing, is that we have some extraordinary income.
Got it. In conclusion, will there be any impact in 2025 on gross margin, EBITDA margin?
There will theoretically be a little impact, but honestly, it is so small that a lot of other factors will be bigger.
Okay. Just following up on the current trading, so it sounds like, is it fair to say your demand outlook today is better than it was in early May when you last reported? Because that's why you're intensifying your CapEx investment in testers, or do you think it's maybe more just Elmos-specific, design win pipeline that is just a function of, you know, new products, et cetera?
We since we last kind of reviewed the guidance, we looked at our customers and our customer orders for this year, but also for 2024, and had some serious discussions with customers on what the demand for 2024 will be and what we need to do. That's a little bit what comes out of it. Yes, there is an update, and we need to reflect the additional demand, particularly in the new year. I mean, as you know, we've got these horribly long value chains, and we have lead times for the invest. We have to look a little bit into the future, and then react accordingly.
Got it. Just last question would be, there have been some stories about foundries increasing pricing again next year. Have you had any indications yet about whether pricing for foundries will be flat or up next year, and whether you can pass that on to your customers? Thanks.
Well, the last thing I read in the press, and it doesn't seem inconsistent to the general news situation, is that it looks like flattish. Let's see what comes out. I mean, it's still not time for yearly price negotiations, I believe TSMC is somewhere in the flattish range. Though they haven't, or they have been, they followed a very sensible and kind of less volatile pricing strategy. Some of the others had a more, I believe, volatile or aggressive pricing strategy.
This may of course, again, be prone to more change than, say, the Taiwanese approach, where they have a very sensible, moderated, and kind of long-term view on how things should go.
Got it. Thanks. Thanks very much, and congrats on the deal.
Rob, thank you very much.
The next question comes from Hugo Maas. Please go ahead.
Yes, hello. I would have two follow-up question regarding the impact for you of the Dortmund divestment. When it comes to the CapEx and the amortization, could you help us to assess what kind of CapEx in the last years, and do you allocate to Dortmund every year? Same thing for amortization. How much of your amortization are dedicated for Dortmund, please?
Yeah, we had a little less than 2% or percentage points of our CapEx going into the wafer fabrication recently, and that then, of course, goes away. That is good. The depreciation, of course, also goes away. I believe it's in about that range. So it's not a huge impact, but of course, if we look at this transaction, we see a very substantial cash inflow. We will see a very substantial extraordinary income. So that is what makes it, for us, very attractive, combined with the fact that the kind of looming threat of restructuring or, I mean, I believe some people wrote or thought that after the prohibition, we now have to sell the fab for kind of a pitiful price or so.
We are happy to come to the conclusion that that is not right. We have an added pricing. We will even see a substantial extraordinary income, of course, at closing, right? This is not concerning this year.
Okay. Yeah, yeah, understood.
This year there's only- [crosstalk]
... likely there's not gonna be a cash inflow. Okay, okay, I see. On the visualization of this cash, do you have already an idea of what could be the usual, cash inflow, please?
Yeah, part of it will of course, go into our beloved test machines. On the others, I can't tell you. We should wait for the regulatory- I mean, we are a little bit like a burned child, right? I mean, we should wait for the regulatory approval to-- before we really discuss it. We kind of started discussions, when we had the other deal, a little bit before, and kind of thought, what should we do? I believe this time everyone is waiting, for the money to be there before we actually kind of decide on, how we are gonna distribute or use, or do whatever.
Okay, very clear. Just the last one, could you give us some details on the visibility that you have at this moment for 2024? Do you have some contracts that are running into this, in this time frame? Is it a big part of your order backlog that is related to 2024, in small part? Do you, I guess you have over time, more contract on the long term, on a long-term basis? Could you say how much does it present of your, of your backlog, that is for long-term contracts right now? Thank you.
Well, we of course do contracts that or these days we do contracts that cover many or multiple years. We wouldn't disclose how much that is, it is not that such contracts insulate us from whatever the business cycle does. Just kind of gives a lot of stability in certain customer relationships, into certain products, which is good. I mean, it's especially important for ramp projects, where we do have to do a lot of new investments, then we of course, like to do a multi-year contract, such that we secure that investment, and but we also can do the Ram operationally.
We try to get as much visibility into 2024 as we can, discussing with our customers, because the normalization phase, I believe, should also be a joint effort between us and our customers. We all need to settle on what it should be, not too much and not too little. This is what we, together with our customers, try to achieve.
Okay. Thank you very much.
Thank you very much, too.
We have a follow-up question from Mr. Schaumann. Please go ahead.
Thank you for keeping follow-up. I think with the Silex deal, you accounted for about EUR 5 million in transaction costs. Are we expected to kind of reach a similar level? Are these included in your 2023 guidance?
Well, I believe our guidance kind of holds. We will have to pay some money to lawyers and these types of people, that is true. You can now try to attribute some costs to the one deal, some costs to the other deal. This is an exercise we haven't really done. After we kind of attributed something to the different deals, we can be a little bit more precise on transaction costs. It's kind of the very normal things that you always have to pay, and it's not gonna affect the guidance.
Good. Okay, thanks.
Thank you, Mr. Schaumann.
Ladies and gentlemen, we didn't receive any further questions, so let me hand pick over to Dr. Schneider for some closing remarks.
Everyone, thank you very much for your participation and your interest in Elmos. I would, as the last thing, like to remind you that we will publish our half year 2023 report on July 27, 2023. With that, goodbye from Dortmund. Stay confident. See you then. Thank you.