Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE conference call regarding the results for the first quarter 2022. 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.
Good morning, ladies and gentlemen, and welcome to the Elmos Q1 conference call. I'm very happy to present to you today the financial highlights of another very successful quarter and a positive outlook for our future business. Although we are still operating in a very dynamic and challenging market and geopolitical environment, Elmos had a very successful start into the new year and recorded strong financial figures for the first three months of 2022. At the end of my presentation, you have the opportunity to ask questions, as you know and already expect. At the beginning, I would like to give you a short update about the status of the sale of our wafer fab to the MEMS foundry, Silex Microsystems AB. All organizational preparations and internal steps for the transfer and the closing are well on track.
Silex, as the buyer, has filed all the required documents for approval at the beginning of this year. Now we are in close and constructive contact with the relevant authorities. The status today, there is pretty much as expected. We are in the middle of the regulatory approval process. Let me continue with a brief update about the current market environment. As we all know, the allocation is still ongoing, heavily impacting the entire supply chain for semiconductors since the end of 2020. In addition to the lack of wafer capacities, the ongoing pandemic, especially now in Asia, and supply chain shortages and logistical challenges due to the war in Ukraine, have further intensified the already challenging situation.
We currently believe that the tight supply chains will continue in this year and not all supply issues will be resolved in 2023 as well. So far, we have been able to supply all our customers to such an extent that Elmos was not responsible for any line shutdowns at car OEMs. This was only possible thanks to a very close coordination and cooperation with our foundries and our customers. I have to highlight here once again that the entire Elmos team is doing an incredible job during this allocation. We continue to fight very hard for additional wafers from our foundry partners. We want to satisfy the high demand of our customers and ensure our delivery capability as best as possible. Concerning the war in Ukraine, we do not directly ship any product to customers in Russia or Ukraine.
So far, the supply from our foundries, as well as the supply of materials and components for our own fab and testing, are also not significantly impacted. However, we are in close contact with our main suppliers and have prepared contingency plans and the setup of alternative sources for special gases, for instance, and other supplies normally indirectly sourced from Russia. For our Dortmund location, we have fixed the prices for natural gas and energy until the end of the year already, some time ago. We therefore do not expect major cost increases in 2022. Also, we have set up contingency plans in case of a relevant shortage of the supply of natural gas. We are unable to quantify, of course, the potential indirect effects of the war to the global economy or to relevant markets.
We do not expect major cancellations by our customers as the demand for ICs is still very high, and the inventory levels in the supply chain and at our customers are still very low. At this point in time, there's no need for us to adjust our outlook for 2022 due to the war. We stand firmly behind the guidance. I mean, we just increased the guidance two days ago. What we do concerning Ukraine is that we are engaged in humanitarian support through the Elmos Foundation. This is important for us. As you know, the Elmos Foundation is a foundation linked to the Elmos Semiconductor SE and engages in public welfare projects. We hope that this terrible war will end as soon as possible.
Let me now present the financial highlights of the first quarter. Thanks to the ongoing high demand for Elmos semiconductors in all of our product segments, group sales increased significantly by EUR 19.3 million or 25% to EUR 96.4 million in the first three months of 2022. Despite increasing material prices as well as allocation and pandemic-related effects, the gross profit margin remained on a good level at 45.6%. EBIT increased further in the first quarter to EUR 19.5 million, compared to EUR 12.2 million in the last year. The EBIT margin increased by 4.4 % points year-over-year to 20.2%. As a side note, reported and operating EBIT were virtually the same at in Q1 2022.
There were only minimal expenses in connection with the agreement on the sale of the wafer production in the first quarter. That is why there is no separate operating EBIT line in Q1. Capital expenditures amounted to EUR 11.1 million or 11.5% of sales, and were mainly spent for the plant expansion of our test capacities, especially in East Asia. At EUR 43.9 million, the cash flow from operations was very strong, supported by the high net result and positive impact from working capital, as well as tax adjustments originating from our 2020 results, which were almost double digit. However, please note that we expect tax payments in the second quarter due to tax alignments from the 2021 income, which will offset this effect again.
Despite our growth investments, we achieved an adjusted free cash flow of EUR 30.4 million, which was significantly above the comparable prior year figure. Due to the positive free cash flow, we recorded a net cash position of EUR 19 million at the end of the first quarter, 2022. Ladies and gentlemen, our order books are very well filled, and we were able to secure additional wafer capacities from our foundries. Therefore, we have further increased our already ambitious full-year guidance two days ago. We now expect sales of more than EUR 400 million this year, an increase of almost 25% year-over-year. We have also increased our profit expectations, now forecasting an operating EBIT margin of 21% ±2 percentage points of sales.
The expansion of our testing capacities will continue in the current year, and Elmos expects capital expenditures of now roughly 17% ± 2 % points of sales. As you can also see, we need to prepare for more growth in the next year. For this year, we continue to expect a positive operating adjusted free cash flow above the previous year's level, which was EUR 11.1 million. Ladies and gentlemen, Elmos innovative semiconductor solutions are playing a key role in the mobility of tomorrow, and we are benefiting significantly from the long-term positive trend of the semiconductor market. Combined with our successful operating model and our international setup, we are well on track for long-term growth, and we are also convinced we are well on track to generate shareholder value. Thank you very much. I'm now opening the floor for questions.
Yes. Ladies and gentlemen, if you'd like to ask a question, please press nine star on your telephone keypad. Please press nine star if you'd like to ask a question. The first question comes from Malte Schaumann. Your line is open.
Good morning. First question is on the guidance upgrade, which was quite significant at the current state in the year. Could you maybe elaborate a bit on the moving parts? How much has contributed to stronger pricing, or is it just only higher wafer volumes you achieved from your wafer suppliers?
Yeah. When we initially gave the February guidance that there were still a lot of moving parts concerning wafers. This is actually the key contributor to the increased guidance. We see kind of short-lived shortages in the assembly area. We sometimes see very short-lived shortages in testing operations at our East Asian partners. These are all not really gating for the revenue that we can make. It's the wafers that are gating our revenue. There's the change and that's the reason for the upgrade.
Mm-hmm. Okay. In the back end, is there any material exposure to China? The current COVID lockdowns, is there a risk for the coming weeks, or is that mostly outside of China?
We have that outside of China, we only have a very limited China exposure there. We see it the most in freight rates and the routes certain planes take. I mean, Shanghai as a hub has recently in recent weeks somehow decreased in importance. I mean, I'm sure it will be back up again, but that's where a lot of COVID impact comes in, that you suddenly have to fly other routes and you lose days in readjusting and yeah, that's happening.
Okay. Do you see some customers, potentially Chinese ones, ordering less because they're not able to produce or, due to the shortage, customer takes everything you can get anyways, and independent from actual production numbers?
If they produce less, it doesn't reach us because, I mean, and maybe justifiably, because before they would actually cancel with us, they would rather put it into their stock. I mean, we should rather think that if we have a customer that produces a little less, that maybe we should reduce his allocation and ship it to other customers such that we avoid any kind of stock taking. That is kind of the theory. I believe the practice is if you have a week or two where you produce less, you just try to get as much as you can.
Yeah. Right. I mean, makes sense. Final question is on US dollar exposure. If I recall correctly, you're short by 20%-30% of sales approximately. Is that still the right figure?
Well, currently it's typical. We're typically short around 10% of sales. We have sales 30%-40% in dollar. We have a little more cost, typically at least. We are partly hedged, actually mostly hedged for this year. If you look at the sales impact that you see on the Q1, for instance, and you look at that year-on-year, it's a +3% impact. If you look sequentially versus Q4, it's less than 1% actually positive. The FX plays a role in our sales growth, but it's actually a relatively minor role.
Okay. You said 10% is approx, very roughly the net exposure.
Yeah.
Okay, that's good. Thanks.
Thank you, Mr. Schaumann.
The next question comes from Stephan Bauer. Your line is open.
Yes. Hello, good morning. My question is around your order book, and the visibility that you say that you have, because you've said that you are preparing for more growth. Can you maybe give us some details about the maturity of the order book, if it's only confirmed orders, and what is your view already on next year? Because you're talking about more growth. Thank you.
We are currently in negotiations, early negotiations with the foundry concerning the wafer volume for next year. I guess this will drag over summer and partly into autumn. We are starting on the first allocation scenarios, I would call them, and checking how this year, 2023 might work out for us, our customers, and so on. It's way too early to come to conclusions there because the wafers are not all confirmed and are in heavy negotiation. This is a process that I believe will take place now over summer mostly, and reaching into autumn.
As last year, it's a very intensive process because of course, we cannot offer 100% of the demand to everyone. That is just not possible, so everyone gets less than 100%.
Okay. Can you talk about the design win activity at the moment? Are your customers still looking for new products? And if yes, where do you see more innovation and yeah, that would be interesting. Thank you.
We have an astonishingly good design win status. I mean, we just increased our target, kind of, I mean, really in quite a significant way. I believe we are set to overachieve it. I'm actually concerning design wins, we had a very good design win, just as a single big design win, and I won't elaborate what it is and who it is, but we had it two days ago, so you find me in the best of moods concerning design wins.
Okay. Is it with one of your current customer, I would say? Or is it a new customer?
Yes. That is, I can discuss. It's with one current customer.
Okay. Thank you very much.
Thank you, Stephan.
Yes. The next question comes from Johannes Ries. Your line is open.
Yes. Hello, good morning. Arne, the question maybe is a little bit boring, but if you listen to, say, analysts, there are two camps, one who are really maybe believe that is a structural thing. On the other side, there are a lot of analysts who are saying something goes wrong in this automotive space, so strong reduction in the numbers of cars and the strong growth in the semi market, and they still believe there is a lot of inventory built in the channel.
Again, this question, do you see anywhere in your own inventory, in the tier one suppliers, maybe in the OEMs, there is a huge real build of inventory, or is it also a misreading of some general figures as analysts do, where they look only at the inventory of maybe the tier ones, but they also buy maybe metal, aluminum and other things. There's also price increases, which also maybe lead to a wrong reading of the inventory figures. Paul, what's your feeling about what you receive the inventory side? Because that's a big elephant in the room always, which is discussed on terms everywhere at the moment.
Yes. I mean, I can give you two indications. For us, our inventory volume numbers are down and our euro numbers trend up, and this is on the cost that we have for the inventory, so the prices of the foundries and others. So there could indeed come a misreading out of that that you think the euro number rises a little bit, so the inventory rises. No, the parts go down. That is, we are really living from our hand directly to the mouth.
The other thing is, when I look at our kind of day-to-day management of orders of customers, there's of course no real 100% truth in that discussions between the logistics people of our customers and our order management. There is no kind of less tightness or less discussion going on. There are still a lot of day-to-day scheduling such that nothing bad happens. There's no one that we know of that has any significant inventory that exceeds immediate and direct operational demands.
Okay.
I mean, if we would know, we would cut their allocation.
Okay, super. Maybe on the wafer availability, what's the reason that you now got more wafers from your foundry partners? Is either a lower demand in other areas, or is this always a cautious method at the beginning of the year, and they have over some reserves and now they give the reserves to you and other players?
Well, you probably should ask them as a first instance. I can only speculate about that topic. I believe fundamentally, we have ramping products that require and are not de-stackable. There's just a lot of cars that would not be built if we would not get that additional allocation of wafers. That is something I believe that you discuss issue after issue. I believe we need to discuss that because we can't have thousands, hundreds of thousands, millions of cars not being built because we do not listen to reason. By and large, we all listen to reason, and we try to do the best possible. That is a process that takes place that is also not completely predictable.
Everyone, I believe, tries their best that out of the scarce resources that we have, we have the least damage and then make the most of it.
From other sources, maybe one of your competitors, I don't want to say this, other big supplier in automobile car, just recently told me said he expects a shortage in the foundry side. In the notes, you are active in the whole automotive and just this space as from 40 up maybe to 110 or maybe 140 or something like this. As I've said, this will maybe stay around for the end of 2023. Do you also see this?
Well, you can find people that tell you this shortage will be there until 25, and you can find people that say, "Oh, it's all cyclicality. We've seen that before. This time is no different. It will be gone in a month or two." What I can tell you is that for 2023, wafers are not freely available, rather the opposite.
Okay, super. On the price point, again, can you give us any idea how much you have increased prices when you have done it? Do you plan another round therefore, how easy it is at the moment? I think it's easier than in the past to give higher prices to your customers. On the other hand in the past, as known that it's going the other way around. This was also a discussion about decreasing prices.
Well, we pass on the allocation-related and pandemic-related higher material costs. You can see that in a relatively stable gross margin. I mean, our gross margin is pretty much at the 10-year average, I would say. I mean, 0.something percentage points off maybe. I mean, by and large, you can see that we only pass on what is happening to us. I believe we are very fair to our customers. Yes, of course, there are substantial price increases because the worlds of wafers and other semiconductor materials and services is getting more costly. The inflation in that respect is there and very visible. In terms of our sales growth, there are the two main factors.
It's both volume and it's pricing, and there's the third factor, which is FX, which is, as I explained, not really a super big factor.
Right. Thanks. Finally, the split of maybe what from your different offerings. Is it still the case that all product groups grow nearly in the same amount, or is there maybe one product group or one special product which is really maybe outperforming strongly because it's a huge demand for it?
Well, there are, of course, some ramps, and ramps do not always happen at the same time. This is kind of a second-level effect. We see strong demand in all of our product segments. This is overlaid by some that grow even a little bit more, but in a planned fashion and a known fashion, and expected fashion. It can't be different because when you have something completely new in a car and then it ramps, okay, you grow more. This is no kind of magic.
Okay, super. Thanks.
Thank you, Mr. Ries.
The last question comes from Robert Sprogies. Your line is open. Mr. Sprogies, your line is open.
Hi there. Can you hear me? Yeah, it's Rob here. I just had a question about the frequency of escalation calls. I was just wondering if that had gone up. That's what some of your peers are saying the last three months. I have a follow-up.
Oh, it is hard to tell because the frequency is already high. No, I wouldn't say it has gone up. It's a continued high level. Then of course you switch, and it's always the next things that people worry most about. It's always the current and the next quarter. I guess—I mean, the topic kind of, it's a moving forward of the topic. You always add some calendar weeks. In the charts, you always add some calendar weeks or months in the discussion, and you discussed about January half a year ago, and now we are discussing about June and July. No, the intensity is the same. It's also the content is more or less the same.
The agreements you're signing, how should we think about that? I mean, we're seeing a lot more take-or-pay type agreements being signed, prepayments, that just didn't exist in the last cycle. Like a foundry, like X-FAB is basically fully booked for 2024 with take-or-pay agreements. What are you seeing? And are you protecting yourself against a potential downturn, or inventory correction? How are you protecting yourself?
Yes, we are doing, I would say, adequate contractual arrangements with our customers that also reflect the allocation situation. Because, I mean, in the end, we cannot offer full flexibility to our customers concerning changes in their allocation. Because if we take it or give it to one, we have to take it from another. If we would see that one customer just says, "Well, I need full flexibility. I don't know whether I want the product," then of course, this is hard to justify to another customer to take share from him and give it to another guy that tells you, "Look, I'm not really sure whether I need it." That of course leads us to maybe similar arrangement.
We try to be fair to all customers. But we also need to reflect that we allocate and we need commitment from our customers, but this is usually not a big discussion or not a big issue.
The last of the questions is just about single sourcing. Can you just remind us what % of your products are kind of single-sourced? I have just one last follow-up related to that question. Thanks.
In terms of number of products, it's not that many. In volume, it's a little bit more, because it tends to be the larger volume ICs. But there's also a lot of single sourcing still going on.
Got it. Would you say the shortage today, which used to be about microcontrollers and discrete, is now more around sort of sub one dollar, little sensors, little driver, you know, analog chips? Is that what the chip shortage has moved from? From kind of big chips to small chips? Is that fair?
Well, I mean, our area is the small chips, and there the allocation is still heavily ongoing. This is what I can confirm.
Okay. Thank you very much.
Thank you, Rob.
There are no more questions. Ladies and gentlemen, if you'd like to ask a question, please press nine star on your telephone keypad. Please press nine star if you'd like to ask a question. There are no more questions.
At the end, I would like to remind you that we will host our virtual AGM of the Elmos Semiconductor SE one week from now on May 11. I hope that many of you have registered to our AGM and will support the proposals of management and supervisory board. The next regular quarterly reporting is scheduled for August 2, with the publication of our half- year results. For today, thank you very much for your participation and your interest in Elmos. Goodbye from Dortmund. Please take care, stay healthy, and stay confident. Thank you.