Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE conference call regarding the results of the first quarter of 2021. 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. I would like to welcome you to our Q1 conference call. I'm very happy to present to you the highlights of a very strong and promising first quarter 2021. It was actually a record quarter in terms of sales. Never before in the company's history were sales higher than in this Q1. As usual, you have the opportunity to ask questions at the end of my presentation. Ladies and gentlemen, the start of the year was characterized by the ongoing COVID-19 pandemic and the high demand for semiconductors. Since the outbreak of the pandemic in January 2020, everyone at Elmos has complied with the extensive protective measures in a very disciplined manner. This has enabled us to maintain our own production and business operations until today without any noteworthy disruption.
Now we are prepared to offer vaccination for our employees, which will be the next important milestone in the fight against the pandemic. We have been ready actually for some time. We are just waiting for vaccines and the official go from the authorities. The first months of 2021 are characterized not only by a high demand for vaccines, but also a very high demand for semiconductors across all industries. The increased demand had already started in Q4 of last year, but has accelerated due to the faster than expected recovery of the automotive market and the ongoing boom of office and consumer electronic products. The increased demand, combined with limited global manufacturing capacities for semiconductors, led to the current allocation situation. The entire semiconductor supply chain, including wafer production, assembly, and testing, is currently under a great deal of pressure.
In addition, many customers would like to see increased inventory levels. However, in the current allocation situation, these wishes are, of course, totally impossible to fulfill, and therefore, IC manufacturers have to prioritize their deliveries based on the real demand. Elmos is not the cause of line down. That was certainly better than some others heard. Elmos had a dynamic and successful start into the new year. Group sales increased significantly by 20.1% in the first three months of the year to EUR 77.1 million. As I mentioned, Q1 marks a new record in quarterly sales. EBIT rose to EUR 12.2 million in the first quarter based on higher volumes and positive cost effect. The EBIT margin improved significantly to 15.8% compared to 11% in the previous year. With EUR 5.7 million, CapEx was more or less stable in Q1. Due to higher sales, the CapEx-to-sales ratio has declined.
The investment in new machinery were mainly focused to increase the capacity and efficiency of wafer and final part testing at the Dortmund site and at our partner site in East Asia. We will see very substantial investment in the course of the year as we prepare for this and next year's growth. The R&D expenses continue to remain on a high level, supporting the numerous serial launches and new development projects. After three months, we are fully on track with our new design win activity, and we were able to acquire new projects in all of our segments, despite ongoing travel bans and limited customer meetings. The strong increase of the cash flow from operations in Q1 to EUR 29.4 million was mainly driven by the higher income and decreasing inventories.
The higher operating cash flow, combined with stable CapEx spending, resulted in a significantly higher free cash flow of EUR 22.4 million. Our net cash position increased at the balance sheet date March 31 to EUR 60.3 million due to the positive free cash flow. Based on the current order situation, we anticipate another successful quarter with further increases in sales and EBIT. For Q2 2021, we expect, as announced already on Tuesday, sales of EUR 79 million ± EUR 3 million, and an EBIT margin of 16% ± 1.5 percentage point. While a reliable forecast for the second half of the year is not possible at the present time, statements of forecasting institutes are still not stable, the further course of the pandemic is unclear, and the allocation situation cannot be precisely predicted.
We do expect for fiscal year 2021 a very significant increase in sales and EBIT, and think 2021 may well be, overall, the record year. With that, thank you very much, and I'm opening the floor for questions.
Operator, can you please open the line for questions, please?
Yes, sure. Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. In case you wish to cancel your question, please press nine, star again. The first question comes from Johannes Ries from Apus Capital. Please go ahead with your question.
Yes, good morning. This is Johannes Ries from Apus. Maybe a short explanation how you achieve this growth and how much upside potential is, if I listen to the accords of the large guys, ST and Infineon, they are all able to improve their own production in their own tabs, but they are very limited by the outsourcing because they don't get enough wafers from TSMC and other foundries. Is it also the case for you, apart your internal production being the strongest growth driver, and how much foundry is a limited factor going forward of the year and maybe next year for you?
Yes, Mr. Ries, thank you for the question. We have three tailwinds. One is the increased number of cars that we see this year versus last year. The other is that we got a good performance in the AMOV portfolio. We got ramps, the products are developing nicely.
Very well.
The third tailwind is our allocation situation, where customers usually do not think twice about ordering, but rather order. Within the allocation, wafers are, of course, the limiting factor. We try to squeeze out a few wafers more a day out of our own facility, though that, as you know, has always been running stable as what can be called 100%. Now if we go to 101% or so.
Yes.
It's a great achievement per se, it's not going to turn the needle too much. We are, of course, relying also on TSMC and Key Foundry to deliver wafers for us. We are discussing the real needs of our customers on a quite frequent basis with them. Such that, the same that held true for the past, we have not been the cause of line downs, will also hold true for the future, that we will not be the cause of such things. I believe this is the key of allocation management, that you only serve real demands, but every real demand, and this is what we, with our foundry partners together, try to achieve.
Therefore, has been the growth in some regard, therefore limited, if I got it right? Can you tell us what is the split between own production and foundry production, and how has that changed maybe in the last 12 months?
Well, we had a certain reduction in foundry production over the course of the crisis, and that is going up again now. You are right in a way, in the very short term, the non-availability or not free availability of processed wafers is limiting growth. We have to be careful because some of that growth would certainly go into the value chain and into safety stocks in the value chain, which are not bad. I am not arguing against safety stock. I am only saying that this would be quite a lot of growth at a certain time, when we may have a time then later on where the safety stocks are very full and growth is more sluggish. The allocation situation that we see today is, of course, at least acting against that cyclicality that might otherwise be a lot more pronounced.
You also see that maybe the cycle is prolonged in some regard by, first, that customers are not really able to fill up their inventories at the moment. I heard even from Infineon, even now from ST, that the guys, the auto mobile customers and the tier ones are maybe guiding or they have the intention to increase their safety stocks after the crisis because they never want to come into situations that maybe the non-availability of chips limits their production. Therefore, I heard from Infineon yesterday, maybe it will go from 12 weeks to 16 to 18 or 20 now. Can you confirm this? Is that also something which you see as which prolongs the strong growth in the sector despite all the structural things which are also working?
Well, I think, of course, now the number one priority is to put out the fire that we currently see. At the same time, people are, of course, thinking, "How can we prevent future fires?
All these elements that come into play, like safety stocks, ordering time, ordering behavior, limits to order changes, you can find ways to prevent such rapid changes, because chips, I mean, it is possible to have them in inventory for quite some time. I'm sure we will have a very positive discussion around that in the industry and think about who should stock them for what amount of time.
What is the safety stock looking like. There are also different practices today in the industry. We do have customers that keep, for some months, worth of production safety stock and others don't. Maybe we'll find a new normal there.
What not is, in average, more positive for you and the whole semi industry.
Yes, that is a good development. It is per se good. It will, in the short and medium term, of course, increase demand. If we get into a more stable production scenario, this is also good for us.
Okay. Maybe to finish this topic up, but it's very often discussed now, and it's important even. You said you have no real visibility for the second half, and it also depending on you have not a view how much wafers you will get from your foundry partners, or you have a key view how much maybe you get allocated?
Well, we have no complete visibility how the second half looks like. We are in negotiations, in discussions, with foundry partners, with assembly partners, with customers. This is a little bit fluid still.
Okay. Nevertheless, despite maybe how strong it will be, like you said, a good year 2021 and most likely even a growth year in 2022, therefore, you are investing, I assume.
Yes. We will heavily invest. This is absolutely rational to do. We are structurally growing very much. Now this growth may have very steep periods, a little less steep periods, but overall, we think we are structurally growing very significantly. We need to invest.
You're investing in testing equipment and things like such, I believe.
Yes.
Okay. That's the part, even if the foundries are delivering, you're fulfilling. I got it.
We fulfill and we test. The foundries do not test for us.
Okay. Last question from my side. On the design wins, how is the pipeline? How much you closed this year? On the other side, how much new ramps you had in this year? How much the growth comes even from, maybe you mentioned it, I may have been two minutes too late, from new ramps, new volume products, which are now going in higher number of pieces?
Yeah. We have a really satisfying kind of portfolio performance, on top of what we see as growth in the number of cars. That is pretty much back on track. We had, in 2018, I believe 13% or 14% growth versus the market, which was super high.
Not so much growth versus the market last year. There we were basically in line with the market. This year we will also see very decent growth on top of the number of cars. These have little fluctuations, but what comes out is that we have a pretty solid product portfolio, and this leads to, on top of the market and number of cars development, to very substantial growth.
Super. Finally, really, that's only a remark, congratulations to maybe to take Ralf Hoppe on board. We know him very well, and we think it's a good decision despite you break a little bit the rule that always a woman is the Head of Investor Relations. Welcome Mr. Hoppe, and yes, looking forward to a great communication and work together.
Mr. Ries, I can assure you he is smiling and he's listening to you right now, of course. Thank you, Mr. Ries. Thank you.
Okay.
I'll try to improve in terms of diversity. We'll see.
Okay, thanks a lot.
Also at Elmos, to be very honest, we hire and promote people based on skill and ability, and not on other factors.
It seems that the right thing. Even though there's a successful woman, a support system. Great. Thanks a lot. Thank you.
Perfect. Thank you, Mr. Ries.
Thanks. Maybe I come back with other questions, but I'll make the line free now for my colleagues.
The next question comes from Stéphane Houri from ODDO BHF. Please go ahead with your question.
Hello. Good morning, everyone. It's very hard to come after Mr. Ries, as always. I still have some questions remaining. Maybe let me try to phrase the question in another way about the second half. I know you don't have the full visibility, but is there a reason why the second half would not be at the level of the first half, given the visibility that you have now? You may have a visibility on Q3, given the lead time in the industry. There's probably some orders for Q4 already or even beyond. Yeah, that's clearly my first question, and I have some others. Thank you.
Stéphane, thank you for your question. We will and have been selling a little bit out of inventory in the first half, so that might be one factor. A small factor, but still a little factor, that leads to the second half being not exactly on level. The underlying dynamic is, however, we also see that fundamental market trend. We see the fundamental ramps in our product. They are just as valid for the second half, if not more. The assumption that there is no real slump in the second half is certainly a good one. However, the assumption that we can now draw a straight line between Q1 and Q2, and by this means we find out all other quarters that are to come, may also not be a really stable one.
Okay. Got it. Okay. Fundamentally, there's no reason, but as you sold some of the inventory during Q1 and maybe also during Q2, we should not maybe draw the line and say H2 at the same level of H1, or not now for the moment, you don't have the full visibility to say that for now, right?
Yes. As the task continues, align 1977, 1979, it may not be as easy.
Yeah. Okay. Got it. Looking on the gross margin, when I look at my model from an historical standpoint, you have been much higher than where you are today. I see a quarter where you even reached 39%, which may have been a very extreme level, but at 42.2%, do you see this gross margin level going back to above 45% at least level in the short-term?
Well, in the short term, this is always a little hard to predict. It depends on how our inventories develop, on how production runs. Generally, production runs smooth, there are, in this allocation situation, sometimes bumps. We sometimes get shipments a little late, then we can't use the machines, then we are overloaded the next week. It's all a little bit less smooth than it was two years ago.
I believe a little bit of that also makes its way to the gross margin. Structurally, I would say there is no reason why we should be worse off. However, in the short term and in this allocation phase, we are in a very dynamic mode.
Yeah. Got it. If I continue on the P&L, that will be my last question and I will leave the floor for others. Everybody's really increasing the OpEx drastically in the industry. We see that really everywhere. Are you on the same trend? Because Q1, for instance, R&D was lower than Q4, so there might have been an exceptional effect in Q4. What's the trend for OpEx generally and maybe a focus on R&D, which is very important for the design wins in the near future?
Yeah, I think we should be not too loose on OpEx. I always like to spend on new product. At the same time, we have to keep our ratios somehow in check. I believe a phase where you see strong growth is an ideal phase, not to be super loose on the OpEx spending side, because actually our structures do support higher revenues and can, with some efficiency gains, also support very good new product development at this level. Usually, these OpEx numbers always edge up. This is clear. You have some hirings that you just cannot do without and don't want to do without. You do have some wage increases, some cost increases at suppliers even. Overall, I think we shouldn't spend all the money we might have gained just because sales are a little higher now.
If you do have some OpEx efficiencies, I would like to keep that over time.
All right. Thank you very much.
The next question comes from Malte Schaumann from Warburg Research. Please go ahead with your question.
Yeah, good morning. I wanted to come back to the inventory, your inventory topic. You already touched on that, but it was quite a significant drop in inventories in the first quarter. Do you need a similar development in the second quarter to support your expected sales volume? How low can inventories really go? Should we then reach a trough level than at the end of Q2, and then it will be very difficult to ship out of inventories any further?
Well, it is very hard to predict inventories, also their valuation on a quarterly level. We are very lucky to have the level we had going into this, coming out of the crisis and going into the allocation crisis, which is a little crisis per se with a just reversed sign. How low can these numbers theoretically go? I believe that there are peers and you could do benchmarking. Actually, we did. They are the ones that are on top of the list of the non-delivery of chips companies now. Currently, we feel we would rather like to have more inventory than less. It would be better for our production flow, but it's just not to be had. We are prioritizing our deliveries. We are prioritizing getting the chips to our customers on time, and then the inventory level is the result.
You've seen the trend in Q1. At some point, of course, it needs to stabilize because we're going down too quickly. There could even be another decrease. This is not impossible.
Yeah. Okay. What are your talks of [products line]? I mean, do you get any visibility on volume increases from timing periods? I mean, is it rather on timing by a quarter earlier or later, or where's the largest hurdle in the talks of really getting the volume you need?
Well, I believe that the whole industry is trying to prioritize the wafers now to the ones that really need it, because otherwise a car manufacturer's line stops, and really stops. Not just people telling you it stops, but it's really stopping because there's no chip anymore. This is what everyone tries to find out. Escalations are needed if you want certain wafers for certain supply chains to certain OEMs. This is the discussion currently. If you can prove that if you don't get these wafers, you will, most likely, proven by numbers, have an OEM line stoppage on the books, then people will find ways. If it's just convenient, very unlikely that people find a way to ship wafers to you.
Okay. That makes visibility, even lowers visibility further. On your customers' inventory, do you think that your customers are currently able to build safety stocks, or would that be just something that will then come later when supply is more eased?
There is certainly not a zero safety stock building, because you do not have perfect insight into what's happening at every customer in every value chain. Of course, the general tendency is every safety stock that can be built will be built. Within the allocation management, we of course try to reduce that in every way we can. The answer will not be zero, but I don't think the answer is really a lot.
Yeah. Makes sense. Okay, thanks.
The next question comes from Christian Sandherr from Hauck & Aufhäuser. Please go ahead with your question.
Hi, good morning, everyone. I would have one question. Can you maybe talk a little bit about the development of wafer pricing? Like TSMC, they have announced that they're going to be stepping up pricing by some 15%, 20%. Do you guys feel this? Or can you mitigate these price hikes by just passing it on to your customers? Is this something that's going to affect margin for the second half? What's your impression?
What you read in the newspaper in that respect seems to be true. TSMC is charging extra on additional wafers. The definition of additional is a little bit arbitrary, but yes, that is true. It also extends to other foundries. Partly, it is a lot more pronounced at other foundries. We have to do some pain sharing with our customers there, and we of course have to ask them to cover some of the costs that are inflicted upon Elmos by this allocation situation. We see that some people have been traveling to Taiwan, and rightfully so, to tell the foundries, you need to make it possible. You need to support the car industry no matter what cost. Now we just have to see that we find a fair split of the additional costs that are involved in this allocation, and we are discussing that.
Okay. Looking at your two margin guides, it doesn't really look like it's much of an issue for right now. Probably more a topic maybe for the second half, I guess.
Yeah. Well, it is an issue, but it is more a topic for the second half, that is true. It is also an issue for the Q2, but we have to see. Yes, if all prices would be stable, we would be better in terms of our EBIT margin.
Right. Okay, cool. Thanks. Maybe second question. You have a large cash pile on your balance sheet. In the past, you guys have been talking about potentially buying something smaller. Is there anything up and coming or not?
We're always looking. We're always having long and short lists. Basically, every time I can remember, during any of the Q calls, we would have to report, yes, we are looking more briefly or more intensely at some or another target. That is true today as well. Nothing is anything close to realization. I feel M&A is a little bit a tedious business. You have to do a lot of looking to, at some point, reach a target, and then you have to find an agreement, including pricing of that target, which proved in the past also to be not always easy. I wouldn't expect to hear anything really soon. I believe it's important to keep looking, that when the right deal comes along, you actually identify it and you're ready.
All right, cool. Thanks. That would be it for my side.
Thank you, Mr. Sandherr.
There is one more question from Mr. Ries from Apus Capital. Please go ahead with your question.
Yes, hello. It's definitely a follow-on question to Mr. Sandherr's question. Only to make it clear, in the past, we always learned that the contract prices on the mobile industry are normally quite stable, even if you had bad times. There was normally not a huge pressure from the price side. Now we discussed just before that prices are increasing for raw wafers, for substrates, and also especially for final wafers from TSMC. Even they are in a depressed situation from this point at the moment. Are the mobile and the Tier 1 customers to reduce cut prices and to increase prices, so you are really able to pass through these cost increases?
To make it clear, is it possible that there are, despite there having stable prices in bad times for you, in very good times for you are able to increase it in some regard where it's necessary?
What we are discussing with our customers is that we somehow share the burdens of this allocation situation. Actually, most customers do understand that this is a burden.
Okay.
There are some that are very inflexible and then discussions are more difficult. However, of course, we do regard that also as a difficult behavior because we have to get through this together. If we invest very substantial money to ensure supply, then we have to find solutions for that.
Okay. Thanks a lot.
Thank you, Mr. Ries.
There's one more question from Robert Sanders from the Deutsche Bank. Please go ahead with your question.
Hi, thanks for taking my questions. I had a few. The first one is, just philosophically, do you feel any slight regret about the whole Duisburg thing? I guess most companies we speak to in automotive feel they're over-indexed to foundry now, and that it's not gross margin accretive anymore to go to foundries. The reason being is that the foundries basically see this as a new paradigm where they can ask for prepayments, non-cancellation terms, higher pricing. A complete philosophical change that they think is permanent. Do you see any difference? Do you have any sense of regret about your increased outsourcing strategy, given the crisis?
Well, actually, for a company of our size, our agility, our need for new technologies, I would say no. This may be different if you have a totally different position. Say, if you're a very huge player with a stable portfolio and a lot of own technology development. However, being who we are, we are agile. We do need new technologies for new cutting-edge products. We do have quick ramps. The foundry model is a good one for us.
Got it. Is it as gross margin accretive as you originally thought, given the prices? Presumably it's going to be harder to get the gross margin to improve using outsourcing.
Yeah. This also depends a lot on the product that you actually do. I believe a lot of the gross margin in the short term is of course a question of terms that you have and find. However, excellent chip design and big steps in innovation usually prove to be the real drivers of gross margin.
Okay.
It is true. If you look over three months or six months, then the foundry prices and whether they go up or down a little, they of course are the direct driver of gross margin. Over a little longer period, this may actually not be completely true.
Do you see the foundries asking for more aggressive terms, including cancellation terms being much more aggressive?
Yeah. I would presume that we see that for the next year. This year, I believe they would accept us canceling all of the volume with them. However, this is not a strategy, this has any likelihood of happening because we desperately need the wafers just like anyone else. No, currently, we don't discuss cancellation terms. For this year, I believe it would be a strange thing to do. Over the longer period of time, let's see what comes.
Okay. What is the industry chatter around when is the bottom for line downs? The reason I ask is because, in Q1, we had this microcontroller disruption in Texas and in Japan, and that massively exacerbated the situation in microcontrollers, which is the key pinch point in auto at the moment, 40 nm. Even auto analysts were shocked when Ford guided down 35% production in Q2, even though that should be self-evident. I'm still a little bit surprised that there seems to be slight disconnect between what people expect in the auto industry and what semiconductor guys are saying. When do you expect the kind of bottom for line downs in the industry? Because clearly that is a key headline risk for any auto semi company.
Well, I believe gradually in the second half of the year, we should be out of the line down scenario. I wouldn't think this extends into next year in terms of really excessive line down. That would be surprising for me. In terms of how long a general allocation is with us, this may take some quarters longer. It may well reach way into 2022. Maybe even a substantial part of 2022 may be characterized by allocation. It also depends on what the strategies within the value chain are regarding safety stock. Once you're out of line down, the question will be, should we now actually build some safety stock? If you ask the people that are suffering line downs today, they would probably say, "Oh yes, we want that. Where can I sign?"
Let's see whether that is still the idea when we reach that point, and then people have to pay for it. I would say this effect that is not only stopping the line downs, but that is also getting back to healthy stock levels, even maybe really safety stock scenarios, this may take some time, and will boost us of course.
Right. I think we should assume just in time is dead and safety stocks are here to stay. I'm sure we discussed last time General Motors talking about semi cars needing 12 months of inventory going forward. Presumably, if you're seeing orders for 95 million to 100 million, which is what ST and Infineon are seeing, and the production is only 83, according to your slides. There is safety stock being built of every product on the planet, except the microcontroller and a few other small little products like sensors which are in short supply. Presumably, the safety stock effect will affect you in 2021, and then it will be in microcontrollers in 2022. Presumably, the normalization for you will be in 2022, and for the microcontroller guys in 2023. I presume that's what is going to happen.
If I only knew for sure. If I look to the year, we couldn't deliver to 100 million cars. We will deliver to various substantially, to the equivalent of a lot of cars less. To get real clarity into all the value chains, that will not be possible for us. It's a little bit like the question Mr. Schaumann asked. Well, what is the safety level that is now happening? Well, it's not zero, but I don't expect it to be huge. Because we are struggling to fulfill the real demand, and you cannot avoid that someone sneaks through the line and then has his little private safety stock. But the large things, you can avoid, and then we do avoid them at this point in time.
Right. You can see consignments stock. You have some visibility into what's going on at your Tier 1s and your OEMs, and I know that they may pull it early, so you kind of lose visibility, but you have some clarity, by just speaking to people. You remember when the industry was doing 95, 100 million units. That was not that long ago, right?
Yeah.
The industry did that in 2018. 2018, the industry did 95, and 2017 as well.
Yeah, you try to take the points that you have and make an informed guess what the situation at the relevant customers is. That is true.
I can only assume because you're being relatively opaque on second half, is that you are already quite concerned about that factor. That's what Melexis is saying, for example.
Actually, not too much. I'm not concerned about the second half actually at all. This is more related to our supply chain, whether everything is on time, because we do not have the usual situation here where we have a production that is more or less or at least by and large decoupled from the supply chain, and whether it's revenue in the last few weeks of a year, is not actually related to the wafer supply anymore. We're tighter now. It's much more stringent. Whether you really get the wafers in time also means whether you get the revenue in time. That is why it's really hard to predict these revenue numbers, because a lot more than just the final steps in the supply chain now have influence. The wafers have influence today, which they did not have some time ago.
Yeah. Thank you.
Thank you, Mr. Sanders.
There are no further questions.
Perfect. Thank you very much for your participation and your interest in Elmos. I would like to mention that our AGM will be held as a virtual meeting on May 20. Despite the special circumstances due to the ongoing COVID-19 pandemic, we would like to encourage all of you, all of our shareholders, to register your shares at the AGM. If you have any questions, please do not hesitate to contact our IR team about it. I would also like to remind you that we will publish our Q2 results on August 4. Finally, I would like to wish you all the best. Stay healthy, stay confident, and goodbye.