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Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE conference call regarding the results for the second quarter 2022. [Operator Instructions] Let me now turn the floor over to your host, Dr. Arne Schneider, CEO.
Good morning, ladies and gentlemen. Thank you very much for your participation in the Elmos Q2 conference call. Elmos has performed very well once again in the second quarter. We expect an ongoing positive development in the remaining course of the year and have further increased our sales outlook for the fiscal year 2022.
Before I start to explain the major highlights of the past quarter, I would like to remind you that all relevant figures can also be found in the investor presentation, which is available on our website. As usual, you'll have the opportunity to ask questions at the end of my presentation. Let me start with a brief update about the status of the sale of our wafer fab to the Swedish MEMS foundry, Silex Microsystems AB.
All organizational preparations for the closing are well on track, and the majority of the closing conditions have been fulfilled. For the final closing, we still need the approval of the Federal Ministry of Economics and Climate Protection in Berlin. We are making good progress in the regulatory process and are working closely and constructively with the ministry.
Let's continue with a brief market update. Despite a somewhat softer demand in the consumer sector, the order levels for automotive semiconductors are still very high. Supply chains, especially wafer processing by the foundries remain tight, and the allocation situation is continuing. The demand for Elmos Semiconductors in all product categories continues to be very high. In addition to limited wafer capacities, the industry is still facing pandemic-related challenges. And due to the war Ukraine prices for raw materials and energy are rising dramatically. The entire Elmos team has managed these major challenges very well to date, and our ongoing focus is to secure sufficient wafer capacities from our foundries in order to fulfill our delivery obligations to our customers.
Despite the lower demand for semiconductors in other sectors, we expect that the tight supply chains for the automotive ICs will continue in 2022, and we believe not all supply issues will be solved in 2023. The IC content in cars is continuously increasing, so we have to continue to fight very hard for more allocation and additional wafers from our foundry partners year after year.
Now some words to the war in Ukraine and the geopolitical situation. The war in Ukraine has significant impact on the overall global economic development. Material and energy prices have risen and the risk of a potential gas shortage in Europe further increases the uncertainties. I've already mentioned in the last call, the direct impact of the war in Ukraine is negligible for Elmos as we do not directly ship any products to customers in Russia or the Ukraine. However, Elmos is not immune against global supply shortages and price increases. One of the main topics discussed these days is the natural gas supply situation in Europe and Germany. So let me give you an update about the situation at Elmos.
Elmos is operating 2 combined heat and power plant units powered with natural gas to partly generate its own electricity, heat and cooling for the fab and all other facilities in its Dortmund location. The current alert level of the gas emergency plan has no impact on the gas supply or production capabilities at the Elmos wafer fab and headquarter in Dortmund. We have already prepared and aligned a comprehensive plan with our local energy supplier, and we took additional steps of cells to secure sufficient energy supply and alternative energy sources to continue the wafer production in Dortmund as best as possible in case of the declaration of the gas emergency level in Germany and a potential reduction or even a complete stop of gas deliveries to Elmos.
We do need a little gas for the exhaust treatment of our fab, but for the rest, there are alternatives. We're monitoring the situation very closely, and we'll update you if this should be necessary.
Let me now present the financial highlights of another very successful quarter. Thanks to the ongoing high demand for Elmos semiconductors in all of our product segments, as mentioned above, group sales increased significantly by EUR 26.9 million or 34.1% to EUR 105.8 million. This strong increase represents another all-time high with quarterly sales exceeding EUR 100 million for the first time in company history.
The weaker euro had some positive impact on sales amounting to approximately EUR 5 million year-over-year, but the main growth drivers continued to be higher volume and favorable pricing as we pass on some material price increases to our customers. You can see the inflationary cost development as well as allocation and pandemic-related effects in the gross profit margin, which reached 43.8% in the second quarter.
As some of our cost is paid in U.S. dollars, the gross profit was negatively impacted by around 2 percentage points in Q2 with the FX effect. The EBIT increased to EUR 25.2 million in the second quarter, including a positive FX result of EUR 2.1 million. So you see that overall the things balance out. The EBIT margin increased 7.9 percentage points year-over-year to 23.8%. Similar to the last quarter, the reported and operating EBIT were virtually the same in Q2 2022, as there were only small expenses in connection with the agreement on the sale of the wafer fab.
Capital expenditures increased to EUR 19.9 million or 18.8% of sales in Q2, as we continue to set up our new test cells, especially in East Asia in order to have sufficient testing capacity for our future growth. Cash flow from operations totaled EUR 21.9 million in Q2. The high net result was partially offset by impacts from working capital as well as tax payments from our 2021 results, as already mentioned in May. And please note that we expect more tax payments in the third quarter. Due to the ongoing high CapEx spending, the adjusted free cash flow was slightly negative at minus EUR 0.5 million in Q2 2022, but still above the previous year's figure. Impacted by the dividend payment in May of EUR 11.1 million, the net cash position amounted to EUR 6.8 million as of June 30, 2022.
Ladies and gentlemen, let me now comment on our outlook. The latest IHS forecast in July showed only minor adjustments for this year, still forecasting around 81 million cars to be newly produced in 2022. This number is significantly lower than the production levels we have seen in 2017 or '18. So there's a lot of pent-up demand for new cars out there, including the strong growth for electronics in all systems and functions of a car, the demand for automotive ICs may well be very high in the future despite the potential macroeconomic slowdown.
Our order books are very well filled, and we were able to further increase our sales guidance for 2022. Based on our positive sales development in the first half of the year, the continued pleasing situation concerning our orders, and the available wafer capacities, we now expect sales of more than EUR 430 million in the fiscal year 2022. Otherwise, the outlook is unchanged compared to the forecast in May.
The operating EBIT margin is expected to remain unchanged at 21%, plus or minus 2 percentage points of sales. As a reminder, the expected operating EBIT margin does not include effects from a possible closing of the sale of the Elmos wafer production to Silex. Capital expenditures, mainly for the expansion of our testing capacities, will also remain unchanged at roughly 17% plus or minus 2 percentage points of sales. For the fiscal year 2022, we continue to expect a positive operating adjusted free cash flow above the previous year's level.
Ladies and gentlemen, I am very proud of the successful work of the Elmos team, delivering an outstanding performance day by day. Despite major market and geopolitical challenges, Elmos is performing very well and the continued high demand for trendsetting Elmos products underlines our successful growth strategy. And despite increasing challenges and uncertainties, we are optimistic about our business performance in the second half of 2022 and also beyond.
Elmos innovative semiconductor solutions are playing a key role in the mobility of the future, and we want to capitalize on the growth opportunities resulting from our promising design wins. So with that, thank you very much. I'm now opening the floor for questions.
[Operator Instructions] And the first question comes from Malte Schaumann, Warburg Research.
My question is regarding the wafer supply situation. So during the recent weeks, months, have you been able to secure additional wafer supplies until the end of the year? So what do you actually see beyond consumer technology, which is a different node? And maybe comment on the early qualitative comments on the situation you experience for next year's wafer supply.
Well, wafers are still not freely available, but in little chunks, we continue to make some progress. These are always little chunks. They come out of discussions out of concrete needs. And we are happy that we get them and can then, after our value chain, pass them on to our customers, which really need that additional wafers. So yes, we made some progress. We also made some progress for next year. But as always, things are not done and everyone is satisfied. But there are continued discussions on the next holes that need some plugs.
Okay. And next year, is there a larger impact from a change in technology to a different supplier? Or is that more or less gradual increases?
We will see a little bit of a ramp in 130-nanometer. It's a minimal ramp this year, and next year the ramp will continue and be more noticeable. Other than that, also 180-nanometer products are ramping and, of course, strongly ramping. So there is always something happening in the product portfolio. There are always new products ramping. There's a shift from one technology to the next, but this is nothing out of the ordinary.
[Operator Instructions] And there is one question coming from Robert Sanders, Deutsche Bank.
Yes. I just wanted to check the extent of what is pent up for next year. So if you were to get 10% more wafers, could you find a home for all the chips on these wafers next year? And what if you got 20% more wafers? Would you be also sold out if you were to get a bigger allocation next year?
Rob, thank you for your question. I believe on both, I would say, yes, we would find a home. But this is kind of based on the situation now where market participants are, I believe, still a little bit, I mean, rightfully so, afraid that they won't get what they feel they have as a minimum need. With a little slowing, with a little more availability that may come or may not come, we don't know, that situation may change. So you don't really know -- I mean, if we were to deliver 20% more and could do that at some point, I believe we don't know whether that wouldn't kind of fuel cyclicality. I would say, beyond 20% more, it may well be that, that would actually fuel cyclicality.
So you mean cyclicality being excessive inventory build?
Yes.
Okay. And how do you measure that how much transparency have you got into that at the moment? Because I mean, I remember we discussed in the past that there isn't a huge amount of transparency. You do a lot of these conference calls with your customers and your customers' customers and your foundries, but there isn't a huge incentive to be 100% transparent.
Yes. I mean it's a little bit like a dark room. And in these crisis conference calls, you can shine with a flashlight into certain corners of that dark room at that moment in time. So will you ever have complete transparency, and the big metrics of all the stocks, all the needs, all the calendar weeks is filled? No, you will never have that. But you can get, with these flashlights, glimpses of the dark room, you can get some information. Today, I would say people are tight and there's some friction, but most are not desperately tight. So there is allocation, but we learn to live with the allocation. Some people learned maybe a little bit more planning in advance. So the degree of kind of real desperation that they say, okay, this is millions and millions of cars that are not being built, people try to adjust and just plan better. I would say, over the last 2 years, that is a trend.
Right. But to be clear, the number of expedite calls, frequency of them is not changing yet?
No, we still have them. It's still a big hassle. It's still a lot yes.
Okay. And just on pricing. So most of the automated semiconductor companies are talking about pricing -- their planning assumptions are at sort of more flattish pricing next year. But in the case of those like Melexis, they're talking about growing in line with their foundry wafer pricing, which is going up by 10% per year over the next sort of 3 years. So are you in the camp of just whatever the market price is from TSMC, you will pass it on? Because I guess the reason I'm asking is because there's already quite big excess capacity now in 8-inch at the Chinese foundries. So I was just wondering, is there a chance that you could increase your pricing for chips, but actually the foundry input price maybe starts dropping next year?
Well, generally, we pass on the higher costs that we have, be it from foundries or be it from other factors. We are very much currently trying to serve the needs of our customers, and we are spending what we need to, to procure the chips for our customers. And I believe this is the right approach in the current situation. Should we get out of this allocation phase, should we have more negotiation power with foundries, with other suppliers, and we manage prices in a positive direction for us, then we will certainly do that for the benefit of all in the value chain. But this does not seem to be today or tomorrow, to be frank.
Okay. But you don't really have like factory contracts like Melexis does where Melexis' customers know what X fab is charging and therefore, there's pure transparency. You don't have to disclose to your customers exactly what your input price is. It's just more that there's an understanding you don't completely screw them over basically.
Yes. I mean, there are various select exceptions, but generally, no, we do not disclose input pricing, but in a way, I mean, is it necessary? Everyone knows what it should be, everyone knows what the percentages should be, and then you can discuss the percentage up or down because you believe that something is a little different, but you also have a lot of other factors in pricing. So I believe it doesn't make a real difference. Most of our customers know where wafer prices are going. They do read the newspaper as a start and have a lot of other information available. So it's not that there's a lot of kind of fundamental information mismatch, I would say.
And there is 1 follow-up question from Malte Schaumann.
Yes. Let me ask a follow-up question on the gross margin that was slightly below 44% in the second quarter. Assuming that the U.S. dollar would remain at the current rate, would that be then your expectation for the gross margin in the coming quarters?
Gross margin is always a little hard to predict. I mean, all the price and cost things go in there, and it's even harder now because things are moving more than they used to when we did not have this inflationary and allocation environment. Generally, of course, you know we like a dollar that's weak better than a dollar that is strong. So we can live with the current dollar level.
If the euro would fall a lot below parity, we would not make a party out of that. So you see that currently, we have a little negative impact on the gross margin, then we have about the same amount, a positive impact in the FX line. So in terms of EBIT, it doesn't really show. If we continue to have a dollar-euro relationship that is just as it is today, we would, in Q3 and Q4, also have little hedging gains. We're not completely hedged for next year. So let's see what the future brings there.
Okay. That would be my next question, we're hedging next year. Is it significantly less than what you have for the current year? Or do you feel kind of okay with the hedging levels you have in place for 2023?
We haven't hedged that much for next year.
Okay. Okay. With regard to other cost items, is there anything that you're seeing, a bigger price increase coming, becoming effective during Q3 or Q4, I don't know, wages or whatever items where your suppliers have already indicated larger increases?
Well, I believe we will do something concerning our own wage structures. Though this will be based on onetime payments more than structural increase, but we will take action there, because we think it is important to stay competitive and to keep people onboard and reasonably happy in a situation where everyone kind of gives their utmost to make it work for our customers and for us. I mean, the good financials that you are seeing, they also come out of sweat and effort from our part. So it is, I believe, important to treat everyone fairly.
We do see that while we have fixed pricing for gas and electricity for this year, that the current market price for electricity and gas is substantially higher than what we actually pay today. And let's see what the government has in stock for us concerning participation in higher gas prices that's currently discussed. So there are cost items that rise quite significantly.
The next question comes from [indiscernible].
This is [indiscernible]. I've got 2 questions left. On the higher sales guidance, could you maybe elaborate a little bit or give some color on what is driving the higher sales guidance maybe in categories? Is it mostly ASICs, is it mostly ASSPs, or is it ADAS or EV related? Just some color on that would be helpful.
Well, actually, the higher sales guidance is partly due to the dollar effect, but also partly due to volume and pricing effects. And it's a very broad portfolio thing. It's not a single product. It's not only the 1 or the other. It's not only 1 region, it's really very broad.
Across all the product categories, okay. And maybe going forward, in the product development side, are there movements there, so how is the development pipeline going?
Well, as most of the times, our design engineers, our digital and analog and software engineers are kind of full with projects. It's kind of stacked until under the roof. But that is good. That is normal. If I look at design wins this year, we actually increased the target quite significantly for this year, and we are set to beat that target. So concerning design wins this year, there's really not too much to worry about. Of course, we shouldn't party because there's next year, and maybe we should increase the target again. I'm still thinking about it.
Okay. Great. And then finally, on Silex. I probably have missed that. I missed the first part of the call. But what's the issue now with the Federal Ministry of Economics and Climate Protection in Berlin? What is the main issue that they have with the...
This is just a normal regulatory process. For foreign investments, you need approval, and there's a lot of things that you can go to answering questions. They also need to coordinate all the other involved parties of the government. So I believe everyone is working good and constructively and is doing their best. But if you look at what is law, it's not an immediate process that you can just push 1 button and everything is done. But I believe things are in a very constructive shape. It's as expected.
Okay. So normally spoken, it would be, let's say, concluded in this year?
Yes. Normal condition would mean within the course of the year, it should be done.
Up next is [indiscernible] Trade International.
In 2010, you made a report about Mobility 2020 and Beyond. And you are seeing now the landscape quite different from that time. Do you see the problems with TSMC and the foundries, or other impact from U.S. against Taiwan, or the talks from U.S. vis-a-vis Taiwan?
Well, the Taiwan issue is a topic that is sometimes raised. Of course, in terms of geopolitical issues, Taiwan ranks high on the list. For Elmos, if we imagine a situation where no chips come out of Taiwan, we have to understand that there will be very little cars, if any. I personally assume there's no car in the world that's then being built. So for us, it's more of a problem that there will not be cars anymore, less than we cannot supply, because, I mean, we first need demand to have then the chance to supply. So I believe the Taiwan issue is 1 that is on the list of general geopolitical issues, but not 1 that kind of is specific for Elmos or specifically kind of hinders us to fulfill our delivery obligations.
And do you see about Intel, they are coming to Magdeburg, but it is a thing of the near future, but will not happen today.
Well, Intel is -- I mean, we are very much appreciating Intel's move to build a leading edge fab in Germany. I believe that, that helps the overall landscape. It will not help us immediately, because the semiconductors that are built in such fabs have very different technology than what you need for big signal semiconductors in cars today, which then would be what we need. However, down the road, it's always good to build it. And in 15, 20 years' time, maybe they are searching for load, and we are very happy to provide the load, though this is really quite some time down the road. There will not be an immediate Elmos production in Magdeburg.
There is also 1 follow-up question from Robert Sanders.
I just -- last question would just be around profitability. So you've guided only 21% despite higher sales. And your gross margins showed a much higher level of profitability. I just wondered what was driving your kind of relatively conservative view on margins, whether it was FX or, I don't know, input costs or something? And the other related question is, I remember you guys having a sort of slightly different view of long-term agreements in the past. And I just wondered if that was perhaps why you were not forecasting kind of the high 40s gross margins in the future, because a lot of the companies we look at, they are guiding to much higher gross margins, and they're basically saying, look, it's all under long-term agreement and so we feel really good about our visibility. But I think you guys, if I remember rightly, were more in the kind of market pricing mindset?
Well, we do some long-term agreements, but also not with our customers, not in all regions. So this is a very, very mixed picture. We try to find the contractual arrangements that kind of fit both partners' needs there. As far as profitability this year is concerned, we did not change the guidance because we thought that currently we are still, in our minds, within the guidance range, which is, as you rightly said, 21% plus or minus 2%. That includes the plus 2%.
There are no further questions. So back to you, Mr. Schneider for some closing remarks.
Thank you very much. At the end, I would like to remind you that our next regular quarterly reporting is scheduled for November 3, 2022, with the publication of our Q3 results. So now thank you very much for your participation and your interest in Elmos.
Goodbye from Dortmund. Take care. Enjoy the summer, stay healthy and stay confident. Goodbye.