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Good morning, ladies and gentlemen, and welcome to the Elmos Semiconductor SE Conference Call regarding the Q3 results. [Operator Instructions]
Let me now turn the floor over to your host, Dr. Arne Schneider, CEO.
Good morning, ladies and gentlemen, and welcome to the Elmos Q3 conference call. Thank you very much for your participation and your interest in our company. I would like to remind you that all relevant figures can be found in our investor presentation, which is available on the Elmos website. As usual, you have the opportunity to ask questions at the end of my presentation.
Ladies and gentlemen, despite a very challenging environment with increasing geopolitical uncertainties and deteriorating economic forecasts, I can present another very successful quarter for Elmos to you today. We have once again performed very well and have managed to increase sales and profitability, significantly. As a consequence of this encouraging development, we were able to raise our guidance for 2022.
Now let me start with a brief update about the status of the regulatory process for the sale of our wafer fab. There has been a great amount of media coverage about Elmos after the [indiscernible] published an article about a transaction last week. Many news agencies and media portals quoted from the [indiscernible] article or made their own report out of it. Unfortunately, the facts or headlines were sometimes presented incorrectly. Today, I will comment on only one issue. Some reports speak of sale of Elmos, and this is a quote, "to a Chinese group". Or quote again. "The Dortmund chip manufacturer Elmos will be taken over by a Chinese competitor". These headlines, as you now know, are, of course, not correct. The transaction is about the sale of the wafer fab and the wafer fab only to Silex and not about the sale of the entire company. So let me remind everyone Elmos is not for sale. Otherwise, there is really no news to report.
The approval process is still ongoing, and we are in a constructive and positive dialogue with the Federal Ministry of Economics and Climate Protection in Berlin, and we do not comment on any details of an ongoing regulatory process, of course.
So let's continue with the market update. The geopolitical events and the corresponding economic weakening resulted in a softer demand for semiconductors, especially for consumer and office electronics. In these segments, order levels have dropped noticeably, and inventories have increased. In contrary, the order levels for automotive semiconductors are high and the demand for Elmos Semiconductor specifically in all product segments continues to be very strong. In the recent months, foundry capacity for automotive semiconductors have gradually improved, mainly as a result of the weaker demand in other segments, but they are still tight for automotive-specific [aging] technologies. As far as we can tell, we do not see a major inventory buildup within the automotive supply chain. The supply and demand mismatch is continuing with order levels exceeding the available capacity. You may have also read about production losses of carmakers not caused by Elmos. But this evidence -- this is evidence of the fact that IC supply is still an issue.
We are also still facing pandemic-related challenges in some regions. Although most restrictions have been lifted, we still need to be cautious about the further development of the pandemic, especially during the winter months. Prices for material, energy and labor continue to increase. Generally, we must pass on allocation and inflation-related prices to our customers. Since the start of the allocation at the end of 2020, the entire Elmos team was able to manage all challenges very successfully. Elmos has not caused any line shutdown, and we get a lot of positive feedback from our customers as a highly reliable partner during this allocation phase.
Before we have a look at the Q3 financials, let me briefly comment on the latest sanctions by the U.S. government. Based on our initial analysis, the new regulation aims at very high-end leading-edge technology, which can, for example, be used for AI or super contributing applications, and I'm sure many more things. But our initial assessment is that the direct impact for Elmos is very limited.
So let's now look at the financial highlights of the third quarter 2022. As mentioned before, the ongoing high demand for Elmos Semiconductor has driven the strong increase in all of our product segments. Group sales rose significantly to EUR 119.6 million, an increase of EUR 38.8 million or 48% compared to Q3 2021. FX adjusted growth would have been 38% year-over-year. Quarter-on-quarter, group sales rose by 13%. The main growth drivers continue to be higher volume and favorable pricing as we pass on cost increases to our customers. At 45.1%, the gross margin in Q3 2022 was quite stable. The EBIT more than doubled compared to the previous year's quarter to EUR 29.8 million in Q3 '22. The higher volume and the below average R&D expenses contributed to this very encouraging result, and could more than compensate the higher other operating expenses, mainly caused by higher provisions for various items.
The EBIT margin increased by 8.1 percentage points year-over-year to 24.9%. Similar to the last quarter, the reported and operating EBIT were virtually the same in Q3 '22, as there were only minimal expenses in connection with the sale of the wafer fab. Capital expenditures increased to EUR 21 million or 17.6% of sales in Q3 '22, and were mainly used for the expansion of our testing capacities, especially in Asia, where we installed new test cells for our future business.
Cash flow from operations totaled EUR 15.4 million in Q3. The strong net result was partially offset by impacts from higher working capital as well as high tax payments from our 2021 results. The tax effects are, of course, only relevant for the cash flow, and already reflected in the P&L as deferred taxes in the last period.
At minus EUR 8.7 million, the adjusted free cash flow in Q3 was negative due to the ongoing high CapEx spending. Correspondingly, Elmos recorded a small net debt position of EUR 2.8 million at the end of September 2022.
At the end, I would like to comment on our outlook for the year. In its latest light vehicle production forecast for 2022, IHS is forecasting around 81.8 million units. This volume is significantly lower than before the pandemic, when production levels reached 95 million cars in 2017, 94 million units in 2018 and almost 90 million vehicles in 2019.
Industry experts estimate the pent-up demand due to the lower production volume has accumulated to almost 25 million vehicles in the last 3 years. The lead time for new cars, especially premium models, are still very long, and the dealer inventories are still low. So there's a lot of demand for new cars in the market. However, the main growth driver today and especially in the future, is not underlying growth of the automotive market, but the increasing IC content in modern cars. This structural trend, combined with the record levels of new design wins in the last 2 years is a very promising basis for ongoing growth in the future.
Based on our positive development in the first 9 months of the year and the ongoing positive order situation, we have raised our sales outlook for fiscal year 2022 once again to more than EUR 440 million with an EBIT margin of 23%, plus or minus 2 percentage points. Just 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 remain unchanged at roughly 17%, plus or minus 2 percentage points of sales. And for the fiscal year 2022, we continue to forecast a positive operating adjusted free cash flow above the previous year's level. So we continue to expect a very successful fiscal year 2022 with new record highs for sales and profitability. We are also optimistic for 2023, and expect further growth for Elmos despite increasing geopolitical uncertainties and potential economic softening. For your information, we plan to publish our financial guidance for the fiscal year 2023 in February as usual.
Ladies and gentlemen, Q3 2022 marked another record quarter for our company. We were able to deliver an outstanding performance and have laid the foundation for an ongoing successful development of Elmos. With our innovative and trendsetting automotive semiconductor solutions, we will be able to capitalize significantly from the structural trends in our industry and we'll continue to outperform the growth of the automotive market.
Thank you very much. I'm now opening the floor for questions.
[Operator Instructions]
And the first question comes from Malte Schaumann, Warbug Research.
Congratulations on a strong set of numbers first. Then on the -- I assume you currently benefit clearly from that you get higher wafers than initially planned from foundries as demand elsewhere in the world might come in lower currently. Is that right?
That is correct. We saw some chances to get some add-on wafers. That were freed up mostly by the soft smartphone demand, and the PMICs that go into smartphone sometimes, not always, but sometimes use capacities that we also use. And when the chance opens up, we, of course -- we do not say no.
Yes. And I mean, probably that trend will continue until 2023. I mean what is your view on wafer supply next year? Are you -- well, I'm not satisfied. I mean, you indicated that allocation probably continues to be in place. So maybe you can add some additional color on that.
Well, we stood here a year ago, and we had really serious issues with wafer supply. And this is not the case today. There are still issues. We still cannot deliver what most of our customers desire that we deliver, but the gaps are a little smaller. And we feel, based on our assessment that the risks for car OEM line downs also got smaller. And I mean, we managed so far very well. We are not responsible for any line down at the car OEM so far. We are confident that we can continue that excellent track record also next year.
And then do you see customers adjusting their ordering behavior? I mean when the can -- are currently already at [indiscernible] deliveries from your sites than initially indicated, then maybe they can somehow reduce their aggressive ordering. You probably had just said over the past quarters? Or is that more or less unaffected?
Well, we, of course, always see very minor amounts. But as a general trend, we do not see a great reduction in orders or a great shifting of orders. That may, however, also be true to the fact that we were not able to kind of over-deliver very much. So we tried together with our suppliers, together with our customers and their customers, the carmakers to get the maximum transparency that is possible. And of course, there's no full transparency ever possible in this huge matrix of part flows and value chains. But we try to get a good transparency and not to over-deliver and to satisfy everyone as best as we can, which then, on the other hand, means that there -- that there's really little that you can give in the value chain. The parts flow through, and that's it. So we haven't seen that much actually rarely almost nothing out of a change in the economic climate.
Yes. Good. Okay. Then on pricing, I mean you get some indications from other players that point towards [positive] pricing effect going into 2023. I mean is that something you would also expect to adjust at Elmos?
Yes. We will have a positive pricing effect. I mean we do have to ask our customers to participate in the higher cost burden that we have. And I mean, the list, as you all know, is long. There's energy. And there is, of course, FX. I mean, at parity, the dollar is more expensive than it was. There's labor. There's wafers. There's other East Asian subcontractors. There's gas -- so special gas, the natural gas kind of falls under energy. But -- so there's really a long list of pretty steep cost increases, and we need to pass them on, unfortunately.
Okay. And then final question is there was some press rumors last week concerning your transaction with Silex. Anything you can add to that topic?
Well, I commented that some things that were written in the press were, of course, not correct. And I believe that the one thing I commented on today is most important is that Elmos is not for sale, because this has been so incorrect that I think I have to comment. Other than that, I would not comment. It's an ongoing regulatory process, and we are in a good and constructive dialogue. So I think we shouldn't add more to it. We generally do not comment regulatory processes while they are still underway, and I believe this is the best way how you can handle such things.
The next question comes from Martin Marandon, ODDO BHF.
My first question would be on prices. Also, you talked about prices being a tailwind for 2023. But -- and it's maybe not a question for 2023, but how do you see prices evolve in case the supply-demand balance normalize, you believe that a large part of the price increases made over the last 2 years are a gain no matter what? That's what my question.
Well, I think it is rare that prices kind of move quickly. But if we find ourselves in a situation where say, wafer prices at TSMC, at Samsung, at SK Hynix or Key Foundry, can be substantially reduced because there's less stress in the system. I believe this opens up the opportunity to have a participation of everyone in the value chain. Honestly, it's a question, I believe, more for -- not for 2023, let's put it that way. So it would need to be some period after that, at least if we judge it by how the situation currently is. We also need to keep in mind that if we enter a macroeconomic phase now of very substantial inflation, and not a percentage point or 2 inflation what we were used to, but more like something that may be high single digit or maybe even as we currently have it, low double digit. This is not an environment where prices for semiconductors are very likely to go down. It's extremely unlikely that they go down in such an environment.
Okay. Very clear. That's helpful. And also a question on margins for next year. As you said, you will pass cost inflation from your suppliers. And so does that mean that we should expect the impact of higher labor and energy costs to be? Is there [indiscernible] on margins next year?
Well, generally, we are reasonably positive about next year. So we will see, of course, an inflated P&L. There are price effects. There are cost effects. But -- and of course, these are relatively big numbers moving. So we have to wait a little bit with the guidance for 2023. But we are not in a negative mood about profitability next year.
Okay. And a final question on Tesla. They announced around 2 weeks ago that they would remove all ultrasonic sensors from their new cars. I guess I have 2 questions on that. First, will the impact be significant for your revenue? And two, do you think this is specific to Tesla? Or could we see other car manufacturers do the same?
Well, yes, this is a very good question. So ultrasonic is a very important sensor technology for a lot of ADAS applications. And yes, it is true. Tesla decided to take it out of -- or partially take it out, but for most, they take it out of their vehicles. It remains unclear for a lot of people how they will fulfill regulatory requirements. You have emergency braking, so rare emergency braking in the U.S. And it is very unclear how you can fulfill that without a relevant system. They also announced to their customers that the parking functionality will not be available in the future. until they will find time to have great AI learn that on a camera alone, which is not now. So this is what Tesla said. Apparently, they believe that parking is not a key feature for their customers, which is, I believe, something they can probably judge better than us. But we do not see that to be a general trend. We would rather interpret that as a technical volatility, and we don't know how this ends up.
Okay. But that's only car manufacturer, which does that at the moment?
Yes.
The next question comes from Robert Sanders, Deutsche Bank.
I was just wondering if you recently qualified Samsung. I was just wondering whether that represented a improvement to your cost structure going forward, whether relative to TSMC or relative to the Dortmund fab? And I have a couple of follow-ups.
It's always hard to compare the different wafers. You can, of course, compare the wafer price, but then it's a very different technology. So -- and we do different products in -- and then even a successor product is different because it has totally different content. So overall, we think that we have a reasonable cost base from all of our sources, and they also technologically complement each other very well. So I don't want to tell you for 10 minutes now about why technology and the things we use there is a good fit, but it actually is. We have some things we can do in the Samsung technology we can't do at TSMC. We have the same vice versa. We have also some advantages in certain areas of our own 50-nanometer process. So I believe the portfolio of technologies currently is great, and I'm sure we will add something over the next year and years.
And on the Silex deal, assuming that deal gets approved in Germany, how many years would you have a supply agreement with that entity? And would the long-term goal be to migrate volume away from Silex to go fully fabless? What's the time line on that?
Well, we have a supply agreement in place until 2027. And that is, I believe, ideal for now. We, of course, have to see that 350-nanometer products are not ramping up so much, but they are slowly, but they are ramping down. And there's a natural way how these things happen with older technologies. So the current supply agreement that we would have then in place with -- after an approved deal secures our needs. So this is a very good situation for Elmos.
So it tails down over time between now and '27? .
Yes.
Got it. And then the last question would just be on ambient lighting. So [ Melexis ] is completely sold out of ambient lighting, driver ICs. I was just wondering, are you doing the same product? And are you taking share for them? And what is driving this such a high interest in what seems like a relatively uninteresting technology?
Well, I believe -- we are also an allocation, of course, in ambient light. We are trying to do the best we can for our customers. Why is it interesting? I believe it is -- it adds a lot of design features. It will also add safety features when you can use light to signal hazards. If we look at modern premium, and increasingly not so premium vehicles, it is a super-high growth area because the older lighting technologies quickly migrate out of the car, and the LED-based light for good reason. I mean, one is, of course, also energy efficiency. Another is design. Another is safety, another is comfort. I mean the right light temperature adds a lot to the comfortable experience in the interior.
So there are a lot of reasons why LED lighting, interior as well as exterior will proliferate in the car, and is increasingly coming into smaller segments and then it's increasingly a feature that you just cannot do without. So it's a quickly developing -- a segment with quickly changing -- or emerging needs. There will be more LEDs. There will be quicker animations. So there's a lot of innovation going on in the field of light.
And presumably, if you're #1, then you're piggybacking on the #1 in auto, which is [ OSRAM ]. So is that a co-developed product where you do -- where we see they do the LED? Or is it that you are both separately qualified at the Tier 1 or the OEM?
So OSRAM would be a supplier just as we are. And there are -- or there may be quite a number of our customers that buy an LED say yes at OSRAM, and that also buy a chip with us. But it's not integrated in any sense. This is the Tier 1 task.
At the moment, there seem to be no further questions. [Operator Instructions] There are no more questions from the audience.
So thank you. At the end, I would like to remind you that we will publish our preliminary results for the fiscal year 2022 on February 16. So thank you very much for your participation and your interest in Elmos. Goodbye from Dortmund. Take care, stay healthy and stay confident. Thank you. .