Coherent Corp. (COHR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Coherent Corp.'s October 10, 2023, silicon carbide update call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Silverstein. Please go ahead.

Thank you, Victor, and good afternoon, everyone. Today with me on the call to discuss our announcement of investments in our Silicon Carbide business are our Coherent Chair and CEO, Dr. Chuck Mattera; and President, Bob Bashaw. They will be joined for the Q&A portion of the call by Interim Chief Financial Officer, Rich Martucci and Sohail Khan, Executive Vice President of Wide-Bandgap Electronics Technologies and the leader of our Silicon Carbide business as well as Mike Kuder, Associate General Counsel. Before I turn the call over to Chuck for his opening remarks, I would like to remind everyone that we will refer to forward-looking statements, including all statements the company will make about its future financial and operating performance, growth strategy and market outlook, that actual results may differ materially from those contemplated by these forward-looking statements. Risk factors that could cause actual results and trends to differ materially are set forth in the annual and quarterly reports filed with the SEC. Coherent assumes no obligation to update any forward-looking statements which speak only as of their respective dates. Today's conference call will be available for webcast replay in the Investor Relations section of our website for 1 year. With that, it's my pleasure to turn the call over to Chuck. Chuck, please go ahead.

Thank you, Paul. Earlier this year, we announced that we had initiated a comprehensive review of strategic alternatives for our Silicon Carbide business. This business includes our silicon carbide substrate and epitaxial wafer operations from growth to finishing [indiscernible] devices and modules. We conducted a thorough review considering a range of strategic alternatives that would be in the best interest of Coherent and our shareholders. We were excited to announce the formation of a silicon carbide subsidiary, which will receive an aggregate $1 billion investment from DENSO and Mitsubishi Electric, to leading Japanese Tier 1 automotive and industrial infrastructure suppliers. DENSO and Mitsubishi Electric will each invest $500 million into the newly formed silicon carbide subsidiary of Coherent in exchange for a 12.5% noncontrolling ownership interest in the business. Coherent will continue to manage and will retain a 75% interest in this subsidiary. The transaction values the Silicon Carbide business at $3 billion on a pre-money basis or approximately 10x projected revenues for the fiscal year ending June 30, 2024. A great value creation for Coherent's shareholders. Moreover, Coherent will deepen its partnerships with DENSO and Mitsubishi Electric by entering into long-term supply agreements that support their demand for 150-millimeter and 200-millimeter substrates and epitaxial wafers. Coherent has demonstrated for more than 2 decades leadership in silicon carbide materials. And in recent years, we have aggressively invested to scale our manufacturing of 150-millimeter and 200-millimeter substrates to address this underserved market. DENSO and Mitsubishi Electric recognize the value Coherent has created and the unique capabilities in our Silicon Carbide business, and these transactions will enhance our position and future growth prospects in this rapidly expanding market, in particular, in power semiconductors for electric vehicles and industrial infrastructure. Over the past 2 decades, we have invested in product and technology leadership at scale and became a [indiscernible] $1 billion investment from our strategic partners will accelerate our capital investment plans in the coming years. This investment will fund the manufacturing expansion of our substrates and epitaxial wafers and accelerate our vertical integration strategy spanning from substrates to modules. The investment in combination with the concurrent supply agreements enhances our position in the silicon carbide market. We continue to pursue vertical integration for our strategic plan to offer devices and modules for the electric vehicle and industrial infrastructure markets, these investments will result in greater financial and operational flexibility for Coherent as we execute on our capital allocation priorities, which include debt repayment and investment in non-silicon carbide businesses. These transactions are evidence of our focus on building long-term shareholder value and present a unique opportunity to further accelerate our growth. With that, I will turn it over to Bob to discuss the details of this exciting development. Bob?

Yes. Thank you, Chuck. As Chuck mentioned, these transactions will provide $1 billion of cash into our newly created Silicon Carbide business to fund our growth plans. Prior to closing, we will separate out the Silicon Carbide business into a newly formed subsidiary. Coherent will retain a 75% economic interest in the independent subsidiary, along with management and operating control. DENSO and Mitsubishi Electric will each own a 12.5% economic interest in the business at closing in exchange for their respective $500 million investments. The transaction is expected to close in the first quarter of calendar year 2024. We will provide details regarding this subsidiary following the closing in the ordinary course. The investments in LLC agreements contain customary rights and provisions and permit Coherent to raise up to $500 million in additional investments in the 6-month period following the close of the transaction. We intend to continue conversations with parties regarding further investment and supply agreements. Coherent is excited to strengthen our partnership with DENSO and Mitsubishi Electric to enhance the outlook for our Silicon Carbide business. Both partners are leading companies with strong global brands, distribution and customer relationships. DENSO enjoys an extremely strong position as a Tier 1 automotive supplier with leading capabilities in electrification and powertrain systems and in-vehicle power semiconductors for the automotive market. Mitsubishi Electric is a pioneer in silicon carbide power devices with a leadership position in silicon carbide power modules for high-speed trains, high-voltage industrial applications and home appliances. The company made history by launching the world's first silicon carbide modules for air conditioners in 2010 and became the first supplier of a full silicon carbide power module for the Shinkansen high-speed trains in 2015 and recently indicated that it plans to invest approximately JPY 100 billion to build a new 200-millimeter silicon carbide wafer fab in Kumamoto Prefecture, Japan in 2026. We are excited to partner with DENSO and Mitsubishi Electric as investors and customers of our Silicon Carbide business. We are confident our business will enjoy above industry level growth in the rapidly expanding silicon carbide market for years to come. Now let me turn the call back over to Paul.

Thank you, Chuck and Bob. Before moving to Q&A in our press release this morning, Coherent revised its first quarter fiscal 2024 revenue guidance to $1.050 to $1.055 billion from previously $1.0 billion to $1.1 billion. We will now open the call for questions. As a reminder, the purpose of this call is to discuss our silicon carbide announcements and business. Accordingly, we will not be responding to questions regarding our operating results in this call. [Operator Instructions]. Victor?

[Operator Instructions] And our first question will come from the line of Samik Chatterjee from JPMorgan.

This is Joe Cardoso on for Samik Chatterjee. My first question, I just wanted to clarify around one of the points that it sounded like you mentioned particularly around the partnership and not expecting it to interfere with the opportunity for Coherent to -- or the Silicon Carbide business to eventually vertically integrate from wafer to power device. Can you just confirm that there's no provisions in the deal with DENSO and this is DC that would essentially halt that opportunity or put that opportunity on pause relative to eventually vertically integrating and moving to power devices? And then I just have a quick follow-up.

Yes, there are no such provisions in the agreement.

Okay. And then a quick follow-up. Can you just outline the time line around the $1 billion investment? Are you guys expecting that to be all upfront once the deal closes? Or is it over a longer time period?

Yes. Yes, the way this transaction is structured, the investment will come in full at closing.

And our next question will come from the line of Ruben Roy from Stifel.

Chuck or Bob, My question, I guess, is very similar to the last one, but I just wanted to make sure I understood this. So in terms of the GE relationship and the technology access, that remains within Coherent Or is there some access to that for device technology? I just wanted to make sure I understood what you just said on the devices.

Yes, thank you for your question. The GE technology will be for the benefit of silicon carbide LLC exactly as it is today. So it's the technology that we'll be using to grow the business.

Okay. And then on the projected revenues for '24 at this point, can you talk a little bit about how kind of you're getting to those numbers in terms of EV versus industrial power devices versus RF or any other detail around the revenue projection would be helpful.

Ruben, this is Chuck. We're not going to provide any more color then that I will review for '24.

Our next question come from the line of Simon Leopold from Raymond James.

Great. I wanted to see if maybe you could hash out a little bit of what's in it for your JV partners, DENSO and Mitsubishi. And in other words, I'm trying to get an understanding of whether or not there's any kind of most favored nation clause or discounting on their purchases of wafers beyond sort of the equity ownership, what are their benefits? And then I've got a follow-up.

Sure. This is Bob. I'll be happy to take the call for the discussion. We are not commenting on our supply agreements with our partners at this time. But it's needless to say, we think the business is a very exciting business. The investment will provide a lot of opportunity to grow and our partners feel the same.

Great. And just as a follow-up, with the cash infusion and the shift of the CapEx burden to the JV, I'm just wondering if you could give us some update or your thoughts on your plans to delever Coherent's balance sheet?

Rich?

Yes, this is Rich Martucci. At the present time, we expect the transaction basically to be accretive in year 1. But at this time, we reserve the rate to take the additional capital that we do have to fund either our debt and/or our priority capital with the non-silicon carbide businesses.

Our next question will come from the line of Jed Dorsheimer from William Blair.

Sorry, I was on mute. I did that. So anyways, congrats on the deal. I guess just a follow up to the previous -- so are you able to use the $1 billion -- I just want to clarify this point. The $1 billion of investment into the JV. Is Coherent able to use that as you see fit? Or is that limited to investment in the JV? And therefore, you're saying that the $175 million of CapEx that you were spending last year on SiC is what you would be able to use for the delevering?

Yes. So the $1 billion that we're receiving from Mitsubishi Electric and DENSO will be used strictly for the purposes of the subsidiary's operations. So the way you're thinking about it is exactly right. Those dollars we receive will be used to invest in that business and it will free up our capital.

Perfect. As my follow-up, once the transaction closes, I'm just curious, the mechanics of disclosure associated with this, will you be breaking down the -- what is materials versus devices or 6H versus 4H? Or is this still going to remain undisclosed?

Mike?

Thank you, Chuck. This is Mike Kuder. At this time, we're still planning to report as we currently are. And if there are updates in the future, those will be provided in the future.

And our next question comes from the line of Meta Marshall from Morgan Stanley.

Great. Just one question for me. You mentioned that you can raise an additional $500 million 6 months after the close. I guess I just wonder, given that you guys just ran a pretty fulsome process, I would expect right now. Why not just introduce kind of more partners upfront or announce more partners upfront? Or kind of what is the thought behind kind of leaving that optionality open just given kind of the full process run currently?

I'm happy to take the question, Chuck. We did run a full process and in fact, it was a really robust process. You're exactly right. We felt at this time that the partners that we have are fantastic partners, both great Japanese companies and the amount of the investment at this time is the right amount on the right terms. So we will remain open and opportunistic to fill out the round, but we feel really comfortable with the amount we raised and we decided to close on these terms with these partners at this time.