GLOBALFOUNDRIES Inc. (GFS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to today's program entitled Global Foundries Advancing Semiconductor leadership in America. [Operator Instructions] I will now introduce your host for today's program, Eric Chao, Head of Investor Relations. Please go ahead, sir.

Thank you, and welcome to our investor webinar entitled Global Foundries Advancing Semiconductor leadership in America. On the call with me today are Tim Breen, CEO; and Sam Franklin, CFO. The press release we issued today is available on our Investor Relations website. A replay of this webcast and the accompanying presentation will be posted to that same site shortly after today's session. Before we begin, I will remind you that certain statements on today's call may be deemed to be forward-looking statements, which can be identified by terms such as believe, expect, intend, anticipate, and may or by the use of the future tents and that you should not place undue reliance on them. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today. For more information about the factors that may cause actual results to differ materially from our forward-looking statements, please refer to the press release we issued this morning. You should also refer to the risks and uncertainties described in our SEC filings, including in the sections under the caption Risk Factors in our annual report on Form 20-F and in any current reports on Form 6-K furnished with the SEC. Note that we will present non-IFRS financial measures during today's call. With that, I will now turn the call over to Tim.

Thank you, Eric, and welcome, everyone, to what we believe is of the most consequential announcements. Earlier today, we announced that GF has been selected as the technology provider and operator for new 300-millimeter fabs at our Multi New York campus under an investment of up to USD 21 billion provided by Japan under the U.S.-Japan trade agreement. Together with our government partners, we developed a truly innovative framework. Japan will fund the investment as part of the U.S. Japan agreement on strategic investments, while GF provides the differentiated technology, manages the construction and operates the fabs once they are complete. This is the first of its kind framework that advances semiconductor leadership in America and accelerates GS trajectory. Today, we will discuss how this announcement aligns with and enhances our long-term strategy. We will cover points. First, as a backdrop, the significant accelerating and durable demand for GS differentiated technologies; second, the strategic imperatives that brought the United States and Japan together in support of this project. Third, GF's proven track record of execution and world-class manufacturing expertise. Fourth, our modular expansion plan and time line in multi New York. Fifth, the structure of the financial model and its accretion to our long-term outlook. And lastly, the breadth of support and stakeholder endorsement. The semiconductor industry is entering of the most exciting areas we have ever seen driven by the rapid scaling of AI data centers and the proliferation of AI into the physical world. These megatrends are creating strong sustained demand for a broad set of semiconductors that enable connectivity, power efficiency, sensing, communication and the intelligent edge. These are precisely the areas where GF is differentiated and where we are best positioned to create value for customers. These megatrends are propelling incredible long-term demand across GF's durable growth markets. The result is what you see on the right-hand side of this slide and explosion of applications requiring much more semiconductor content. Autonomous vehicles, intelligent factories, cloud infrastructure, next-generation communications networks, smart consumer devices, intelligent drones and robotics, all require specialized semiconductor solutions. We believe this strongly favors the differentiated technology portfolio we've built over many years. For these reasons, the long-term demand outlook for GF technologies has never been greater. But it's not only about the technologies that are needed, it's where they are needed. Customers require substantial semiconductor supply in the United States, where domestic capacity for these critical technologies remains limited. GF is 1 of the only at-scale foundries with meaningful capacity and expansion capability on American soil. This brings me to why the United States and Japan came together on an initiative of this scale because the strategic imperatives on all sides are highly complementary. For the United States, the initiative reduces reliance on geographically concentrated overseas semiconductor supply and significantly expands domestic production of the chips that American industry, critical infrastructure and national defense depend upon. We expect these new fabs to increase total U.S. wafer capacity by approximately 10%, making Multi New York 1 of the largest semiconductor clusters in the entire country. In doing so, this initiative is expected to create approximately 27,000 construction and ecosystem jobs as well as more than 1,000 high skilled manufacturing jobs in New York's capital region. For Japan, this initiative reduces geographic concentration risk and trade exposure for Japanese companies, provides Japanese customers with access to trusted U.S.-based capacity for the foundational technologies their products depend upon and creates a meaningful opportunity for Japanese suppliers to participate in the build-out of both fabs. Ultimately, this is a clear win-win for the U.S. and Japan. Two countries with incredible depth and complementary capabilities in the semiconductor industry. Both sets of national objectives are served by the same project on a campus that is already operating, already permitted and already staffed by a workforce that has been operating in upstate New York for more than 15 years. GF was selected as the partner for this initiative because fabs at this scale require differentiated technologies, customer trust, operational excellence and a proven ability to execute large and complex construction programs on schedule. Very few companies in our industry can incredibly bring all of those things to a project of this magnitude. GF brings the world-class technology, workforce and manufacturing expertise as well as a deep track record in delivering trusted solutions for the most critical applications. This is not just our claim. We have demonstrated a proven track record and strong execution. The first is Malta itself, where we took a greenfield site in upstate New York from background to high-volume 300-millimeter manufacturing establishing the infrastructure and large-scale production capability in a timely manner. Our Multi fab became 1 of the largest private public partnerships and manufacturing projects in New York State's history and an incredible story of a company and community working together, the deep support of community town, state and federal leaders to create lasting economic impact, high-quality jobs and transforming the prosperity of the region. This site today serves as GF's global headquarters as well as the hub for some of GF's most innovative new technology breakthroughs, serving a broad and demanding set of customers for more than 15 years. In 2023, we delivered a highly efficient brownfield expansion in our Singapore campus, demonstrating our ability to expand alongside a fab that was already running at volume. Not only did we completed ahead of plan and on budget, we did so while navigating supply chain disruption of the COVID period. Our track record speaks for itself, and we were selected by our government partners for these reasons. We are confident we will deliver. Let's now discuss our build-out plan in Malta New York. The program is modular by design and comes in 2 phases, both of which will be constructed on land adjacent to our existing fab. Note that all of the wafer figures mentioned in this presentation refer to 300-millimeter equivalents. Each phase is expected to add approximately 900,000 wafers of annual capacity when fully operational. The build-out will be funded by up to $21 billion across the 2 phases under the U.S. Japan trade agreement. The first phase is shovel ready with key permitting complete environmental approvals received and core infrastructure already in place. We have lined up our key suppliers and early enablement work on the site is already underway. The second fab will proceed after a go-no-go decision between the stakeholders before the end of 2028. Beyond the readiness of the site itself, Malta brings clear economies of scale, existing established infrastructure and experienced and broad talent base strong support from New York State and from Saratoga County and status as a U.S. Department of War Trusted Foundry. All of these aspects allow this program to move faster and ramp more efficiently than comparable alternatives. The technology scope for these fabs includes our highly differentiated and sought after FDX, BCD and UX platforms. Each of these technologies serves multiple secular growth markets where long-term demand is substantial and where domestic supply is limited. For example, FDX supports Edge AI and fiscal compute across automotive and industrial applications as well as a growing set of data center use cases. BCD is in very high demand for power management with particular growth or powering tomorrow's AI data centers. While UX serves the broad industrial and connected infrastructure base that underpins the wider economy. We also expect to add additional technologies to the fab build-out over time based on market conditions and the requirements of our customers. This initiative does not displace or replace what GF is doing on its own. In fact, it is wholly additive. This accretive program runs in parallel to our growth plans and accelerates us towards reaching our strategic goals. Let us now talk about the expected time line for construction and operations. The first phase begins with construction and infrastructure moves into initial tooling as the clean room becomes ready for equipment and then enter a sustained period of continued capacity ramp. We expect to break ground during this quarter and for the fan to be ready for equipment during 2028 with first wafers out during 2029. The second phase would follow the same sequence beginning with engineering studies and permitting. The term of the project will be for a minimum period of 20 years. With that, let me hand it over to Sam to take you through the model structure and accretive financial benefits for GF.

Thank you, Tim. Before I begin, please note that the figures I referenced are subject to the signing of definitive agreements and reflect the financial metrics and expected accretion from the first half only. Finally, note that I'll be referencing non-IFRS measures. With that, let's dive in. As Tim has outlined, the distinguishing feature of this structure is that GF will be enabling significant incremental manufacturing capacity here in the U.S. without directly incurring the associated capital investment. Unlike a conventional capacity expansion, we believe this is a first-of-its-kind innovative model that meets the combined objectives of the Japanese and United States governments while ensuring that GF generates a return for the services we'll be providing without the committed capital market or utilization risk associated with building and operating the fab. Through this model, GF is enabling our government partners to accelerate meaningful capital that unlocks supply security across critical technologies in the U.S. We believe this represents a strong balance of objectives between all parties and is intended to secure a win-win outcome under the U.S. Japan investment agreement. In terms of the core structure, a dedicated special purpose vehicle, or SPV, owned by the U.S. and Japanese governments will fully fund and own the fab infrastructure in capacity. Although this SPV is the funding vehicle, its obligations encompass the entirety of the funding requirements. Project development, construction, ramp operations, technology and management fees. GF will undertake several critical roles such as the construction and operations manager overseeing the workforce optimizing the running of the fabs, including the labor, shared services, utilities, suppliers and materials. In exchange for undertaking these services, GF will earn construction and operations management fees, technology fees as well as a share of the future EBITDA generated by the SPV. Because these fabs will be based on our multi New York campus, they are expected to benefit from the economies of scale associated with our existing operations and thus, a distributed operating cost structure from day 1. This should enable better cost absorption across COGS and OpEx, which strengthens the economic returns for both the SPV and GF. Let me now take you through how the economics of the arrangement are structured over the life of the project, which come in 4 components, each with a distinct profile. Firstly, technology fees which are sized relative to the value of the differentiated process platforms GF is contributing to the SPV. These are expected to commence in 2027 and run for a minimum of 20 years. Construction management fees are earned during the build-out phase to deliver the infrastructure, tooling and manufacturing processes to the site and will conclude when the construction phase is complete. Operating management fees will begin as the first fit comes online around 2029 and scale as each fab ramps towards full run rate capacity and additional cost and expenses reimbursement mechanism will also be implemented for any shared services and infrastructure between GF and the SPV which will be allocated pro rata and funded as part of the SPV's annual operating budget. Finally, as an added incentive to maximize the performance of the fabs, and EBITDA sharing mechanism will be eligible from first production and its size to grow in line with the ramp of the fabs. This is a robust model that insures GF is compensated for the critical roles and services being provided to the SPV over the life of the projects. Upon final close of the agreements, we expect revenue contribution of approximately $50 million in 2027. This chart provides an illustrative overview of the core fee components. Next, let's discuss the expected returns metrics. We expect this initiative to drive meaningful accretive financial benefits for GF commensurate with the equivalent profit per wafer had GF elected to fund and only expansion of the projects. Because GF is contributing expertise and technology capability to the projects, rather than any capital, the returns are additive to the long-term model we laid out at our Investor Day in May. In fact, this innovative investment framework accelerates that model, allowing GF to monetize its decades of semiconductor technology, fab construction and operational management expertise while supporting the onshoring initiatives of the U.S. government. For all these reasons, we expect to drive accretive benefits to our operating model. In terms of gross margin, we expect annual accretion of 30 to 50 basis points in 2027, growing to a range of 100 to 200 basis points over the long term. For operating margin, we expect annual accretion of 100 to 200 basis points in 2027, growing to a range of 200 to 300 basis points over the long term. The operating margin uplift relative to the expected gross margin benefit is principally due to our preliminary views on the income statement recognition associated with the construction management fees to be earned during the build-out phase. As a result, for earnings per share, we expect annual accretion of $0.10 to $0.15 in 2027, growing to a range of $0.50 to $0.75 over the long term. Given the capital efficiency of this structure, we expect the technology and fab management services model to generate approximately $3 billion of cumulative free cash flow over the next 10 years. As part of enabling the combined objectives of the U.S. and Japan governments to accelerate domestic semiconductor manufacturing capacity, GS profit per wafer under this arrangement has been structured over the next 10 years to be comparable to what GF would have earned had the capacity being built internally. Effectively, this means GF is expected to achieve the target profit per wafer without incurring the associated fixed cost. As a result, this investment framework drives incremental returns to our long-term model objectives while preserving GF's own capacity to respond to demand upside within our existing footprint. With that, let me hand it back to Tim.

Thank you, Sam. An initiative of this scale only works when there is genuine alignment across governments, customers and the local community. And the breadth of that endorsement is significant and encouraging, not only is this project supported at the highest levels of both governments under the U.S. Japan trade agreement, it continues the partnership with New York State and Saratoga County, which have invested consistently in the capital regions driving semiconductor ecosystem over many years. All of this is anchored by customers and suppliers with whom we have long-standing relationships, such as Renesas and Tokyo Electron in Japan; and Apple, Cerus Logic and General Motors in the United States. We are in advanced discussion with many more customers than these who also seek differentiated technology and secure supply right here in the U.S. Let me close with 3 takeaways. First, this initiative meaningfully accelerates trusted U.S. manufacturing capacity for the foundational technologies the AI era depends upon from the cloud through to the physical world. Customer demand for the differentiated technologies we offer is set to grow significantly in the coming years. Secondly, GF was selected given its deep manufacturing experience and expertise in ramping scaled fabs in the United States and deploying differentiated technologies at scale. And finally, this initiative is meaningfully accretive to our financial model, starting as soon as 2027 and building momentum from there. The scale of the site, fee structure and profit sharing allows GF to accelerate its strategic and financial goals over the next decade and beyond. Beyond the important expansion announcement today, GF continues to accelerate investments that strengthen U.S. supply security for AI data centers, including in silicon germanium, silicon photonics and interposer technologies. To support these investments that will help GF address significant customer demand, the U.S. chips program office has agreed to repurpose $955 million of our previously awarded chips funding towards R&D and capital expenditures beginning in 2027. Separately, the U.S. Department of Commerce will receive an equity stake in GF of approximately 4%. Together with the previously announced DOC frameworks that support our Quantum silicon photonics and advanced packaging initiatives, this represents a meaningful equity stake that allows the American public to participate in our future growth. As aligned with our partners at the Department of Commerce, we do not expect any further equity participation by the U.S. government beyond today's announcement. Our strong partnership has already started to bear fruit and we believe today's announcement is only the beginning for driving customer momentum and strategic U.S. onshoring. Ultimately, we believe the conclusion of these agreements reinforces GF's strategic role in the U.S. semiconductor ecosystem and supports long-term value creation for all our shareholders. We look forward to providing more details at our upcoming earnings call in November.

In summary, this is an extraordinary moment. 2 great nations, Japan and the U.S. have come together to forge a world-class semiconductor ecosystem right here in Upstate New York. The combination of our differentiated technologies, manufacturing expertise, talented workforce and proven record of execution makes GFP ideal partner to realize this strategic vision. I want to thank our teams in New York and around the world whose work and dedication made GF the partner of choice for this landmark initiative. I'm incredibly excited to execute this new chapter for GF. Thank you all for joining us.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.