Siltronic AG (WAF) Earnings Call Transcript & Summary

Welcome, everybody, to our Q1 2023 results presentation. This call is also being broadcast live over the Internet on siltronic.com. A replay of the call will be available on our website shortly after the conclusion of this call. Joining me on today's call are our new CEO, Dr. Michael Heckmeier, and our CFO, Rainer Irle. We are very excited to have Michael on board since this week. He will introduce himself in a minute. Rainer will then guide you through the current trading, key financials and provide an update on our guidance and current market developments. After the presentation, we will be happy to take your questions. Please note that management's comments during this call will include forward-looking statements, which involve risks and uncertainties. For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and presentation. All documents relating to our Q1 2023 reporting are available on our website. I now turn the call over to Michael for his introductory remarks.

Thank you, Verena. Welcome, everyone, and thank you for joining us for our Q1 '23 Results Call. This is my first conference call for Siltronic, and I'm very excited to have my new role as CEO. Some of you might know me from my previous roles, I've spent the last 25 years in various functions at Merck, a Dutch listed company. Most recently, I was in charge of the Display Solutions business. At the same time, member of the management of the Electronics division, where I gained already valuable insights into the electronics and semiconductor landscape. I consider a great and unique opportunity to serve as CEO of such a thriving company. Waivers and semiconductors are the basis for future technologies. These products enable advancements in digitization, AI, autonomous driving and countless other groundbreaking applications that are transforming our lives and the global economy. I'm truly proud to be part of this dynamic environment and to contribute to the future together with the Siltronic team. I joined the company just a few days ago and already gained some first insights. I look forward to speaking to you in the H1 '23 Conference Call on July 27. As you are key stakeholders appreciate your feedback and input during the upcoming roadshows and investor meetings, I will enjoy meeting many of you personally. For today, I asked Rainer to take over the lead in this call. So let me hand over to Rainer, and thank you for joining today.

Thank you, Michael. And I must say, we are all thrilled to welcome you on board here at Siltronic. I promise that you will enjoy the time here. We have the greatest employees. We're a technology leader, and we have a great future ahead of us. But now let's dive into the latest developments at Siltronic. Again, it is all about inventories at our customers and OEMs. Massive inventory build through H2 last year and Q1 this year now requires a massive response. You probably read about the significant wafer start reduction at many of our customers. As usual, customers tell us rather late about their plans. January still looked okay. However, in the meantime, we received many calls from customers asking us for pushouts. Consequently, our earnings were impacted significantly. Compared to Q4, our sales were down by 14% to EUR 404 million. EBITDA was at EUR 125 million, and the margin came in at 31%. CapEx was EUR 260 million, mostly spent FabNext, our new factory in Singapore. Due to the high CapEx, our net cash flow was negative as expected and came in at minus EUR 106 million. Our net financial assets were positive at EUR 284 million at the end of Q1. FabNext construction is fully on track. This is actually a great story. We have such a great team down there to make it possible. The building is basically completed and the clean room is operational. To give you an idea of the impressive work done by the team, the construction site covers an area roughly equivalent to the size of 25 soccer fields. Around 5,000 people are working on site to get everything ready in time. The picture on the slide gives an impression how large the site is. On the left side, you see our existing fab, which is connected by link bridge to the new fab. We already moved in some equipment and started it up. I'm convinced that FabNext -- next will be a game changer for Siltronic. It is our largest and most automated factory at Siltronic, which will enable a leap in Siltronic's EBITDA margin. And now we go through the financials in more detail. We start with sales, which, as anticipated, were weaker quarter-on-quarter due to a decline of wafer area sold. Additionally, the FX headwind from the stronger euro against the dollar put some extra pressure on Q1 results. Overall, sales reached EUR 404 million and are in line with our expectations. In Q1, COGS came down to EUR 288 million, EUR 30 million down quarter-on-quarter due to lower wafer result. Costs went down with lower areas sold, however, less than proportional to sales volume. We saw inflation in labor costs, raw materials and supplies as well as in energy cost. Overall, we expect another EUR 50 million unit cost increase year-over-year. Given their slow but good improvement in electricity costs, such increase may actually come in somewhat below EUR 50 million. Our gross profit decreased to EUR 160 million and the gross margin to 29% in Q1. The U.S. dollar exchange rate averaged 1.07 in Q1, i.e., it was almost $0.05 stronger than in Q4. On the slide, we updated our FX sensitivity and the change in [indiscernible] sales by approximately EUR 11 million and EBITDA by roughly EUR 7 million, as always excluding hedging effects. With the U.S. dollar at 110 and the Japanese Yen at 145, we expect a EUR 65 million negative impact on sales for the entire year '23. The stronger euro burdens Siltronic sales and gross margin, though we get some of it back through FX hedging. Hedging result was negative 20 million in '22 and is expected to be about EUR 20 million positive at in 2023 if the U.S. dollar was around 110. EBITDA in Q1 came in at EUR 125 million and was in line with our guidance. EBITDA margin was 31%, down from 35.6% in Q4. While it's disappointing to see the decline, I would like to give it a different spin. With all the improvements of the last decade, we have elevated margins to a much higher level, even at times of a cyclical decline, we still run the company at 30% EBITDA. This, in my view, is impressive. EBIT in Q1 reached EUR 78 million with an EBIT margin of 19%. EBITDA and EBIT were both impacted by the lower [indiscernible] and higher costs for raw materials, energy and supplies. Despite the market weakness, a considerable net profit of EUR 73 million was achieved in Q1. Earnings per share were [indiscernible]. The dividend payout of EUR 3 per share for '22 was approved by the AGM last week and actually paid yesterday. Looking at our balance sheet, equity rose to EUR 2.1 billion at the end of March '23. Equity ratio was 51%. The increase in equity as a result of the strong net profit. The IFRS interest rate for pension provisions in Germany was 3.66%. In the U.S., the interest rate decreased slightly to 4.68% at the end of Q1. This resulted in pension provisions of EUR 22 million, almost no change. Net financial assets were still positive at EUR 284 million despite high CapEx. Again, we had strong cash flow from operating activities. We have some EUR 676 million financial debt and liquidity of almost EUR 1 billion, which will obviously decline in Q2 with the dividend payment and high CapEx. Operating cash flow in Q1 was EUR 147 million, following EUR 190 million in Q4. Net cash flow in Q1 was negative at minus EUR 106 million as expected. Net prepayments for customer LTAs amounted to EUR 22 million in Q1. We expect some additional prepayments in '23. However, prepayment inflows and returns will be in the same order of magnitude this year. '23 CapEx is expected to be slightly above '22. Most of this amount will be spent for FabNext in Singapore. In '24, this amount is expected to come down by half. Due to the planned start of FabNext in '24, depreciation will nearly double in '24. The financing strategy of the new fab and other CapEx has a solid foundation. We primarily use cash on hand and operational cash flows, customer prepayments to fund the project. In addition, we have some financing in place. And to give you a quick overview, there's 3 instruments in place and the fourth one will be completed soon. The first one is the ESG-linked promise loan note, EUR 300 million that is fully drawn. The thing is a SEK 450 million term loan that is partially drawn and will be fully drawn through this year. Then the EUR 200 million loan from the European Investment Bank, which is also fully drawn. And then in preparation of the ongoing expansion of the FabNext the term loan in a combination with our revolver is currently negotiated. It is intended to serve as a liquidity reserve and will be drawn in '24. And as I said in the last call, we do not plan a capital increase in '23. Now let's turn to silicon end markets. I will talk about end markets first and later about inventory burn. Year-over-year, smartphones, which represent the largest silicon end market are anticipated to show weaker unit sales. On the positive side, silicon content in smartphones continues to grow. Therefore, wafer demand is expected to remain stable this year. PCs coming down from high demand on COVID are expected to decline further this year. Server demand remained strong, although we see some pockets of weakness. AI and other high-performance applications massively drive silicon content in service. Demand for industrial applications is projected to see a modest increase, while the automotive sector, particularly electric and hybrid vehicles continue to see significant growth. In summary, the overall end markets before inventory correction in '23 anticipated to show somewhat a little growth. But due to the high inventory levels throughout this value chain, particularly among our customers and to a lesser extent, also at OEMs, wafer demand is expected to decline by slightly more than 10% year-on-year. We have seen such excess inventory before, particularly in 2009, 2012 and 2019. And burning inventories takes time and the 3-month cycle times that our customers do not allow quick response. Some customers already reduced wafer sterile in Q4, others just recently decided to reduce output. We do not like it, but eating through these high inventories will delay our upturn by a couple of quarters compared to end markets. And this leads us to our outlook for the second quarter. Siltronic start to the financial year was muted. Siltronic expects the market to remain sluggish in the coming quarters. Some customers asked to push out vapor shipments, and this will probably affect the entire year '23. In the second quarter, we expect sales on Q1 level and EBITDA margin to come in between 27% and 31%. This is based on an FX rate of $110 million Inventory burn takes start. Therefore, we do not anticipate any improvement in H2 yet. As you may have read, a large memory customer will be reducing wafer starts further, which will put some burden on the second half. Accepting that things will take a while is difficult, but we continue to look unbent that the bright future lies ahead of us. And let me highlight 3 areas. Area 1, the demand is down a little more than 10% due to excess inventory. Once burned, demand will automatically increase by 10%. Some end markets might already be through the worst while other markets need more time. Memory has just reduced wage starts further. Reason 2 megatrends, such as 5G, AI, electromobility and digitalization continue to be growth drivers for the semi industry. Consumer sentiment is still muted. Inflation is hard to fight. China is still under shock from the lockdown and the terrible war is looming in Europe. But sooner or later, consumers will come back, and content will continue to grow anyway. And finally, costs are coming down. Electricity prices are improving both in Europe and in Singapore. Electricity costs are still elevated, but far below the fear prices of last year. We also see improvements in other cost categories like freight costs. Now prior to concluding the call, please allow me a few words about myself. As you may have read to today's webcast, we'll be my last one for Siltronic. Claudia Schmidt will take over the role as CFO on July 1, as I have decided to take on a new professional challenge. With Claudia Smith, Siltronic will gain an experienced and highly competent CFO from within our own ranks. Claudia has been with Siltronic for over 13 years, and Claudia and I have been working together for almost 20 years at Siltronic and at Wacker. Claudia is the Head of Controlling and Treasury. She has played a significant role in shaping key strategic decisions during this time. Having worked closely with her for many years, I cannot envision a better success. For me, personally, the past 20 years at Siltronic and Wacker has been an incredible experience. When it started in 2003, our EBITDA margin was 20% lower compared to peers, and we started an incredible journey, slimming overhead functions, driving automation to new levels, moving HVM to Singapore and fostering our technology leadership. The IPO definitely stands out as one of my most memory experiences. But I'm also proud of the leadership team that we put together a strong basis for future success. I enjoyed engaging with all of you during earnings calls, investor conferences and road shows, and I'm deeply grateful for the trust that you have placed in me as CFO. Obviously, I will be still available for meetings and calls until my departure end of June. But in case we do not speak before all the best to you, and I'm looking forward to seeing you again in my new role. And with this, we close our presentation, and we are now available for your questions. Operator, please open the Q&A session.

[Operator Instructions] And the first question comes from Robert Sanders from Deutsche Bank.

Rainer, best of luck with your new role, which I'm sure will be a huge challenge, but we're looking forward to seeing what you can do there. So my first question would be on utilization. So it looks like your utilization, your loading is about 60% at 150 and about 80% at 200 and 300. So what I'm interested in is how you think the pricing situation is going to play out? Are you seeing customers wanting to drive concessions on pricing, particularly those with short-term contracts? And I have a follow-up.

Yes. Thank you, Rob, for the wishes. I'll try to do my best. On the utilization, I mean, it is -- if wafer starts are down 10%, then utilization is down 10%. So utilization is down. Luckily, actually, we do not see pricing pressure. And that's kind of a bit different from the prior slowdown in 2019 where we saw pricing pressure. But so far, it is more about customers just pushing out. And I guess all customers we talked to know that wafers will probably still remain to be very tight next year. So they try to be friendly to us. They try -- they ask for pushouts, but they have not been talking about prices so far.

Got it. Okay. And then on the CapEx, it looks like it's a little bit lower than your previous statements. So -- is the situation you're going to ramp up full speed to Phase 1 and then perhaps revisit depending on demand as we move through this year, the speed of Phase II? Or is there anything I should read into to what you're saying about CapEx? Can you just remind us on first wafer-out and what capacity Phase 1 will give you?

Yes, Rob, I was trying not to change the language that we have been using. So absolutely no change. We go full speed. We are -- we just cut the first wafer actually last week, but it will be a longer process to qualify everything. And then kind of -- I mean we still expect the first wafer to ship basically on January 1 or on January 1. And so no change there. We never disclosed the exact output, the capacity of Phase 1. So we want to continue not to disclose that. But there is no change in strategy. And then maybe the -- later this year, there needs to be a decision on the ramp speed for Phase 2. But I think this is something to be done in fall of this year.

Just one quick follow-up on that. On depreciation, how do you think depreciation and amortization will start kicking in from that fab next year and the year after because I think depreciation is roughly 200-and-something million this year. How will it trend in the next 2 years? Does that mean -- I understand it doesn't affect your EBITDA, but does it affect your gross margin? And what sort of step-up in depreciation should we see -- that's it for me.

Yes. Okay, Rob. So depreciation will basically double next year. I mean if you look at our balance sheet, more of half of the long-term assets are assets in construction. So that will all hit next year, become operational and then depreciation will start. I think the new factor will have a positive impact on EBITDA margin from day 1 because even at a slow production output, it will be already very effective. Though obviously, it will put a burden on EBIT with the higher depreciation. And that will take a little to come back because depreciation really comes from day 1 for all of the factory, for all of the clean room and for all of the equipment that is already there. And then kind of with the loading increasing over the first years with the ramp, then more and more EBITDA will be generated and then EBIT will kind of come back to all levels and in the end, probably at higher levels than we see today.

And the next question comes from Adam Angelov from Bank of America.

Yes. And just echoing the well wishes and all the best for the next role, Rainer. So firstly, I just wanted to get -- I know visibility is low today, but your initial views and maybe if you're having any of these conversations with customers on 2024, given, I guess, a limited or no expectation for the market to recover in H2 2023, and we have all this new capacity coming online in 2024, just why you're hearing from customers there? And then secondly, just on the pricing developments. I was curious, just maybe if you could go into a bit more detail on your answer to the last question. I would have thought maybe spot was slightly weaker than where we were a few months ago and LTA pricing may be a bit more resilient. Wonder if you could just go into that in more detail, that would be great.

Yes, sure. Adam, thank you. So kind of -- I mean if you read through customers' presentations and also from our conversations with customers, everybody is expecting a significant uptick in '24. I mean, if you look through the earnings calls, I mean, of, for example, a large logic manufacturer, they see already the trough now. Though typically, we see it 6 months later because the inventory needs to be digested. But there's clearly a lot of positive signals into next year. And again, I mean, if this year is down 10% for inventory adjustments, you would expect next year to pick up just from that by 10%. New capacities you said, I think the amount of capacity coming online from customers next year, might even a bit higher than capacity coming online from data manufacturers. We believe we are somehow somewhat ahead of competition when it comes to expansion. As you remember, we were the first ones to decide on greenfield. And the project is actually executed very, very well. So we will be able to ship from the new line really early in January 1, and we think we are ahead, and we do not expect that there is more capacity added on our side that our customer side. It's rather the other way around. Now -- we said that pricing for this year would be up a little, and we stick to that comment, particularly from new LTAs coming online. But there is no weakness in quarterly contracts. It is really less -- I mean, volume is down, but we have not had customers asking for price reductions or kind of give you more volumes if you lower the price. We really don't see that because the customers are expecting this to be a very temporary weakness and the market to come back next year, and then they need a significant amount of wafers.

Okay. Got it. That makes sense. And just a quick follow-up. Is the plan roughly still to ramp a next over 4 years?

Yes. Adam, I -- this is nothing that we need to decide today. So we have kind of Phase 1. We will continue to go as planned. And then if we -- what we do kind of in '26, 7, 8 is something that can be decided later. We can continue as planned, meaning that we will ramp it until '28. This kind of depending on the market assessment in the second half of the year, we could also slow down by a year or 2.

And the next question comes from Gustav Froberg from Berenberg.

Also to just reiterate from previous comments, Rainer, best of luck in your new role. So on to questions. I just really have one and I think you've alluded a little bit to it earlier, and it's on cycle dynamics. I'm just trying to compare the current cycle as you see it with the one we saw in 2019 when we basically saw EBITDA decline year-on-year in '19, we saw further decline in 2020. And given what you see today and what you know today, how do you think the timing of the cycle will work this time around? Do you think that the inventory digestion is greater than or less than what we've seen previously? Yes, just basically any color around cycle dynamics compared with the past would be very helpful.

Yes. Sure, Gustav. And thank you for the kind words. It is -- it kind of fits a little like 2019. Those kind of the -- I mean, the market is down even a little further. The big difference is really that we do not see pricing pressure. And so kind of -- but the starting point is the same, right? 2018, end of 2018 was particularly strong. Customers were still taking spot volumes. And that's kind of the same that we saw end of last year. I mean, customers took spot orders, spot volume. And they also said they would take more spot be in Q1 this year and then suddenly kind of inventory went up in inventory data on inventory always comes late and kind of we realize very light there is an issue. And then customers reduce wafer starts. And then kind of we are behind the -- I mean, our cycle is like 6 months behind the semi cycle, which is kind of takes a long time until we are told to reduce wafer starts actual year result in lower wafer sold. And so also the uptick takes 6 months later on our side. But really -- I mean, it feels like the last cycle, but the big difference is that there is no pricing pressure. And I truly believe that the reason is that -- I mean, first of all, we have a lot of great LTAs, but also on the shorter term, we do not see pricing pressure and customers really expect that wafer supply might be pretty tight next year.

That's great. Just a follow-up on the LTAs. Could you remind us of the percentage share covered by LTAs currently, please?

2/3, roughly. No change.

So the next question comes from Jurgen Wagner from Stifel.

I have on solar wafers. Given the current initiative of our green government to subsidize electricity quite significantly. At what point would you consider the production of solar wafers being an economic alternative? I know that you previously said an option but now things seem to change in terms of production costs. And all the best...

Yes, thank you. I think we will see each other soon. So yes, I mean, solar base. I think the last solar wafer we sold in 2008, and this is really not a business for us. I mean this is kind of -- I mean, I saw solar paper manufacturing in China. So these new tolls where they have thousands of products to produce a very, very cheap product in the manufacturing cost of a solar wafer maybe 10% of electronic rate wafer or maybe even less. This is really nothing we are interested in. And I mean, personally, I obviously follow that discussion with a lot of interest, but that is definitely nothing we would ever engage in.

[Operator Instructions] And we have a follow-up question from Robert Sanders from Deutsche Bank.

Just picking up on the pricing commentary you made. I mean if pricing is stable and the industry is worried about tightness next year, why don't either customers continue to build up inventory? Or you run your factories flat out in order to take market share next year because you'll have the volume and no one else will. I mean, that's a bit I don't quite follow.

Yes, Rob, I think customers already built inventory, and they now realize that their warehouses are full and they have to reduce and then also on our side. I mean, you always -- I mean, you're thinking about let's pre-produce, I mean, kind of the capacity that we don't use today has been gone. But I mean, history clearly tells that good leadership means to cut immediately and don't transfer the problem, right? I mean, it's kind of -- if you let it go in Q1 and then you might have a problem in the second half of the year. So it's clearly good leadership is having flexibility in the company being able to cut quick but also to restart quickly. So we are ready to ramp up production quickly as soon as the demand comes back. But as it's always difficult to predict the exact timing, we actually reduced our manufacturing output in line with market demand. And I'm 100% certain that, that is the right thing to do because otherwise, we would just push out the problem.

Got it. And the only other thing I wanted to just ask was around prepayments. So CIMCO makes a big deal that none of their expansion is contingent on prepayments. What they argue is that companies like you and global wafers are kind of obligated to ramp at full speed because of prepayments. So can you just sort of contrast and compare what you're doing with prepayments with the company that is just building to demand as they see it. Is there an obligation for you to kind of buildup regardless of the demand picture?

I'm not sure -- I mean, I'm surprised to hear that comment not sure, it makes a lot of sense. I mean we're -- our LTAs sell wafers, not a specific factory, right? So I mean, if we would realize that the overall demand is growing less than we had expected, and we have sufficient existing capacity, we would not be obliged to expand factory. That's why I said before kind of if we later realized this year that the demand picture for the next 5 years is probably lower than we thought before, we could very well slow down the expansion. I mean, Rob, I actually do not see that. So I would, as of today, I think that we would continue to ramp. But the LTA is just obliged to sell vapors, but it does not tell from which factory necessarily.

And the next question comes from Martin Jungfleisch from BNP Paribas.

Just a quick question on the margin guidance. I mean, do you expect sales basically flat quarter-on-quarter in Q2, but margins down at the midpoint. And if it's not pricing, what is the primary driver for this? Is it ForEx and personnel costs? And then maybe generally on costs, I mean, obviously, the market is not something you can control. But what are you doing in order to keep profits at a certain level? Is there any levers that you have a stronger influence on...

Sure, Martin. So the margin in Q2 is down very little. And the biggest driver for that is exchange rate. You're right. And I mean, then there's a small minor things, for example, kind of to be first in, first out in January, you still use a lot of materials that you actually bought last year. And in Q2, then the only consumer material that we bought this year, but that is small effects, but that is the reason for the guidance. Now profitability is sluggish, and we do a lot of things. Like I said, we don't pre-produce. We rather try to reduce the workflow for us temporarily to also see the reduction in in labor cost. And what's probably most important on this time is keeping the productivity up, so reducing temporary people, reducing our accounts and so on. And then also on the -- we saw significant inflation in our material costs last year, also in electricity. We are trying to take the right decisions now to make sure that our electricity costs come down next year. We see some reduction already in spot prices now. And we try everything we can to change the course of the supply cost. So rather to see -- I mean, first of no further increases, but then maybe going into next year, some first reductions.

Right. Great. And all the best, of course, for the -- sorry, future.

And we have one more follow-up question from Adam Angela from Bank of America.

Just a quick one. I was wondering if you could go a little bit deeper into logic foundry versus memory, both on the inventory side and then, I guess, as a result on the demand side as well would be great.

Yes. I can. I mean we cannot make any specific comments on the individual customers. But obviously, there -- if you look at the logic company, they, in their own communications seem to be through worse they see improvement starting in the second quarter already. Foundry, obviously, is kind of always sees a bit more of a reduction. But if I wrap the transcripts of some of the foundry customers correctly, they also seem to be a bit more positive about the second half of the year. And then in memory, I guess, we would all say that they were slow to accept that they have to reduce wafer starts and that they kept producing. And memory is probably the area where we see the highest inventory level. So that will be the area where it takes most time to actually get back into growth.

[Operator Instructions] So it seems there are no further questions at this time, and I hand back to Verena Stutze for closing comments.

Thank you. This concludes our Q&A session. Thank you for joining us today. We hope you will join us again in our H1 '23 release on July 27. Have a good day. Goodbye.