Wolfspeed, Inc. (WOLF) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome back to the Credit Suisse Tech Conference. I'm Chris Caso, Credit Suisse semiconductor analyst. So our next and personally, my last presentation of the conference is Wolfspeed. Gentlemen, thanks for attending.

Well, thanks for having us here. We're thrilled to be at the conference, and it's been a good start to the day so far. So glad to be here.

Yes. It's been a great conference. We've learned a lot and obviously the place that you guys are participating as a very high interest to investors what's going on with silicon carbide in electric vehicles. So maybe I'll start by giving you a moment for maybe some of the folks that aren't as familiar with you and give a kind of a quick overview of what you do and where you fit into the semiconductor ecosystem?

Yes. So Wolfspeed, we're in the middle of a major transition in power semiconductors. And I think we're kind of at the center of that for the most part. And we have a product or a material called silicon carbide, which is really highly efficient in high power electronic applications. And you can think of things like electric vehicles or other nonautomotive type applications as well. And what's happened over the last several years is with the advent of electric vehicles and the adoption rates picking up, it's created a great market for silicon carbide type products. And the volumes with the electric vehicle adoption rates picking up, what that's created is an opportunity to create volume. And that volume zone is given the opportunity for us to take cost down. Silicon carbide has always been a great product from an efficiency standpoint, but the cost is relatively high. What's happening now is that cost is coming down. It's creating a great opportunity both in electric vehicles, but also in nonautomotive applications. And that's opening up a number of high-power applications outside of automotive as well. And we're seeing -- and what that's translating into is very high growth rates, not just for us, but across our industry and you can think about our market growing 30% to 40% out to the end of the decade.

And Chris, just to throw a couple of data points out for the group here. In the last 3 years, the opportunity pipeline has gone from $5 billion to $40 billion. And those are things that might traditionally today be silicon that we think we can convert to silicon carbide. And then in the last 3 years, our design in total. So agreements with customers total more than $14 billion. So we really have seen an opportunity to capitalize on what Neill just outlined.

And maybe a place to start. And I mean the company has been in transformation for a while. And silicon carbide is one of these technologies that's hot now that people are talking about. But you guys had to make that bet a while back. So maybe talk about what did you see that allowed you to make that bet and what were the core technologies within Wolfspeed that allowed you the tools to make the bet.

Wolfspeed has a long history in this technology. If you go back and look at our history, in a previous version of the company before our current management team is there, people kind of knew the company as Cree, which is primarily the lighting and LED company, which is one of the applications for silicon carbide. So over 30 years, we've made a significant amount of all of the silicon carbide wafers in the entire industry, basically building off of that LED franchise over 30 years. So we have deep domain expertise in this kind of burgeoning technologies. So we've been doing it for a long time. When Gregg Lowe came in as our CEO, he did a real pivot to really think about the opportunity as you think about automotive and the electric vehicle adoption rates and other applications to really focus on this part of our business, which is the silicon carbide kind of power applications. And that's been a real change. We divested those assets. We changed the name of the company to Wolfspeed. And we've been really focused on investing in this kind of really high-growth opportunity where you have a really nice competitive advantage, both from a technological standpoint but also from a know-how and experience standpoint as you look over time. So we've invested in a lot of capacity to start to bring this type of opportunity to kind of reality as you look across the industry.

Great. And I guess the silicon carbide really becomes an enabling technology for EV inverters. And I guess there's really no other alternative for that if EV adoption is going to take place.

It's really important because if you look at the -- an electric vehicle, the highest cost part of an EV is the battery. And by using silicon carbide in the inverter of an electric vehicle, you can get between 5% and 20% efficiency improvement. You can get that in 2 ways. You can take the battery and make it a little bit smaller, a 5% or 20% smaller and get the same range or you can keep the same battery size and get 5% to 20% more range. So it is like the #1 kind of Pareto item if you think about range. And in electric vehicles, as you think about competitiveness and selling them, I think what OEMs have come to understand and realize and compete on is range. Range anxiety for customers is important and silicon carbide is really the basis for creating extended range of vehicles. We just did a deal with Lucid recently where they use not just our material, but they use our devices and our modules. And I think that's over 500 miles of range on now. It's one of the highest in the marketplace. So extending ranges is really important at silicon carbide plays, not just a role in the efficiency of the vehicle, but also extending range and creating competitiveness for our customers.

And Chris, I think thematically, the way that we think about this is that electrification right of the powertrain. If you believe that EVs have a sustainable future that a great way to derisk investing is to think play silicon carbide, just because of all the characteristics that Neill talked about, it's a highly efficient technology. And this is where when we talk with automotive customers, there was this debate early on about wall, I'm on a 400-volt bus I'm on an 800-volt bus. The market's moving to 800-volt bus, which is then it's a perfect fit for silicon carbide. Silicon carbide can go into the 400-volt design solutions, but it looks like the market is kind of moving that way for the reasons that Neill just outlined, range and charge time are the 2 things that a consumer is thinking about.

Right. So maybe you could speak to the competitive advantage that you have, both on the material side and device side. And I'm sure what you're going to say is having both of them is a competitive advantage in itself.

Well, I think #1 is, I think -- and you're seeing this in a lot of places, like vertical integration for silicon carbide companies is important. And the reason for that is it's not just about the base material, but the integration of the material, I would think all the way through the supply chain. So think about it from the material itself to the device, so creating like a silicon carbide MOSFET and how those 2 things work together is important. Then as you take those devices and put them into modules, wrenching out and getting more productivity out of the module itself is still in the very early stages. So integrating with customers around technology, around the packaging and the integration of the chip with the module continues to be important as well. So in the early stages of this supply chain, having vertical integration, I think, is still -- continues to be an important piece of the puzzle. The second thing, and I think it will be that way for a while just because of the early nature of what we're looking at. The second thing is that customers from a kind of a vertical integration standpoint, they're very interested, particularly after the supply shortage in silicon over the last several years. They're particularly interested in having a good understanding and control with their suppliers around the entire supply chain. So from the module or the chip all the way back to the material. And that's something we can provide. We have the largest materials capacity capability in the world. We've had 60%-plus market share on the merchant market for silicon carbide for the last 20-plus years. We've obviously done this over a long period of time. We have the largest silicon carbide materials factory down in Durham, North Carolina and just announced a new facility that will be more than 10x larger than the largest one in the world already. So when we talk to customers from a competitive advantage standpoint, yes, the technology, the deep domain expertise is important, but also that capacity and control over the supply chain and seeing that we've got opportunities to control the amount of capacity that comes online is important as well.

Great. Maybe you could speak to getting down the cost curve on silicon carbide. And knowing this is something challenging and getting the bulls do longer and you know where I'm going to go with that. And it's -- more recently, it's proved to be more challenging. So I mean, first, talk about the importance of getting down that cost curve and getting to the longer bulls what do you expect that to do to the cost of silicon carbide over time?

Well, it certainly come down, and maybe I'll start off and Tier maybe you want to hit a couple of things here. Maybe I'll talk a little bit about like why is it so difficult? Now silicon carbide is -- to grow crystals with silicon carbide, -- you're talking about temperatures -- temperatures growing in these furnaces that are kind of like about half the temperature of the sun. So they're very, very hot. As Gregg says, you can't kind of take the top of the lit-off and take a look at it kind of midstream to see how it's going. So you're dealing with very intense heat in order to grow the crystals. The second thing is that it's the -- I think, the second hardest material on earth -- so once you do have a good crystal, which I'd say is the hardest part of the process, then you have to be able to cut it, grind it, polish it and get it ready for epitaxy and eventually get it into a fab, Working with a very hard and also but [ brittle ] material like this also creates challenges downstream. And it's very finicky. So it becomes very difficult to work with, not just in the crystal growth but also in the wafering operations and it's actually there where we had some of the challenges. So you really have to get to scale and get to a lot of learning cycles to get just the crystals to grow, get them to yield. And then as you look downstream, you start to think about the other operations and getting those to work as well can be challenging. Now what we've done is we've expanded in, I think, a fairly uniform type of fashion. So I think over time, as you start thinking about us expanding the facilities, it will really be about settling down those processes and then making them repeatable.

Yes. And Chris, it's a good point to bring up above the cost curve because at the same time, we're going through a diameter shift. We're going to go from 6 inch to 8 inch. Our Mohawk Valley fab is going to be running exclusively 200-millimeter wafers, which changes the economics on devices. And so to the points that Neill made, I think scale is where we sit today. We think that, that's a competitive advantage. That's why we have been talking a lot about capacity expansion. I mean today, we run the world's largest materials factory for silicon carbide. In September of this year, we announced that we are going to increase that by 10x with the establishment of our Siler City materials factory. So once again, creating the world's largest materials factory. And the same thing goes with our fab strategy, too. We haven't -- we've built Mohawk Valley. We've been talking about adding a second fab somewhere in the U.S. or Europe. So for us, the more capacity that comes online in the next several years, we think is good for the industry. But to be honest, we know that it's not enough.

And I think that's a really important point, Tyler. As you think about where we sit today, we're shifting from 150 millimeter to 200-millimeter wafers. The Mohawk Valley facility will be a 200-millimeter only. And as far as I know, we're the only company commercializing 200-millimeter wafers at the chip level today. And what that's going to do for us is -- and typically, it runs the same math as you would do silicon and silicon. If you make a diameter change, you get about a 40% cost improvement at the die level. Now our Durham facility today runs at 150 millimeters. It's a small facility. It's essentially an old LED factory. We're trying to make automotive grade MOSFETs in, which can be challenging, which is why we're expanding the capacity into these bigger kind of modern facilities. But because of that, when we make that transition, we'll see well over a 50% cost decrease at the die level at the chip level or product level when we make that transition. So the path to cost improvement, I think, for most people is to get volume to drive this down. But for us, in addition to that, we've got a unique capability in having a 200-millimeter wafer, which is going to give us a nice competitive advantage. I think on the cost side when we think about driving that through a highly automated efficient facility at the higher -- the larger wafer diameter.

And speak to some of the challenges we've had more recently, which is, I believe, was on the -- more on the back end on the substrate. And I guess that is the slicing of the wafer was that where the most recent challenges have been?

Yes, we talked about a few weeks ago at the earnings call is -- one thing that we're always doing, I would say our team has done this for a long time, and we have our own internal roadmaps around engineering programs also science projects, I would say, around driving costs down and driving efficiency into the materials themselves. And part of one of those programs was to create longer bulls. And I think it's a fairly obvious setup from a productivity standpoint. And I would call it the proverbial good problem to have. A longer bull creates incredible efficiency gains. I think over the long-term, this will be terrific for us. But in trying to handle those longer bulls, we had challenges, and I talked about downstream processes related to our materials manufacturing. As you got into those downstream processing, small changes in that downstream process can create challenges, and that's what we saw. Now those are temporary in nature. I think we've got a great team. We have people who have worked with the company 30-plus years. One of our founders, who still works at the company, I call him up and gets -- he's down on the floor working through these things. They do a terrific job. So these are things we'll see a kind of a curve come down. You see some yield challenges. The teams get involved in it, they identify what the challenges are and you start to come back up the curve again. And this is not atypical. You've seen this before when you make a change. There's some yield challenges. I would say this one was a bit steeper, maybe a bit longer than we've seen before. But I'll also say that the advantages of the longer bull are probably better than a lot of the other programs we've seen before as well. So as we get through this challenge, I think we'll come out the other side a lot better for it.

Right. And that longer bull just simply cut -- reduces the -- reduces the substrate cost over time.

Right. So if you think about it by having a longer bull and you get a certain amount of wafers per bull off of that bull by having a longer bull, your opportunity for the number of wafers per growth period -- increases. So you get more wafers per run. And obviously, each time you go through a crystal growth process. You've got to take the machine down, cool it off, clean it and go through another cycle. So by doing more wafers per run, you get a lot of efficiency out of that.

Right. And where do you think you stand competitively with that, both in terms of the longer pool, the move to 200-millimeter -- where do you stand versus others in the industry?

Well, on the material side, we're notoriously secretive in terms of what we're doing. And I would have to admit if we did not have the yield issue, we probably wouldn't be talking too much about the longer bull. So I think you can get an idea what that is, but I think others are also and reasonably, I think, somewhat secretive about what they do with their bull lengths. So I can't really say exactly what that means versus what others are doing on the bull size. But from a diameter perspective, we did our first prototype and correct me if I'm wrong Tyler in 2015 for 200-millimeter. As I think one other company as well. And it's taken us 7 to 8 years to get from prototype to commercialization of the product. So it does take a long time to get there. And it's -- I don't think it's unusual in silicon carbide to have that kind of long period of time to get to that length.

Yes. I think, Chris, we talk about the competitive landscape as our rivals because we're still very early stage making a market for silicon carbide. And that's why you see us, we're vertically integrated. We have agreements with large device players. At the same time, we have our own device business. And as Neill points out, it takes cycles of learning to be able to improve the quality of your material to improve your yield. So where we kind of sit today is it's extremely important to continue with the development of material continue to supply the market because, as I said, we're still very early stage. And where we sit, demand is going to outstrip supply well past 2030. So I think where we sit, we will continue to push our own capabilities. At the same time, we hope the rest of the industry, our arrivals continue to look to expand their capabilities too.

Right, right. And I mean as you walk down that cost curve, who captures that value in the end, meaning that right now, it's an enabling technology. We need cheaper silicon carbide devices in order to enable electric vehicles. If you do it first, you imagine you're going to capture most of the value on that, but then you get a benefit from additional electric vehicle units, which you're enabling.

No, I think that's right. I mean it's following, I think, a path and an early technology path. And I think the important thing is when we started this journey several years ago to really focus on this was to create a market for this material. And that obviously has pricing arrangements that go out over a long period of time. So customers can have certainty as to what that is and what that looks like. But what that -- what's important there is at a certain price point, customers have voted and they've said, silicon carbide at this price point with these long-term agreements that we do, whether it be a materials or devices or us and others as we did for them, they voted and said, "We want silicon carbide in our vehicles at this rate of return at that price makes a lot of sense". So I think that's already -- in my mind, that debate about what's the right pricing or what is that market going to look like has already been decided and customers had voted, a lot of design-ins, a lot of orders have been won, and they continue to come in. So I think we're seeing that already. So what that's going to do then is create a lot of volume, a lot of volume certainty, which is what makes us really confident around looking at that long-term opportunity. If you think about an automotive deal, today, we get a design and it takes about 4 years from design in to the time the revenue starts to ramp. I think about a model year for a vehicle, it takes another 7 years for that cycle of that vehicle to [ gestate ] over time. And then in the middle 2 years, you start to see the peak of that revenue. So it's really 7 to 8 years, you really start to see the peak of that design. And so there's very good revenue visibility, I would say, out in time. We've also done some assurance of supply agreements. We just announced a deal with BorgWarner, where there's obligations on both sides to commit revenue and volume. So I think we're getting a lot of that visibility to what's out there. What that means is that translates to, okay, now the real key is we've got to invest in supply. And that's what I think retailers going is that getting ourselves now funded and investing in CapEx and facilities to support what's going to be likely a capacity-constrained industry between now and the end of the decade.

Right. And you mentioned long-term agreements, and I wanted to kind of move on to some of the capital investments that you're making right now. So it's safe to say, all the capital investments you're making now are backed up by long-term agreements that this is your customers making commitments to you then you go out and getting the equipment?

So the way that it works normally is on the material side, we have -- we sign up and I think roughly about 70% of our business was under a long-term agreement, 60% to 70%. We don't play in any type of spot market. So even anything outside of those agreements would be a longer-term arrangement at least a year plus in terms of how we think about that. So I know it will be long-term in nature. On the device side, it follows pretty much the typical semiconductor kind of model, I guess, I would say. And that's now changing. You go out, you get a design in with a customer, they have a model year vehicle they're doing, if it's in an automotive application and then it follows the cycle, it's a cycle that I discussed earlier. But what we've seen change recently is that with our announcement with BorgWarner is that customers are really concerned about and focused on assurance of supply. So they're coming to us looking for opportunities like we did with BorgWarner, around how to get committed supply over a certain period of time and they invested $500 million into our financing a couple of weeks ago, try and get a corridor for them in time. So I would say it was following more maybe the historical kind of semiconductor cycle where we would get design-ins and then go build factories. But now I think that's shifting somewhat, and we're starting to see more and more committed supply from customers over time. I don't know, Tyler, if is there anything I missed that.

No, I think Neill makes a great point, which is the BorgWarner deal has top and a bottom in terms of commitment from them on what they're going to purchase every year. But I think the point that we want to make is that these types of deals, like the way to think about this is kind of if we were selling seats on an airplane, first class is kind of sold out. Now we're kind of in economy plus selling those aisle seats. And then eventually, as you get to the middle seats, they're going to be more and more expensive. So I think the thing to watch is continued interest in securing capacity corridors, but they're also going to get price tier and the opportunities are going to become less and less.

And what does that mean with regard to financials? Because right now, you're kind of in an investment phase, there's a lot of capital commitment that you have I think your comments were like free cash flow positive in 2026, if memory serves correctly. So you're in an investment phase now and then kind of how does that ultimately pay off as you fill the middle seats at higher prices? Is that really kind of where the margins and the cash flow begins to inflect?

Well, I think that if you look at what the capacity that we're installing, I think it's really important to understand what we're looking at here. If you look at like Mohawk Valley, the fab that we're building up in upstate New York, that's a 200-millimeter. If you go back several years ago, the difference now is we've proven out 200-millimeter, we grow crystals. We do epitaxy on them. We've run wafers through the fab. We've seen very, very good yields, both on a pilot line that we've had there as well as what we're running through the fab today. So -- and in fact, those yields are better than we had on our 150-millimeter platform. So we've actually seen improvement already. So getting more and more confidence around what we're seeing out of the 200-millimeter platform. If that pays off like we think it will, and I think -- and within very reasonable constraints or reasonable specifications, as you look out in time, these factories are very solid cash flow generating vehicles. So think about Mohawk Valley, for instance, at full capacity, it can generate about $2 billion of device revenue per year. But it can generate about $1.2 billion of cash, cash flow. So you're talking about a 200-millimeter fab, but we're automated, we're not talking about a [ bleeding ] edge node technology here. We're talking about a fab that cost roughly on a gross basis, $2 billion to build. We've got incentives for about $1.5 billion. So for about $1.5 billion of our net cash that we're going to invest, we'll get a $1.2 billion cash flow generation vehicle per year. So it's going to take some time to invest in these things. But the return opportunity and the cash-on-cash returns for those things are really terrific. So it's really a matter of execution, I think, between now and that timeframe of bringing up this capacity, building it out in such a way where it creates these really good returns. And then over time what we'll see and we've got very good visibility, obviously, to what the outlook from a volume perspective looks like. And then these factories will generate, I think, terrific returns for us over time once we get these facilities up and running.

And Chris, what we tried to do at the Investor Day a couple of weeks ago is outlined the capital plan. It's $6.5 billion. We got this convert on it, $1.75 billion, there's still some cash that needs to be raised. But what we're trying to do is kind of outline where we see our footprint going over the next several years, and we know that there was a bit of an overhang on the equity as we started to talk about this plan. But I think we're just going to kind of give you a plot points along the way. The underlying economics that Neill just outlined is something that we'll update every quarter to kind of give people kind of a report card on progress.

Right. We about 5 minutes left. If there's a question from the audience, we can take it. Rob, it sounds like we got 2 questions. Which Rob? I will give you. Rob, we'll give Rob the client before Rob, the salesperson.

Just at the Analyst Day, you talked a little bit about the next 200-millimeter fab, maybe just an update on timing and where in the world you think that will materialize?

Thanks, Rob. So a couple of opportunities here. I think if you look at the government incentives, it will play a role I think, in how that works. And I think you saw the U.S. CHIPS Act was passed. We're very happy about how that's kind of turned out. We got a chance to talk to some of you about that. We've also been engaged outside of the U.S. I think the European processes are also looking very solid. So really depend, I think funding will certainly play a role in where that happens. It could be -- I think -- and I think we could see a fab either in the U.S. or potentially in Europe as well. So I think both of those things are on the table right now. And I hope -- and we're hoping to know maybe early as you get into calendar year '23, where that will end up. So we're working towards kind of a timeline in that type of -- the type of the framework. And what we're shooting for is set up in terms of what we had in building Mohawk Valley. The fab itself will likely be bigger than what we have in Mohawk Valley. But if you think about it, we had about 25% of it funded through government incentives. And then we're shooting for something, I think, similar with the next fab.

Just a quick question. Soitec issued a press release that STM will be qualifying Soitec's SiC substrate technology over the next 18 months for future 200-millimeter substrate manufacturing. Just curious on what the implications are for you guys? And then more specifically, the implications as it relates to Soitec's Smart Cut technology being more broadly adopted. I mean is this something that Wolf would consider licensing from Soitec potentially?

Well, I don't -- I can't really talk to specific technologies and what people are doing. But I think the obvious thing here is that what you have is an industry that there's a huge opportunity in okay? And a lot of people are working on a lot of different things, trying to solve for that equation in terms of what we're looking at now. What I see today is deals that we're doing that stretch over multiple years. It has kind of talked about the timeline. And a lot of these decisions are being made today. And when we get down to that kind of maybe [ final 4 ], final 2 and a lot of these deals, what we're seeing today is silicon carbide-based technology. If you look like back from just a couple of years ago, it was maybe silicon versus silicon carbide, that's completely changed. I think it's very much just silicon carbide versus silicon carbide, and that's what's being one today. Because I think there's potential for future technologies out there that could enhance supply in the industry. But I think that's still a ways from playing out.

You talked about some cash that still needs to be raised. Can you just talk about the timing and the highest probability options that you [indiscernible]?

Yes. Well, we did the convertible offering with BorgWarner being kind of the anchor a couple of weeks ago for $1.75 billion. So you can kind of think of that as being kind of the first tranche. I think that gives us a nice opportunity and certainly takes -- gives us some flexibility in terms of what timing looks like going forward. We don't have to go out immediately and do something. I don't think that's necessary. However, we're going to continue to watch cost of capital, look at dilution and look across the 4 vectors I talked about at the investor update, which was the government incentives, talked a little bit about that. Customer financing. We've been successful with BorgWarner executing that. The other one was public markets, convertibles. We've done ATMs before with shelf registration. And then the last one was the project or private financing. So we haven't tapped that one yet. That would be the obvious next choice. However, it will just depend on what the market looks like. What we will do is be very thoughtful. There's a lot of options that we have on the table, but we just want to be thoughtful about managing what I said, both cost of capital and dilution. And as we move forward, we'll be opportunistic and look at what makes sense. But I can tell you, we're working at this every day. And if the right deal came along that made sense. I think we go execute it. But like I said, I don't think we have to just given what we did a couple of weeks ago.

Okay. And maybe just following up on that point with a little bit of time left. And it sounds like a project financing would be along lines to what Intel is doing right now with their Arizona fab. What they've said is there's a substantial amount of interest in doing that. And I guess the way that would work is there's some partnership in terms of the upfront capital commitment and then that partner would take some piece of the revenue stream on that facility going forward.

Yes. I think there's a lot of opportunities. That's one potential, but there's a lot of different opportunities out there as well that we're looking at. So I think if you look at the -- if you look across that whole arena, I mean there's different types of potential. I'm not saying we're working on that type of things specifically, but there are several different ones. I am familiar with that kind of as you laid it out, Chris. So we'll just continue to watch and see what the opportunities are that are out there. We're working a lot of different pieces pretty actively and then we'll go from there.

Okay. And I mean I guess that's a function of a higher rate environment where perhaps when rates are 1%, 2%, you don't need to be as creative. That's a pretty easy one. Now we...

We have a multi-decade opportunity in front of us. And the markets now are more variable and maybe a little bit more challenging. We can't really let that slow us down in terms of what we're seeing as a secular change in the industry. So we're going to be really thoughtful about how we manage through this. What we are going to do is continue to move forward because I think from a customer perspective, having additional capacity to bring on behind what we've already announced is really, really important and it's something that we're really, really focused on. So we'll -- like I said, we've got a number of things we're working through. You mentioned one that could be a potential out there if we wanted to go that way, but we'll look at a number of other things as well.

Got it. Well, it's very helpful. Unfortunately, we're out of time. But Tyler and Neill, thanks for your time.

Thank you.

Thanks, Chris.

Thank you.