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

Perfect. So welcome, everyone. My name is Jed Dorsheimer. I'm one of the analysts -- one of the newest analysts actually at William Blair, joined 9 months ago and had the privilege of heading Strategy for the Energy & Sustainability Group, which is a new group at William Blair. We have a, I think, unique thesis, which looks at energy as an organizing principle for value creation. So what the hell does that mean? It means that as the quality of energy resources comes down. It's going to change the value proposition. One of the areas that we focus on is energy efficiency. And what was revealed is that in semiconductors, we've always focused on silicon because it's cheap in terms of transistor density, et cetera. I like to think of that as sort of that 1950s-big car with the fins on the back. You didn't worry about the cost of gasoline after the oil embargo, we worried about we focused on efficiency. And semiconductors is going through a similar transition, particularly around power where now the value proposition of compounds is actually going up, which always was more expensive, but now as energy costs rise as a percentage of GDP, It's changing things, Okay. So we have Wolfspeed here today that's a leader in silicon carbide used to be Cree. Changes name to Wolfspeed as it divested of some of the LED business, compound semiconductor, known as silicon carbide kind of putting together 2 materials that don't naturally form easily. And so very controversial name that in the space, so always good in terms of, I guess, volatility and something to talk about, which is good for me, I guess. And so I asked Tyler, who's all the way on the right, Head of Communications to think about at this conference, let's put together and bring Elif Balkas, who's CTO to talk about some of the challenges that Wolfspeed is going through as well as the opportunities on going from 150-millimeter to 200-millimeter as a way to drive down cost to ramp on the back end. And then let's bring the front end, which is Missy Stigall to my right here, who's Head of all global fab operations at Wolfspeed. Now our compliance would be upset with me if I didn't say go to our website for any important disclosures. And with that, we're going to shift instead of doing a canned presentation to go through more of a fireside chat. And maybe to start off, either Tyler or Elif -- maybe just take a couple of minutes to frame out where you might see things a little bit differently in terms of how I laid that out and what -- some of the questions that you've been getting today already or from investors, how should investors somewhat newer to the story, think about silicon carbide and Wolfspeed.

Okay, I think. To start, as the world thinks about saving energy and when we first started working with Jed several years ago, there was this dire interest in being more efficient as you think about the transition from internal combustion engine to electrified powertrain. And this is what created an interesting opportunity for silicon carbide. What's happened over the last several years in silicon carbide is the cost curve continues to come down. And what that has done is it's to open the aperture, not only for automotive, but also for industrial and energy. So when you start to think -- think about things like motor drive and heat pumps and the wide variety of applications, this is why we're kind of sitting here today because as efficiency in energy management becomes a bigger and bigger topic, silicon carbide is kind of at the center of the bull's eye. And so what we're doing and the way that we think about the market is that last fall, we announced a capacity expansion plan that required about $6.5 billion of investment. And what we're focused on today and what the team can talk about in greater detail is our domestic footprint expansion for the next 12 months, which is essentially 200-millimeter substrate growth on our Durham campus, which then gets -- those wafers go up to Mohawk Valley to our state-of-the-art 200-millimeter fully automated fab where we're going to be producing devices. And just to put this into perspective, the Durham fab today is a manually oriented fab. We touch wafers about 10,000 times or more a day. When we go up to Mohawk Valley, we will not touch a wafer. Everything will be fully automated. So you think about cycle time, you think about yield, you think about the dramatic shift in the operating profile of Durham versus Mohawk Valley, that gets us pretty excited. And then tying into that is we're going to need more wafers to feed New York. And so what we're doing is we're building the world's largest silicon carbide 200-millimeter materials factory in Siler City, a 450-acre campus that is going to be -- once again, state-of-the-art compared to what's out there today. So that's a quick summary. So we're scaling capacity as quickly as we can. We're focused on our U.S. footprint at this time. And I don't know, Elif, do you want to talk a little bit more about technology.

I want to actually give my perspective from the technology side of things. It is [well] speed and prior to that is created, we've been working on silicon carbide-based technologies for almost like 40. Is it better now? Maybe I hold this closer Yes. So it's going to be, I think, soon 40 years, the 36 years, we've been working on silicon carbide-based technology solutions that materials side of things in conductor to begin with, but working on the ADDs optoelectronic solutions for years and then bringing power electronics for good 20-plus years in the RF side of things. So for us, in the technology side of things, that we've been actually that studying and perfecting and then developing the technologies now is actually this really exciting time for us. The kind of like the name of the game is that how do we scale up, how we address the market need towards energy efficiency and electric vehicles market. But at the same time, for us in the technology field, also to work with our counters on the manufacturing and then leverage that excellence and to scale it up, whether it's in the durham facility, like Tyler mentioned that expanding into Siler and then feeding the Mohawk Valley fab and then also our next fabs in the future. So it's very, very exciting times for us. us in the -- it will speed the technology teams. It is something that they've been working towards for more than 30 years. And now we're seeing the applications and the first of it is -- we're all very thrilled.

So I want to jump to Missy for a second. Thank you, Tyler, and Elif and just frame for 1 second. So silicon carbide, you can do more with less. And so the electron mobility of the material allows you to do that. And we know that it's about 10x in terms of what you can do. The problem is that it costs more to manufacture this compared to that of silicon because of the challenges. And so Missy, if I just split the business in terms of now you're in charge of all fab operations. So if we look at Elif's side in terms of the technology to grow the wafers to feed your newest P&L, which is Mohawk Valley -- maybe talk about some of the opportunities and challenges at the downstream fab level in terms of what you're seeing in running the wafers through Mohawk Valley and how that maybe differs from Durham and then I'll come back to Elif.

Sure. It's a great question. So we've talked a lot about Mohawk Valley. It's the first only world's 200-millimeter silicon carbide factory. So there's no one else in the world doing 200-millimeter wafers on silicon carbide today. And so because of that, from an economies of scale, if you look at the semiconductor world today, you see a lot of announcements about 300-millimeter. Why? Because the economies of scale to go produce those wafers are there. For silicon carbide because it's so strong for us, the natural step was 150 to 200. So we've taken 300-millimeter technology from tools and automation, and we've brought it back down to a 200-millimeter level. So some of the challenges that we faced is really how one are we going to get these 200-millimeter tools to be automated because they don't exist today. If you look at 200-millimeter factories in the world, we have some automation, but a lot of that tends to be through robotics. And we will actually want to utilize the overhead space to maximize our clean room. The second piece would be not only how are we going to get them to interact, but how are these tools going to interact on a larger wafer diameter size given the fact that silicon carbide is so strong. It's the fourth strongest material in the world. And so we -- while we were building Mohawk Valley, remember, this started right during COVID, when we started building it, we actually had 2 sites. We had SUNY Poly that was doing a lot of the integration work. So you can't just flip a switch and go from 150 to 200 millimeter. There's actually a lot of integration work that goes into it because there are some tool differences. So we had a team that focused on that integration work at SUNY Poly. They also started working on what could these tools do from an automation standpoint, how could they receive this material. And then we had a second site that actually focused on the overall automation. And so we've really spent the last 4 years throughout the build of Mohawk Valley, focusing on, one, how do we get the best yield, the best quality out of these materials on a 200-millimeter space, then also how do we go take that 300-millimeter technology and make it work for Wolfspeed, so that we can also see those economies of scale from a P&L. And so that's really where our focus has been on.

So you talked about the hardness of silicon carbide second to Diamond and -- but it's also brittle. And so as you think about automation, where are the pockets of yield improvement in 200-millimeter automation compared to 150 -- is it in the litho, is it in [H]? Is it in automation, a combination? How do you think about your cost structure for that fab?

So a couple of things. One thing that we did with the fab overall was, again, we go back to that overhead delivery, we're able to go maximize our clean room space. So all of our materials stored overhead, which means I can put as many tools as possible into that clean room space. And because we have the automation, we also are able to utilize different guidelines for tool spacing. So we really look at the square footage and how many wafers per square foot. That's one advantage that we have. The second piece is exactly what you said. We've taken silicon carbide. We've looked at the integration of the technologies, and we've actually come back to figure out exactly what tools we need, what consumables. Consumables are big in the semiconductor market because these are the things that the tools utilize daily. And so we've been able to take advantage of some of the learnings we've had early on to make sure that we have the right consumable packages there. From a cost standpoint, it's really also on the labor side. If you look at 150, and you look at a lot of the older semiconductor fabs out there in the market, a lot of their P&L is really going to go towards the labor piece. That's where we win because by having this overhead automation, I don't have operators who have to carry wafers across a fab. With my automation, there's over 7 miles of track, I can have a lot delivered across my clean room in less than 2 minutes. If I also have a tool go down, I can reroute those lots to the next available tool for that. If you were in a manual factory today, you would have to have the operators go locate a lot. They would have to load it on to a car. They would have to push it to the next. So you can imagine these wafers [see variations] and things like that. So we win on the quality side, again, from a cost perspective, we'll be able to get more die out for wafer because we have less defects, less defects from the movement of the wafers, less defects from the handling and the wafers. And so really, that's why Wolfspeed's focus is 200-millimeter automated factories.

Yes. And I think to Missy's point, you wouldn't find this automation in anywhere, but maybe a 300-millimeter silicon fab and there's, what, maybe a dozen of those about that? Yes. So I think there's a lot of discussion within the industry about everyone's wanting to vertically integrate on silicon carbide. We're going greenfield. We're building brand-new facilities, state-of-the-art capabilities. Others are going to retrofit existing footprint. So we think from an efficiency standpoint, we're going to have an operating leg up because of the way that we've constructed the footprint.

And the retrofitting is going to be complicated, too. So if you have factories that are going to run on both silicon and silicon carbide, which I think that's where some of our competitors are going, those -- the wafers and the variation in the wafers is actually very different. So they're going to have to be very creative in how they go retrofit those tools. That's -- again, a lot of the work that we've spent the last 4 years is the wafer thickness is different because of the brittleness of the wafers, our consumables are being utilized different, and we have to handle those wafers differently. So even things like Chucks on a semiconductor tool where a chuck vacuums down a wafer, we've had to go in and make adjustments on that because of the brittleness and because of the thickness of the wafers.

So I want to address the elephant in the room, which is you have a beautiful state-of-the-art fab, and you need about 200,000 plus or minus wafers to kind of optimize it to 100% utilization. So Elif, I want to turn to you in terms of what you're doing to help Missy kind of get that utilization and how investors should think about growth where there's been some delays on the process for 200-millimeter to basically get the number of wafers that she needs to fill that fab, maybe an update there in terms of technology process. And then I do have a follow-up, too.

Okay. Sure. So I'll give that update on the both on the technology side and then how the collectively, we support Missy's organization to get the fab to running -- on the 200-millimeter, so years ago that we collected they decided that the Mohawk Valley fab should be 200-millimeter. Looking back, it was a really good decision because if it stayed on the 150, we needed to do all of these [indiscernible] and we need to go to 200-millimeter again. So I'm very happy with the decision. So looking at the 200-millimeter technology side of it, within the last, I would say that 3 to 4, maybe 5 years, we did very active work on the technology and then the way we brought it up to speed in terms of the wafer quality with respect to 150, we feel really good about it. So we're ready to ramp and scale the technologies. The update on the site at so when we think about our durham site, are historically as well that the 30 years at our R&D facility and as well as the pilot is in one building. So with respect to based on our demand, so we need to expand out of that building, that we run out of space and the equipment. So there are 2 activities that looking at the external demand, looking at our fab capacities and then our activities with Europe that we decided that we need to go much bigger and then we made the decision to build the make a factor in the Siler city. But in the meantime, that we also have activities to expand our capacities in the durham site. What we are doing is that what we call the durham extension that expanding with the second separate building where we built the crystal [brought] reactors. So that's been going well that we had, as you all know, that we have some -- the hiccups primarily because of the external supply chain-related reasons that actually delayed our [promise to] occupancy to start the reactors there. But then -- so that problem is behind us right now, and then we kind of started to ramp up the production there. Looking at the performance quality and the yields coming out of that building is looking really good so far and it's just basically a work in progress from now on. I'm also happy to say that -- back to the question about how we're collectively supporting Missy's organization. So that in our plan that the durham extension is going to get us to the 20% of the fab. And then we need to bridge it to the JP facility in Siler City. But from the technology and production teams, it is kind of like the ramp-up activities for us, it all has the change management and the further development and process optimization activities. And I'm happy to provide update that while we rented the durham extension that we are also showing the yield in progress currently into the -- providing more wafers into the fab.

So in -- when you were Cree and in LED, you went through a similar transition from 100 to 150 millimeter in terms of that optimization. That might be apropos for what you're going through now in terms of the 150 to 200. How should we think about the time line? Because if you're until the Siler City or the JP comes up, you're somewhat locked in the variables in terms of how much output you can have, unless you either get a taller [bull] or thinner wafer or some combination or higher yield, et cetera. So how should how-- what lessons when you talk about this 35 years, can you kind of parlay over to the 150 to 200 as we look at 50 to 100 millimeter transition?

Jed, there -- I look at it from 2 perspectives. I'll start talking from the technology accumulation perspective. So every time I've been with Wolfspeed that when I joined that we were just transitioning from 3-inch to 100 millimeter. But then if we kind of model, look at the 100 to 150 transition or every time that we transition that we kept also building the technology, the understanding and the maturity every time actually that I have a chart that when we introduced a new diameter product that we also show the quality to improve. And in 200-millimeter, actually there was the biggest improvement in the quality that we showed because what we did also with the 200-millimeter prior to that, we redesigned and established our growth platform specific to all that learning adapted to 200-millimeter and beyond with -- like you're saying that the high aspects of it or the further diameter aspects of it. So we're feeling really confident about that. So that's quality part of it. But then when we look at the -- when I study analysis -- analyzed the history, we did the 100-millimeter to 150 transition as Cree primarily for the LEDs is the largest the volume. There that after we established the wafer supply, we work pretty the good number of years to control the wafer breakage and then fab line yield. And then here, actually, we're in a completely different the zone that we are testing our wafers, they look really good in terms of the stress levels and then the breakage inherent to the materials. On top, on the fab that we're building all of the equipments that integrated with the automation because the reason that I think is very important today in the Durham fab with are the enhanced 150-millimeter materials that we still see the highest yield head as the breakage in the durham fab.So it's very, for us, the promising to see on the Mohawk Valley fab actually that breakage is really none to very minimal. So from that perspective, so there are 2 components that our technology keep advancing, but our manufacturing skills and the styles and the infrastructure is developing as well. So Jed, I think that we're maybe 1/3 of the time in terms of the rent.

Great. Tyler, I want to toss it back to you. Thank you, Elif. And if I kind of look -- taking a step back, you broke the cardinal rule of that Intel says only change one variable when you're going through a process change and you decided to change 3. And so now as we're kind of -- instead of looking back on a post mortem kind of where we're at and where you're at and kind of moving forward, how do you think about -- is the patient been stabilized from listening to LF and Missy in those 2 components, there's this 1/3 of capital maybe spend a minute talking about because you threw out a big number of $6.5 billion -- what's still needed? Where are you in that process? And how should these investors think about that in terms of potential dilution in what's left?

Well, thank you, Jed. It's a good question. And since last fall, we've kind of talked about 4 buckets of financing. And right now, the way that we think about it, we need about $1 billion between now and the end of this calendar year that we want to raise. But let me take you through the 4 buckets of financing. First of all, there's customer funding that we've done things like with BorgWarner and with General Motors to where they've provided some capital upfront to allow us to expand our capacity. So that's one bucket. Next is government funding, and we can unpack that a little bit more if Jed chooses to do so. But Chips Act funding, European Chips Act funding, there's a lot of things that are coming in the next several quarters that will help underpin our expansion strategy. The next is what you would traditionally know as equitize or converts and ATMs. And we've done that. We've tapped the capital markets. We did a $1.75 billion convert at the end of last year. And -- but that does put dilution into the market. And where we sit at the current stock price, we don't think that's a viable option at this point. The last bucket is kind of project financing. So that's things like sales leaseback or term loans. And that's something that we haven't done, and that's probably a path that we're looking at very closely right now as the next viable solution or an alternative for funding, and we're looking at that path. Because like I said, I think we're focused right now on domestic U.S. capacity expansion, Siler City, Building 10, ramping Mohawk Valley. And that really is that next $1 billion of capital that we want to raise is underpinning those activities. We've talked about further expansion into Europe and the importance of doing so. But that's more of a fiscal 2025 thought for us. Right now, we're really focused on what we need to get done here in the United States.

Tyler, you opened the door, so I'll go in, but maybe just unpack the government funding, the 48D that's been filed. And a lot of these people probably aren't aware of some of those moving parts. So as you mentioned that, what's changed recently there in terms of how we should think about potential dollars on the table domestically for that $1 billion?

Yes. Yes. It's -- I promise we're not going to get into a policy discussion because it's kind of [indiscernible].

It's a breakout session.

Yes, that's a whole breakout session. But to Jed's point, here's what we're talking about here. The U.S. chips act provides some interesting avenues of funding to where -- like in the inflation Reduction Act, we get a 25% cash rebate on our taxes for the next several years for any kind of manufacturing that we put in for semiconductors. And so Silar City, our materials footprint will be a perfect fit for that. But as Jed talks about 48D, we kind of knew in our conversations with treasury and commerce that in their initial rule-making process they were not open-ended on silicon carbide. They were looking for companies like Wolfspeed to provide some commentary on how should that fit into this REG 48D. And so they asked for public comments. And we provided what we think is a good road map because we think compound semis should be an important part of the CHIPS Act strategy. And aside from 48D, another really positive development is the U.S. geological services has a critical mineral list of something that they look at annually. And we petitioned to get silicon carbide on the critical mineral list. And we just learned last week that the Department of Energy believes that that's the right choice. So there's some additional discussion and consideration goes on. But once again, if silicon carbide is designated as a critical mineral, that bolsters our 48D application and the potential funding that we could get out of the U.S. government to expand our capacity footprint. So we had President Biden at the campus about 2 months ago, 1.5 months ago. We've had an opportunity to talk with folks at treasury and commerce. So we're feeling very good about the opportunity to get some U.S. funding for our expansion.

And I'm guessing you can't frame it, but maybe I can. Is that sort of -- we look at the $1 billion, is that 1/3? Is it half? Or how should those in the audience think about the potential impact?

Well, I'd say this, Jed. I think we did the convert last year for 1.75. We're talking about potentially another raise between now and the end of the year on this $1 billion that you could look at this, what I'd call, project financing bucket. There's still a couple of billion dollars that I think CHIPS Act funding could definitely support. We're also going to -- as Mohawk ramps, we start to get into an operating cash flow situation. So we kind of see like this next $1 billion raise is an important part of what I would call our U.S. construction strategy. And then CHIPS Act funding and some of this other activity kind of underpins the next phase of expansion.

That's great. I'd like to bring it back to Missy, focus on you for a second. And by the way, congratulations. When was the promotion that you took over all of fab operations?

It was in February.

February? Congratulations. And so prior to your taking P&L ownership of Mohawk Valley, Adam Milton was in charge of that. Correct?

Yes.

And so I guess one of the questions I get often is with some of the delays where the issues were, you wouldn't take P&L ownership of that facility, if there were any issues in terms of that, that would still be with Adam in terms of development. Is that correct? Is that the right way to look at it, I guess?

Sure. I think really, what we're looking at is we took some of the talent that Wolfspeed has. We've brought in external talent. I'm external, but Adam has grown up at Wolfspeed when it was Cree and has a strong background. And so with his operations, with my operations background, we were already peers. We were both leading each of the fabs, and then it made sense with the expansion, the fact that he built Mohawk Valley had been part of working through some of the government funding, the interactions to move him to run the materials side and to focus on Siler City because it's almost a repeat of what we're doing in Mohawk Valley just with materials. And then I have extensive background with running global projects and opportunities in my previous life.

Where was that?

At Texas Instruments. And so I was able to bring in that and step fully into running the fabs. And so to me, it wasn't really a question of like, is there a P&L concern? It was just this was the right direction for Wolfspeed to make sure we have the right focus in the areas that we need to focus on.

And does Siler City roll up to you is fab operations? Or is that still separate in development?

So that actually will fall under Adam. So Adam Milton runs all of the materials and epi business for Wolfspeed. And so we have epi end materials on the Durham campus, Siler City, and then I will run all the factories and future factories. So that's the Durham campus, along with RTP that we mentioned, Mohawk Valley, and then the recently announced Saarland facility.

And what's the update on Silar City? Like when will that start to contribute in terms of the wafer supply, which is all 8-inch to...

Yes. I think the best way to think about that, Jed, is we're rolling construction trucks. We're probably going to go vertical in the next couple of weeks, and we're super excited about that.

What do you mean by vertical?

Vertical, steel, framing and with the intention of trying to start to install crystal growth tools beginning early next year. But we -- the thought is you get to that point, but you probably wouldn't start seeing wafers until to the back half of calendar '24, which would be the first half of our fiscal 2025.

Now, Elif, I know JP used to hide it talking about processes in terms of what differentiates Cree, Wolfspeed versus others in terms of manufacturing. But it's probably safe to say that there's a unique growth technology that you guys have developed. Could you elaborate on how that gives you an advantage in 200-millimeter because it seems like 200-millimeter is in addition to just the benefits that Missy takes advantage of downstream, how on an upstream basis that fits with your overall business.

Jed, when you say growth, I think you're talking about crystal growth, correct?.

Yes.

Because I was going to jump on the JP facility in the Siler City, how we actually did work at that facilities and operations team to bring the site up from the technology perspective. There's a whole different, very exciting, the conversation that we can do. But when it comes to crystal growth that we -- yes, we have built unique technologies and in the larger scale that we benefited in the 150-meter. What we did for 200-millimeter, we took all of the technologies. It's for -- when it comes to crystal growth, it's all about the accumulated knowledge and the technology. So we can think about 200-millimeters more as the 150 where the technology is, is the beginning for the 200-millimeter. So because the reason for that, we have -- we established a really good kinetics and thermodynamics, the understanding that how the silicon carbide works, and then dealing with firsthand vertically integrated, what works and what needs to be improved for the devices like for all those years in the 150 world, we took our crystal growth reactor platform and then designed it for 200-millimeter. And this is not something new we did within the last couple of years that we've been working on this for -- we demonstrated to 200-millimeter in 2015. And then prior to that, we've been actually doing this conceptual design, what needs to be better, what can give us the better consistency and quality. So in terms of the kinetics and thermodynamics, the 150 technologies, just the beginning for the 200-millimeter in terms of our growth rates and the highs and everything, it transferred 1 to 1 to 200 millimeter, but with the more accommodating, more effective and more yielding the reactor. So from there on, that we have a really strong road map actually specific to 200-millimeter.

I think we're out of time, but that's a great spot to end this portion of the discussion will move the breakout session up to is it Adler? Adler, which is upstairs, and we'll continue. Thank you.

Thank you.