X-FAB Silicon Foundries SE (XFAB) Earnings Call Transcript & Summary

Hello, and welcome to the X-FAB Q1 2024 Results Conference Call. My name is Karen, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Rudi De Winter, CEO of X-FAB to begin today's conference. Thank you.

Thank you, Karen. So we have here in the call as well, Alba Morganti, CFO of X-FAB. So first of all, welcome to the X-FAB First Quarter '24 Results Call. In the first quarter, we realized revenues of $216.2 million, up 4% year-on-year and down 9% quarter-on-quarter. Excluding the impact from revenue recognized over time of -- which was minus $2.6 million, first quarter sales was $218.7 million. This is in line with the guidance of $215 million to $225 million. Revenues in our core markets, automotive, industrial, medical, amounted $202.6 million, up 9% year-on-year and representing 93% share of total revenues. The first quarter was characterized by continued strong growth for X-FAB's 200-millimeter CMOS technologies, in particular, the 180-nanometer process and microsystems technologies, resulting in a record quarterly bookings of $271.1 million (sic) [ $271.5 million ]. These bookings were up 20% year-on-year. This is also reflected in the backlog, which amounted to $521 million, up $45 million compared to the previous quarter. In the first quarter, automotive revenue came in at $136 million, up 12% year-on-year and down 11% compared to the strong previous quarter. Industrial revenues were under $53 million, which is an increase of 12% year-on-year. Industrial end market benefited from record silicon carbide revenues in the first quarter. The silicon carbide revenues totaled $26.3 million. This is an increase of 100% year-on-year. On the other side, the customer actions to reduce high inventory levels resulted in a low quarterly silicon carbide bookings with a book-to-bill of 0.38 for the silicon carbide in the first quarter. Despite this temporary weakness in silicon carbide, the outlook remains positive of our silicon carbide customers. We continue to be upbeat about a long-term perspective. And we were able to sign another long-term agreement with one of our silicon carbide customers, and we have further negotiations with others ongoing. The long-term fundamentals for the automotive and industrial end markets remain strong. The mega trend of electrification of everything to mitigate climate change drives the structural demand of our specialty technologies that enable energy-efficient and climate-friendly solutions for a wide range of applications. Apart from the silicon carbide, our 180-nanometer high-voltage CMOS technology with its differentiating features is in high demand and one of the key technologies used. Its growth this year will be supported by the ongoing capacity conversion and de-bottlenecking of our factory in France. And in the first quarter, the French site revenues based on X-FAB technologies recorded a year-on-year growth of 42%. The site has produced 150-millimeter CMOS technologies, meaning Erfurt in Germany and Lubbock in Texas recorded lower utilization rates in line with the lower demand for these technologies. Both sites are focused on the transition to their respective new areas of business, being MEMS and microsystems in Erfurt and silicon carbide in Lubbock. In the first quarter, our capacity expansion program continued as planned. Key projects include the expansion of capacity for our popular 200-millimeter CMOS technologies at our factory in France and at our factory in Malaysia as well as the silicon carbide business where we invest in Texas. The building construction at the Malaysian site to create additional clean room space is on schedule, and it is planned to start moving in equipment in the fourth quarter this year. Total capital expenditures in the first quarter came in at $105 million, and this is in line with our plans. I would like now to pass the word to Alba for the financial update.

Thanks, Rudi. Good evening, ladies and gentlemen. And now let's talk about the financial update. I would like to start this financial section by highlighting that the first quarter totalized $216.2 million sales, which was within the guidance of $215 million to $225 million, and representing an increase of 4% year-on-year. Our EBITDA was of $51 million with an EBITDA margin of 23.6%. If we exclude the impact from revenues recognized over time, the EBITDA margin of the first quarter would have been of 24%, at the lower end of the guided 24% to 27%. The quarterly guidance does not take into -- does not take the impact related to IFRS 15 into account as this cannot be reliably predicted. The first quarter profitability was negatively impacted by a combination of, on one hand, a lower production of the 115-millimeter (sic) [ 150-millimeter ] CMOS line and also from a lower SiC wafer start. But we expect a reversal in the second half of this year, mainly driven by the recovery of the SiC business and the positive effect of increased economies of scale, which will be possible, thanks to the additional capacity becoming available on the 200-millimeter CMOS, thanks to all the CapEx expansion projects becoming operational and allowing us to increase the capacity in this field. In addition, we have initiated a certain number of measures to improve our cost structure, especially for the sites producing 150-millimeter CMOS wafers while accelerating the transition to the silicon carbide in Lubbock and microsystems in Erfurt to replace the 150-millimeter CMOS business. And the last word on the update is a good news, as Rudi mentioned, is that we had, again, an all-time high sales for the SiC business with $26.3 million revenue, which represents an increase of 100% year-on-year. And the quarter closed with a record global all-time high bookings of USD 271.5 million, up 20% year-on-year, which was another record. Thanks to the natural hedging of our business in terms of currency exposure, our profitability is not affected by exchange rate fluctuations. And at constant U.S. dollar-Euro exchange rate of 1.07 as experienced in the previous year quarter, the EBITDA margin would have been 0.1 percentage point lower. Cash and cash equivalents at the end of the first quarter amounted to USD 351.5 million. And to conclude this financial section, I would like to share our guidance for next quarter and full year. For the second quarter, we forecast our revenue to be in the range of $200 million to $210 million, with an EBITDA margin in the range of 20% to 23%. This guidance is based on an average exchange rate of 1.08 U.S. dollar to Euro. The full year 2024 guidance gets reiterated with revenue in a range of USD 900 million to USD 970 million and an EBITDA margin in the range of 25% to 29%. This means, at the midpoint, a year-on-year increase of 5%. And now I would like to give the word back to Rudi.

Thank you, Alba. Let me summarize. So in the first quarter, we continue to see very strong demand for our popular 200-millimeter CMOS and microsystems technologies, resulting in an all-time high quarterly booking. On the other hand, our silicon carbide business was impacted, at least the bookings in generally in -- for the silicon carbide, reflected by a decline in the orders. Supported by our silicon carbides customers' confidence in their future business development, we see this as a temporary dip. We are confident in X-FAB's positioning in the semiconductor market, and the overall high level of bookings underscores the importance of our ongoing capacity expansion programs to ensure reliable supply for our customers. With more capacity coming online and the recovery of the SiC business, we expect a strong growth in the second half of this year versus the first half. And with this, I would like to end the introduction and open for questions. Karen? Operator, can we open for questions?

[Operator Instructions] Our first question comes from Michael Roeg from Degroof Petercam.

Yes. First of all, there were some technical problems on the line during the introduction. So I'm not sure whether everybody is still on and whether that could affect people being able to ask questions or not. So that out of the way, first question I have, in your Q1 PowerPoint presentation, there are a couple of slides on your 110-nanometer technology, as you introduced at the end of last year, and it includes a lot of customer interest. Can you give us an update on where you stand, whether you already received an order for that? Where do you see the 180-nanometer transitioning to 110 in terms of share in, say, 5 years from now?

Okay. Thank you for that question. So the -- so we introduced this 110-nanometer. Introduced mean that we launched the design kit and is, at end of last year, open for customers to start designing products. And so this is progressing well. So we have -- but you know that this takes time. So we're planning to do, first, general customer prototyping this year. In parallel, we worked with a few lead customers early on during the development, and they have started production. And so first deliveries of volume, production deliveries will also happen in the second quarter, third quarter and will be gradually increasing.

Yes. And say, in 5 years from now, how much of 180 today can be moved to 110 by then? What is sort of your projection?

Well, I expect that the 180-nanometer technology will continue to have a very long life. The 110 will come on top, and for some -- for customers who really see the benefits of -- for their applications, we expect -- well, it also depends on how much capacity we want to put in place for those technology. But for now, we have planned capacity in the time frame 2026. So that is 2 years from now to have a capacity of around 50,000 wafers in this node per year.

50,000 in 2026? Okay. And in a previous session, you indicated that manufacturing on 110 nanometers is more expensive than 180. Should we think of, say, 10% more expensive? Or is it much bigger? Say 40% more expensive? And how will this affect gross margins?

It -- so the cost in semiconductor all depends on how much depreciations or how much capacity you put in line. So if you produce on depreciated equipment, the costs are not so much higher. It's less than 10%. Depend on the complexity and the product mix that we've also done the products that the customers want to do. If you build capacity, then that's, of course, a different story. And..

Suppose that I would have the same design with one on 180 and one on 110 on both on depreciated machines, would there be a major cost difference for you? Probably not.

Not so much.

Then a second question on a different topic. China, it's probably a question you get a lot. All the wafer fab manufacturers are getting tons of demand and sales from Chinese customers. And it's typically for mature equipment. What do you see happening? What do you hear from customers or other parts in the value chain about Chinese companies rapidly expanding their mature capacity?

Well, what I can see for X-FAB customer base is that our -- in the first quarter, we recorded a year-on-year growth of 22% of our Chinese customers. And China was 12% of sales in the first quarter. We see a good interest for our innovative technologies from Chinese customers. But yes, they come to X-FAB for differentiating features and things that they cannot find in China.

On the one hand, that's reassuring because with your specialties and you still get good growth from there. But in the end, somebody must be cannibalized by all that equipment there. So do you have any visibility what kind of end markets are served by all that capacity expansion? Is that something very different from what you're doing?

Well, there is. For instance, if you go into chips for mobile phone, power management ICs, things like display drivers for consumer products, but also, simple discrete transistors, power -- yes, power electronics are areas where more and more is being produced in China.

And that's indeed quite a different business actually because you've been downsizing in consumer electronics and so on. Good. And then the final question, sort of a technicality. I noticed in the cash flow statement -- no, $32 million income from a sale and leaseback.

Correct.

Could you tell us what you sold and leased back?

No, no, no. It's actually -- we didn't sold anything. It's just a financial instrument we used from one of the banks of our syndication to finance tools that we already bought.

Okay.

It was in France.

So -- but there was a cash inflow. And is this something that will reverse in due time?

No. So in the sense that we bought the tools, and then as they were already the property of the company, we could not do a financial lease per se. Therefore, we used a sale and leaseback. That's common.

Our next question comes from David O'Connor from BNP Paribas.

Maybe Rudi, firstly, just on your side. Just looking at the bookings, quite very strong record bookings as you outlined in your opening remarks. Could you just talk a bit about the -- within those bookings, where is the strength coming from, from a maybe geographical standpoint? Which end markets are you seeing those strengths? Is it across the board in automotive and the industrial side of things? And also, just while you're talking about that visibility, the -- you reiterated the full year guidance. You talked about Q2 being the trough. Just can you talk around that level of confidence that you have that you can call on Q2 as the trough here?

Yes. So the bookings were very strong from -- in the 200-millimeter CMOS for us, also our 180-nanometer technologies and microsystems for -- also products that were running already and also some new products that are launched. I was mentioning the microLED headlamp type of applications. And so it's all concentrated very much on the 200-millimeter lines and the microsystems, a lot -- mainly automotive. And so it shows that we're investing in the right technologies. And now you could say, okay, why? With such a strong booking, why is the second quarter down? Well, yes, first of all, these bookings came in and it takes a bit of time to convert that into sales, to load the fabs. But also, we are limited in capacity on the 200-millimeter, so we are expanding there. And the expansion primarily is happening for within 2024 in our factory in France, which is month after month ramping up. So more and more of that will come in the third and the fourth quarter. And then in the dip in the second quarter is the very weak silicon carbide bookings that we expect was -- is really below in Q1 on bookings and resulting in Q2 very low revenues. But that will gradually also improve in the second half of the year. And therefore, we expect also that, that will then, from there on, also continue to drive the growth.

And maybe just on your kind of electrification bookings or EV bookings. Previously, you talked about that the kind of numbers this year had come down looking back versus a year ago for 2024. Are you -- is it fair to then say now with these bookings that EV bookings have started to kind of a bit of an upswing? Or the trough is behind us on the EV side of things? And I have a follow-up on silicon carbide.

Well, the -- I think that the weakness in silicon carbide is also driven somewhat by the weakness in the EVs. The -- we are a multitude of products. And sometimes, it's kind of difficult to see what exactly driving what. I think that the inventories in general are indeed getting at a lower level. We -- definitely, in our 200-millimeter, because we have been in allocation for a while, we're working very closely with our customers to make sure there is a sufficient supply. But we know that there is throughout a very low inventory level there. So any update there will also immediately mean additional orders.

So how do I reconcile that? You're talking very little inventories at your customers. Yet you guys, looking at your balance sheet here, have record inventories. Just wondering how we should reconcile that and maybe, if you can talk about the trajectory for those inventories through the second half, given the strong ramp-up.

You're referring to X-FAB inventories or...

Well, I'm just trying to reconcile your comments on very low inventories at your customers versus looking at X-FAB inventories, which are quite elevated at the moment. If you can just kind of reconcile those 2 pieces of information. And also, this trajectory, what are your plans for X-FAB inventories through the second half of the year?

Well, the X-FAB inventories are very much related to the WIP, so that's the products in process. It is -- we generally do not have a finished product inventory. As soon as the wafers are finished, we tend to ship them immediately to our customers. And yes, what I hear from -- in general, from our customers is that the WIP levels or the -- yes, the inventories are decreasing. So I expect also in the industrial that we are coming to improved bookings gradually in the second quarter and so also feeding then the third and fourth quarter.

Our next question comes from Robert Sanders from Deutsche Bank.

Yes, to be honest with you, I haven't really heard -- been able to hear most of the answers or the opening remarks. So I'm probably asking a question you've already answered either in the Q&A or in the beginning. But could you just outline the utilization of the Erfurt site? You might have seen Siltronic have exited 150-millimeter wafers. They seem to be suggesting there's no kind of long-term loading opportunity in 150. So I'd be interested to know what your thoughts are around the future of that site. I remember it being 56% loaded in the middle of the last decade. I'm just wondering where it is relative to 200.

Yes. So the 150-millimeter lines, CMOS lines are relatively -- I think the loading is in the range of 50%, so it's really low. We do expect this to recover. Many of those products are small volume, industrial type of applications, very fragmented. And with respect to the supply of 150-millimeter wafers, there are multiple. It is not only Siltronic, so there are multiple suppliers. So we don't see an issue with the security of supply and then continue to run as long as it makes sense. But we already explained that as well. The site in Erfurt, there's the one in Lubbock, there is a transition plan to new technologies being silicon carbide and the microsystems. The microsystems in Erfurt in the future will also be 200-millimeter. So I don't see this as a fundamental problem in the long term.

And on silicon carbide, how would you assess the quality of the merchant 200-millimeter suppliers? I know you've been quite public saying the Chinese are comparable with the Western suppliers of 150. But is there, do you think, going to be a transition? And does that put you at a disadvantage in your Lubbock site?

I cannot comment on the quality of 200-millimeter substrates as we are not buying them. I know that they are expensive. But yes -- and I hear that still also, several of our competitors signed long-term agreements for 150-millimeter wafer. So I presume that, definitely, the supply is not there yet.

And sorry, just circling back to the 200-millimeter. If it's 50% loaded at 150, what's your loading in 200?

100.

100%? Okay. Got you.

Is there a acoustical problem? Also, Robert, I mentioned that the loading was 100%. And maybe we can move to the next question.

Did you hear my question, Rudi?

No, I didn't hear your follow-up question.

Okay, no. It was just about -- so the 150 demand -- so the industrial demand in 200 has been weak for a while, right? But you have backfilled -- the way you have got to 100% utilization in 200 is by backfilling that capacity with automotive? Is that correct?

Yes, automotive. But also, medical, everything -- well, the total demand. So we -- also, if there are products that are maybe somewhat weaker because they serve the EV market, that's also compensated by capacities or needs for applications serving the combustion engines. So we have sufficient demand for the 200-millimeter.

Just last question. I remember the $1 billion CapEx expansion you outlined. I think it was in June last year or the year before, I'm not sure. But clearly, the market has changed and you're not going to achieve your $1.5 billion goal for revenue. So why are you still spending so much CapEx? You're the only company I cover that is spending more CapEx this year than last in your end markets. Is it just because you have specific customers that are very tight, whereas everyone else in automotive is suffering from too much capacity and too much inventory? Is that what it comes down to?

Yes. So we are not suffering from too much capacity. So we are short in capacity and the LTAs that we've signed for the '23, '24, '25 and the forecast and the demand that we see short term and the forecast that our customers give us for the near future, they all indicate that the capacities we have and we're additionally building, they will all be fully utilized.

I was just saying that -- just could you outline your CapEx in '24 and '25 just for my model?

So from the amount, so we have CapEx for '23 was $350 million. And for '25, it will be around -- well, we reported around $550 million. And then 2024 will be $550 million, and '25 will drop again to something like $300 million.

Our next question comes from Guy Sips from KBC Securities.

My question is on the French site, where the revenue is now based on [ extra ] technologies is nearly doubled year-on-year, and it's now over 90% of the site's revenues. What is the capacity over there? And how close are you to the boundaries?

Well, we are still ramping up. So the conversion from the old technologies happened to a large extent, meaning that the older products and technologies are now mostly out. We have -- we are in the phase of converting the machines and adapting it for the future business. In the actual output, so today, we are somewhat below 10,000 wafers a month, and that should go by end of -- beginning next year therein, more than double.

We have no further questions in the queue. [Operator Instructions] There are no further questions in the queue. So I will hand you back over to your host.

Thank you. Yes, thank you very much. So if there are no more questions, I would like to close the call here. Thank you very much for your participation, and I invite you again for our conference call on the second quarter results in July 25. Thank you.

Thank you.

Thank you for attending today's call. You may now disconnect.