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

Hello, and welcome to the X-FAB Full Year and Fourth Quarter 2024 Results Conference Call. My name is George, and I'll be a coordinator for today's event. [Operator Instructions]. I'd now like to turn the call over to your host, Mr. Rudi De Winter, CEO, to begin today's conference. Please go ahead, sir.

Thank you. We have today and also in the conference call, Alba Morganti CFO. Good evening, everyone. So let me first walk over the highlights of the fourth quarter of 2024. The revenue was $189 million. Excluding the impact of IFRS, the revenue was $197 million, within the guided range. And the EBITDA was $40 million, excluding IFRS 15 impact, the EBITDA was 22.8% or so in the guidance. And the EBIT was $10.6 million or 6% of sales. With respect to the '25 we are planning for growth and Alba will go more in detail for that later. Looking at the business side for the fourth quarter comparing versus a year ago, the CMOS and particularly the 180-nanometer did well due to good demand and the capacity expansions of 180-nanometer in particularly in our factory in France, contributing to the growth. The 180-nanometer will be the growth driver also for 2025 due to our further expansions and the continued good demand on the further BCD-on-SOI. The CMOS 350-nanometer was weak due to automotive inventory corrections. Overall, about 75% loading as we speak now. The CMOS 150-millimeter, so the 6-inch wafers they are doing well with good feasibility for the next 2 years due to the last time buy orders that all came in. On the silicon carbide, we reached the low. Better booking came in for production in the fourth quarter. So this quarter and the next quarters will look better. A lot of proto tapping was recorded with new MOSFETs in 2024. The customers are preparing with new devices with better performance and new products are focusing more on the automotive end market. So we expect the gradual increase of and shift from mostly industrial to also a mixed industrial automotive. The Microsystems was mixed. New applications are ramping up, such as the smallest contactless medical temperature sensor in the world for health applications in mobile devices. While the automotive sensors are also suffering from inventory reductions. Looking at the end markets, the automotive supply chain is still reducing inventories. We noticed this in particularly in the 350-nanometer, which was the highest volume in the past and not so much constrained. So this portion of our business will -- is suffering right now and we expect recovery later this year. The 180-nanometer is growing and particularly due to the BCD-on-SOI, where we're adding most of the capacity. This is where we have most of the new products in the pipeline as well. This is driving the growth. However, short term, not yet compensating the loss on revenue on the 350-nanometer. Maybe a regional remark, while our automotive business comparing '23 to '25 was more or less flat for the full year. Our China automotive business grew with 20%, and we expect this to further accelerate in 2025. We see a gradual recovery of the industrial business, particularly the CMOS demand. The SIC portion in the industrial is lagging behind the CMOS recovery. We will see this gradually increasing. I mean, the silicon carbide in the first quarter. And this is based on our visibility on the bookings and the wafer starts we have done. The medical recovery is mainly driven by personal medical devices such as hearing aid, pacemakers, glucose sensor devices and then also the larger medical equipment such as echography and devices for echography and x-ray. On the CCC is as expected and nothing particular to report. We expect this also to stay flat going forward. And this, I would like to pass to Alba for the financial section.

Thanks, Rudi. Good evening, ladies and gentlemen. And now let's go to the financial update. In the fourth quarter, our EBITDA was of about $40 million with an EBITDA margin of 21.1%. If we exclude the impact from revenue recognized over time, the EBITDA margin for the fourth quarter would have been of 22.8%. In the full year of 2024 X-FAB recorded an EBITDA of almost $189 million with an EBITDA margin of 23.1%. If we exclude the IFRS 15 impact on the fourth quarter, the revenue in the amount of $8 million the full year EBITDA margin would have been of 23.5%, which was in the guided amount. While comparing year-on-year numbers, we need to keep in mind that Q4 2023 was a record high quarter and really hard comparable as it was our best quarter ever in the old history of X-FAB. Once again, profitability is not affected by exchange rate fluctuations as X-FAB's business is naturally hedged, which is crucial in this context of trade war. At a constant U.S. dollar euro exchange rate of 1.08 as experienced in the previous year's quarter, the EBITDA margin would have been 0.1 percentage points lower. In this fourth quarter, we had a net loss of $7.3 million, mainly due to a noncash deferred tax asset adjustment of $16.5 million. Cash and cash equivalents at the end of the third -- of the fourth quarter amounted to USD 215.8 million, which were down 32% against the previous quarter as expected after the payment of several CapEx. Now that we are almost at the end of our major CapEx expansion plan, our CapEx will decrease significantly. As you can see, our CapEx in the fourth quarter were of $133 million and only $510 million for the full year, which was far below the announced $550 million. It means that we are $40 million better than anticipated. Despite this reduction, we will still remain within the $250 million CapEx announced for the full year 2025 and won't exceed this amount. The plan is to return to a normalized CapEx ratio of 10% to 15% of total revenue from second half of '25 onwards. This also means that we will go back to positive cash flow and should get to a sustainable balance between debt reduction, capital returns and further growth. And to conclude this financial section, I would like to share our guidance for the first quarter of 2025 and give you an update for the full year's perspective. Q1 '25, revenue is expected to come in within a range of $195 million to $205 million with an EBITDA margin in the range of 22% to 25%. The guidance is based on an average exchange rate of USD 1.04 to Europe and is not taking into account the impact of IFRS 15. For the full year 2025, revenue is expected to come in within a range of $820 million to $870 million with an EBITDA margin in the range of 24% to 27%. And now I would like to give back the word to Rudi.

Thank you. Before going to the Q&A, so I confirm so the long-term fundamentals for X-FAB, remain intact serving applications related to electrification of everything and this will drive the long-term growth. I'm very pleased with the high level of interest in our specialty technologies. Our next-generation silicon carbide platform announced in December is gaining strong market interest. Several customers started porting their products to the newer platform. Also, X-FAB's microsystems and system integration expertise is also getting a lot of customer interest as well as our gallium nitride offering from resin. While 2025 will be a transition year due to continued destocking along the automotive supply chain, it will also mark the completion of our capacity expansions, allowing us to better support the increased production demand for 180-nanometer, and we are planning for a single-digit growth for 2025. And with the completion of the expansion, it means that we will return to positive cash flow in the second half of 2025. I -- with this, I would like to conclude the introduction. And George, I'm open for questions now.

[Operator Instructions]. We do have our first question just came in right now. And it is coming from Guy Sips of KBC Securities.

Yes. I have a question on the industrial and medical markets, where you already see signs of recovery. Yes, can you elaborate a little bit on that? What kind of recovery signs are that? And then the second question is on the automotive supply chain? Yes. It's, of course, very difficult to estimate, but are we -- is the trough behind us? Or what kind -- what is your expectation on that?

Yes. So thank you, Guy. Let me start first with the industrial. So on the industrial, this market. We saw the first market where we saw weakness and it's now almost more than a year ago. And so there, we see first signs from increased orders from customers that -- so gradually the inventories are depleted. And so that's looking positive. But that's -- if you look at the whole of our industrial segment, the -- we used to have a lot of silicon carbide in there plus the CMOS. I'm mostly referring to the CMOS now where that is strengthening. The silicon carbide that we do see new orders coming in and bookings -- book-to-bill above 1 for the silicon carbide in the fourth quarter. So we expect going forward gradually from Q1 to Q2. And step-by-step, we will see also improvements in the silicon carbide. On the medical, it's a bit the same pattern. So the -- in particularly medical equipment, so the larger equipment like echography, x-ray machines and so forth because of the COVID that drove also reductions in investments in these areas. And then the high interest rates, they resulted in delayed investments in those type of equipments. And therefore, they had enough chips. And we see this also now coming back. And if we ask our customers that, that's what they give us the reason that there was a pause on these kind of investments for a while, and this is now recovering. On the automotive, in general, so what automotive is the biggest portion of our business, and so that has also the biggest impact overall. Where do we stand? So this is mixed. So we have a good pipeline of new products also with Chinese major EV brands that is ramping up, and that is a positive side. On some other products, on the 180-nanometer where we're still in allocation because we gradually build more and more capacity. We're able to grow there. But on the 350-nanometer, where also a lot of automotive businesses, that is not fully utilized. So we are there at like 75% utilization. And there, we expect that still to take 2 to 3 quarters before business will come back. So I see this -- this could last well within 2025 for a good recovery there. But because we -- the 180-nanometer is doing well that supports the gradual growth that we will see throughout 2025.

And if you allow me for one more -- one additional question on your statement that once you generate positive free cash flow, you aim to achieve a sustainable balance between debt reduction, capital return and further growth rather critical. Can you elaborate a little bit on that? And -- And how do you see that related to the LTAs, for instance?

Well, to the -- with respect to the , we have debt that we need to pay back, and we need to also pay back the repayments of the LTAs that will start end of this year. But while we expect to have significant higher EBITDA than the CapEx going forward as of the second half of this year. And so first off -- first, we will use that to pay back the loans and then in 2026, there is maybe room for also returns to investors. But this is -- we'll have to take decisions on that later this year or actually next year.

Yes. And is it in that order, meaning first debt reduction, of course, and then capital return and then further growth? Or is that not yet decided perhaps should be first again, investing in further growth before thinking about capital returns? Or -- or how do you look at this? .

No, I think we have invested a lot into capacity increase. Remember, we have the $1 billion investment that we did over the past 3 years. puts base capacity in place that should allow us to come roughly to $1.5 billion revenue. So as we are not yet there, we can wait with further capacity expansions and think about return if investing in more growth.

[Operator Instructions]. We have another question came in just now from Trion Reid of Berenberg.

It's Trion here from Berenberg. Just 2 questions. Coming back to that comment on capital returns, first of all. I just wondered if you could give an idea of a leverage level that you'd be happy with before you would consider capital returns? Is it a case of paying back all of the debt to get back to a net cash? Or is there a leverage you would accept? And then the second question was just on the '25 outlook? And what that means in terms of the bridge to the '26 guidance that you gave at the end of last year? Because it looks like quite significant growth in '26 compared to where '25 might end up? Just wondering if you have any comments on that.

Trion. So for your first question, definitely, we want to be back to a more leveraged and balanced level between our debt and our cash. Means that for the time being, we will still continue to deteriorate our -- or increase, if you want, our net debt. But then as the CapEx plan, as Rudi mentioned, is now going to the end, and we will anyway go back to normalized levels. But with a much higher capacity in place, this will mean that the operational cash coming out of the operations will increase significantly. And that would help to reimburse all the LTA prepayment and to go ahead, reducing our overall level of debt. So going back to a more normalized level we had before we started all these major CapEx investment. So that being said, don't forget that our EBITDA margin should go up as well, and that we intend not to exceed the EBITDA level in terms of CapEx. So what we earn -- what we will make as EBITDA will serve to pay -- to invest, and we won't exceed that from this year -- second half of this year onwards. Then I forgot your second question.

Yes, the second question was on the bridge to 2026. So yes, indeed that will be an acceleration of growth, but we see this coming first because the -- we continue to see growth on our pipeline, new products, the 180-nanometer that is growing and so forth. And then the fact that the inventories are depleted this year, and that should bring also additional business back also next year.

Our next question is coming from Robert Sanders of Deutsche Bank.

I noticed actually 1 of the Tier 1s today. Aptiv mentioned that they feared a auto chip shortage ahead of us and that they were now accumulating strategic inventory of semiconductors because of possible shortages in late 2025 and early '26. I was just wondering I think the context here is a sort of repeat of 2021 when the consumer demand picked up and then suddenly there was all these shortages. Is that's something that you've heard about? Obviously, these OEMs and Tier 1s have built up a lot of supply chain capability to avoid a repeat of 2021. I was just wondering if you'd seen any sign of the stuff that Aptiv doing is doing as a sort of beginning of a trend?

That's a good question. So I think very much we can compare what's happening in the automotive today with 2019, 2020. in particularly 2019, 2020 was then the COVID, but 2020 the recovery was already happening before the COVID stroke. Whether there is a risk again of shortage? It's hard to say what we see now. If we look at forecasts that coming from customers, then yes, our capacities going forward will be well utilized. Whether -- however, the bookings that we see today are still below that level. But if -- yes, if suddenly it turns around, yes, then things can go back quickly to very high utilization rates. Therefore, my recommendation with the customers is, yes, be very careful, don't overswing with inventory reductions because it's -- yes, you can reduce orders quickly, but if you increase above 100% is not possible.

Yes. I mean given the Melexis said that some customers have reduced to 1 month of inventory on hand, but some are still at 3% to 4%. What is the steady state given the experience of '21, is it to go back to 1 month, which I think was the sort of prior to 2019? Or do you think now that actually a lot of companies may stay at 3 to 4 months?

I cannot answer your question, not enough visibility in the inventory levels in the supply chain. But what I fear is that people not to learn this. So they -- it's by the time it's a couple of years that the shortage is over people start to look again at optimizing their inventories. And I think it will not happen that they're smarter, but whether they will be smarter, let's see.

Got it. My last question is just about the China business. So I think it was in the region of $100-odd million in '24, but you've got this big ramp-up. So where could it be driven by the automotive business you're seeing in China in 2025? Is it -- does it go from $100 million to $200 million? Or is that too aggressive?

No. So there is the total China business, which used to be around $100 million, but that was predominantly nonautomotive or -- so I think in 2023, we had around $100 million China business, '24 million, it was less. In fact, if you take the overall, it's $90 million but that was the drop was mainly on silicon carbide. So the difference is like drop of [ $50 million ] silicon carbide. So all the other besides silicon carbide they did show growth in 2024. But if you look specifically to automotive -- our automotive business, in China that went up from low 30s to somewhere early low 40s, so like 20% to 25% growth. And so when I refer to the automotive growth in China, that's where the level where it was in 2024, and we expect significant increase in '25.

[Operator Instructions]. As we have no further questions coming in, I'd like to turn the call back over to you Mr. De Winter for any additional or closing remarks. Thank you.

Yes. Thank you very much, everyone, for attending the call today. And I'm looking forward to speak to you on the 24th of April to discuss the first quarter results. I mean then I wish you further all nice evening. Goodbye.

Thank you, [Foreign Language]. Ladies and gentlemen, that will conclude today's conference. Thank you much for your attendance. You can disconnect. Have a good day and goodbye.