X Fab Silicon Foundries EV

PAR:XFAB

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to today's X-FAB quarterly conference call. [Operator Instructions] I must advise you that this conference is being recorded.

I would now like to turn the conference over to your speaker today, Rudi De Winter. Thank you. Please go ahead.

[Rudi De Winter, executive]

Thank you, and welcome, everyone, to the first quarter '22 quarterly results call. We have also in the conference call here today Alba Morganti, CFO.

In the first quarter of '22, business was very strong, and we recorded a revenue of $179 million, within the guidance. And it is up 15% year-on-year and 4% quarter-on-quarter. Bookings remain strong at $239 million, further increasing our backlog.

First quarter revenues in our core markets amounted $145 million, up 16% year-on-year and 5% quarter-on-quarter, accounting for 81% of the total group's revenue. The first quarter highlights include record prototyping revenues in automotive as well as all-time high volume production revenues in industrial and medical.

Overall, medical recorded the strongest revenue growth, up from 59% year-on-year, while automotive and industrial rose, respectively, 7% and 28%, whereas all segments were limited by capacity allocations. The first quarter CCC revenue came in at $32 million, up 6% year-on-year.

The pipeline for new projects is solid, reflecting continued strong prototyping revenues in the first quarter, which amount to $25 million, up 30% year-on-year. We also see accelerating transition to green energy and mobility driving the demand for X-FAB's silicon carbide technologies and other supporting applications, spurring growth in industrial and automotive.

First quarter silicon carbide revenues almost doubled compared to the same quarter last year and reached $12 million. X-FAB's medical business continued strong as well and in particularly the digital health care covering point-of-care diagnostics and personalized medicine or telemedicine. As in previous quarters, lab-on-a-chip applications were the main driver. They require a combination of CMOS and MEMS, which is a very strong element of our offering.

In the first quarter, as order intake remained exceptionally strong, capacity allocations have to be continued, while every effort is made to supply customers with the quantities required to avoid supply chain disruptions. At the same time, the ramp-up of our X-FAB technologies in X-FAB France progressed well, contributing positively to the first quarter revenue growth. The share of French site revenues based on X-FAB technologies reached 42% in the first quarter, supporting particularly by automotive growth. While the consumer demand for the X-FAB RF SOI technologies was rather weak.

On the operations update, we can further say that the first quarter X-FAB factories continue to run with high load. With continued high demand, increasing productivity and removing production bottlenecks at all sites remained a key priority and a major operational focus throughout the quarter. Multiple new tools ordered in 2021 were delivered as we went through the quarter, and they are adding gradually to capacity.

Labor markets remained tight in all regions and strong focus has been placed on recruiting and employer marketing activities to ensure there are sufficient staff available to handle the high workload in the fabs. We also suffered still from higher absence rate due to COVID quarantines.

In light of the current volatility of supply chain and even more so to support the group's future growth, X-FAB is closely monitoring the supply situation, taking appropriate measures to mitigate any supply risks. This includes the qualification of second and third source suppliers as well as geographically diversification. To date, X-FAB has not been impacted by supply shortages.

Capital expenditure was $49 million in the first quarter, reflecting equipment orders mainly from the 2021, which were delivered during Q1 2022. Full year capital expenditure is expected to come in at around $200 million. X-FAB is expanding its capacities across all sites in response to the increase in demand and as well short term and long term.

I'd like to pass now to Alba.

[Alba Morganti, executive]

Thanks, Rudi. Good evening, ladies and gentlemen, and now let's walk over the financial update.

We are very pleased to share our positive performance of the first quarter 2022. As you can see, our first quarter EBITDA was $41 million with an EBITDA margin of 23%, which was really at the upper side of the guided 19%-23%. Utilization rate was 86%, which further grew from 82% of Q4 last year.

Top line growth contributed positively to profitability as well as the substantial increase of unfinished goods inventory, which amounted to $12.4 million in the first quarter. This is the result of the increased number of mask layers produced by the factories in line with future growth.

As expected, in this particular context of pension, cost inflation and rising depreciation resulting from the group's capacity expansion projects put pressure on margins. In order to compensate for this effect, we are currently increasing pricing accordingly.

Cash and cash equivalents at the end of the first quarter amounted to $259.3 million, which represents a decrease of 11% if we compare to the previous quarter end. In the fourth quarter 2021, we had drawn funds of about $78 million from our revolving credit facility, which were partially used in the first quarter to cover CapEx payments for new equipment delivery.

Euro-denominated sales share came in at 40% during the first quarter, which is absolutely in line with our level of costs incurred in Europe. The actual U.S. dollar, euro exchange rate for the first quarter of '22 was $1.12, leading to an EBITDA margin of 23%. If we compare with a constant exchange rate of $1.21, which was experienced in the first quarter '21, EBITDA margin would have been 22.8%, so almost the same. This demonstrates that the achieved natural hedging of the business has made our profitability development robust against exchange rate fluctuation.

Our guidance for Q2 2022 revenue is expected to be in the range of $180 million to $190 million with an EBITDA margin in the range of 20% to 24%. The aforementioned guidance is based on an average exchange rate of $1.10 U.S. dollar to euro.

And now to conclude, I would like to add that based on the accelerated market development, we have adjusted our long-term guidance. And thus, we expect to reach the $1 billion revenue in 2 years, actually, earlier than originally planned. This means that we should reach $1 billion revenue in 2024 rather than in 2026, as we said in the Investor Day that we organized in May last year. We also raised the corresponding EBITDA margin guidance to something over 30% compared to the previously announced level of over 27%.

Thank you. And now I'd like to give the word back to Rudi.

[Rudi De Winter, executive]

Thank you.

So to summarize, in the first quarter, we saw continuation of the strong market demand, both for production as well as prototyping, reflecting how well X-FAB is strategically positioned. With our automotive, industrial and medical business, we are serving the strongest growing end markets for semiconductors. And our technology portfolio enables much needed innovative solutions, especially for accelerating transition towards green energy and cleaner transportation.

Despite a manifold of challenges arising from geopolitical conflicts and tight supply chains, I'm very excited about X-FAB's growth prospects and see us well on track for sustainable success, which is also why we have adjusted our long-term guidance upwards.

With this, I would like to open for questions, operator.

[Operator]

[Operator Instructions] We will now take our first question.

[Ruben Devos, analyst]

Ruben Devos from KBC Securities. I've had a question related to the new EBITDA margin target. You've reiterated the sales target of $1 billion basically, but you said it's 2 years earlier than anticipated. Now the absolute sales target remain the same, but your EBITDA margin objective has gone up by 3 percentage points. So yes, the logical question is, what are some of the drivers there to lead to that margin improvement? Yes, should we think about product mix, better operational efficiency, productivity gains from installing new machines? Yes. What are the underlying drivers here?

[Rudi De Winter, executive]

Well, it is mainly price increases. So what we see as well, it's not the same guidance. It's actually the guidance is now 2 years earlier. So it's a much stronger growth. That means that we need acceleration of investment and moving faster. And so that means also on average higher depreciation, and we want to compensate that with higher EBITDA to not sacrifice on our EBIT.

[Ruben Devos, analyst]

So basically, I mean, you set the earlier guidance in, what is it, in June last year. At the time, we did not really have an inflationary environment as we have today. So basically, then you were expecting 27%, now more than 30%. So you are able to sort of increase prices by a significant margin more than the rising costs basically coming from inflation. That's how we should think about it?

[Rudi De Winter, executive]

There is a very strong shortage on chips and all our customers want more than what they anticipated. We are positioned very well so. And this gives us some selling power. And while we don't want to take too much advantage of this, but we need to invest more than and faster than we anticipated. And so we want the customers to participate in this.

[Ruben Devos, analyst]

Okay. Okay. And as of when will that really start to kick in, let's say, because, I mean, you talked in the press release about, yes, that you're working on these pricing efforts. I think we've seen an update by Melexis and they also had like a positive update from a margin perspective. Obviously, you're their most important wafer supplier. Yes, for this year maybe, as of when could we really see an impact from that?

[Rudi De Winter, executive]

So as I explained, we have a large backlog and so that results in a delay of the price increases to become effective. So we are now focusing on the long-term agreements that we're making with all our largest customers. And these long-term agreements, they are based '23, '24, '25. Some will include maybe '26 and '27. And these, the structure of these agreements will have a new price. And then so in concreto, there will be some price increases still this year, but they are moderate because there is already so much backlog and then they will become effective as of, so in the LTA as of the 1st of January next year.

[Alba Morganti, executive]

But also don't forget that we had to pull in some of the investments that were planned on a later stage due to indeed this growing and continuously growing demand. We had to review our CapEx plan.

[Ruben Devos, analyst]

Okay. Okay. Very clear. And then just on the sales guidance itself. I think if you take the midpoint of the guidance for this year, you could basically assume a 13% growth rate in the next 2 years to reach to that $1 billion by 2024. So within the mix, like how should we think about the various segments? Which of the segments should be outperforming that 13% basically because you still have the CCC business, which I can imagine will further stagnate or even decline. So yes, within the segments, how should we think about that?

[Rudi De Winter, executive]

Yes. So as a percentage of revenue, I think that the CCC, where now we are at 19% of revenue, in 2023, 2024 will drop to maybe 15% or maybe down to 12% or so. And automotive will, and then our core markets will all grow strongly. But yes, automotive is already a big part, and that will remain the biggest part. So I expect that all 3 segments from now on will gradually grow together.

[Ruben Devos, analyst]

Okay. All right. And then just a small question related to your site in Corbeil. I think the press release mentioned that the share of revenues based on X-FAB technologies was 42% in Q1. That's a bit lower than in Q4. I mean, generally, the trend was upward, but is there a specific reason for the slight decline?

[Rudi De Winter, executive]

Yes. So the X-FAB technologies, they consist of, a certain portion is automotive, and there was quite some portion in the RF SOI for consumer applications of the mobile in particular, and that performed slower than expected and our automotive is performing better, somewhat better than expected. I mean, the market in automotive is very strong. We have allocation there. So we produce, we could sell more. But the fact that the consumer was somewhat slower also helped us to maybe be a bit better on the automotive side as well.

[Operator]

We will now take our next question.

[David O'Connor, analyst]

Great. David here from Exane BNP Paribas. Well, Rudi, maybe in the same vein as the last question, pulling in the long-term guidance to 2024. I mean, what gives you the confidence right now in light of a kind of deteriorating macro backdrop that you can pull in that? I mean, no room in there for any recession or any scenario like that. Can you tell us what gives you the confidence to pull the guidance forward right now? And that's my first question.

[Rudi De Winter, executive]

Well, it's because we are fully booked and we also for the following year. And we are signing up these long-term agreements with hard commitments from both sides. So we have to deliver and the customers have to buy the products with take-or-pay, yes, style contract. And then a large portion of our revenue is covered through these take-or-pay agreements.

[David O'Connor, analyst]

Okay. Understood. Good to hear. And I mean, from this, can we imply that you're already sold out for 2023?

[Rudi De Winter, executive]

Yes. So very good question. You could say that we are sold out for 2023 and 2024.

[David O'Connor, analyst]

Okay. Okay. Very good. And maybe if I could just switch to the short term. Some of your peers reported that lockdown in China had an impact. And you also talked about the CCC business kind of being a bit weaker. Can you talk to us more about any difficulties you're seeing or slowdown in China that's factored into the Q2 guide. And yes, that's the second question.

[Rudi De Winter, executive]

Well, yes, our manufacturing, so we do not source much from China. So whatever we produce, we produce in-house. And then the supply is mainly from U.S., European and Japan from chemicals and special materials and so forth. So we're not too impacted of this from an operational side on the Chinese lockdowns. Our customers might be struggling with that, but that does not impact our revenue.

[David O'Connor, analyst]

Okay. Got it. And then just lastly on the CCC business, it was actually weaker. What are you seeing on the consumer side there? Your peers across the smartphone just as weaker. If you could talk around that, that would be helpful.

[Rudi De Winter, executive]

Yes. We saw that very strong demand for these RF SOI products in September time frame. Last year, customers were very bullish, but that kind of dropped back towards the end of the year. And so the orders and output for the time being is somewhat weak. Customers tell us that they expect it to recover in the second half of this year.

[Operator]

[Operator Instructions] Next question, please go ahead.

[Robert Sanders, analyst]

Yes, rather strange process of announcing myself. It's Rob from Deutsche Bank. My first question is around the $1 billion target. So if you compare it to 2021 sales, it's roughly 50% higher. Can you break out pricing and capacity? Is it fair to say that pricing is about 40% higher and capacity makes up 10% of the 2, those are the 2 key drivers or is there another element we need to think about?

[Rudi De Winter, executive]

If you compare it with 2021, then I would say, it's about 50-50 that is pricing and quantities. But there is also an element, if you compare it with 2021, there's also an element on product mix because we will be significantly reducing the consumer in the total share, and it will be replaced by automotive, industrial and medical. So it's kind of difficult to say. Not exactly, we're not comparing apples with apples if the product mix changes.

[Robert Sanders, analyst]

Got it. And on silicon carbide, can you confirm when you'll be at a $100 million run rate annualized for this business?

[Rudi De Winter, executive]

That I expect somewhere maybe mid next year or so $100 million run rate, so about $25 million per quarter.

[Robert Sanders, analyst]

Yes. Okay. And then on the take-or-pay agreements. What percentage of 2024 is actually backed up by long-term agreements with take-or-pay terms today? And what's stopping you just taking agreements up to 100%, if not 100%?

[Rudi De Winter, executive]

Well, we do not like to take 100% on take-or-pay because typically, we do the take-or-pay agreements because there's a lot of administration and negotiations and so forth with only the larger, as you say, the top 20 customers. And yes, we have 400 or more customers. And the smaller customers, they also have higher pricing because it's lower volumes and then it's more specialties left and right. And we want to see the corridor for that. So that's why we prefer to book something like 75%, 80% with long-term agreements.

[Robert Sanders, analyst]

Got it. So where are you today percentage-wise on 2024, like lower than 75% long-term agreement?

[Rudi De Winter, executive]

Well, the papers are not fully signed. However, the customers also are, they want, so not all the contracts are fully signed, but the customers, they want more than what we can sign up for. So the challenge is rather to find the right or to give everyone the right here to spread the burden of not having enough product. But it's not a problem to come to this 80%. So if we would want to, we could sell 100% to our 20 largest customers.

[Operator]

We will now take our next question.

[Michael Vander Elst, analyst]

It's Michael Elst from Degroof Petercam. I have a follow-up question. I heard that you said that you're more or less sold out for 2023 and 2024. So that actually makes your target for 2024 more of a guidance for 2024. And if I look at your sales guidance for this year is going to be close to $800 million, then $1 billion in 2024. So let's assume $900 million in the middle in '23. Is it going to be a gradual process until 2024 because I assume the main bottleneck is going to be on your equipment deliveries. Is that going to be a gradual delivery throughout that period or there are certain periods?

[Rudi De Winter, executive]

We have been ordering equipment all along in 2021. They come now in gradually over 2022. And then 2023, it will also be a gradual increase.

[Michael Vander Elst, analyst]

Okay. So the CapEx in Q1, well, it was almost like 25% of your full year guidance. So in Q2 about $50 million and in Q3 $50 million, very evenly distributed over the next 2, 3 years, right?

[Rudi De Winter, executive]

So I expect that the CapEx will continue in 2023 at the same pace, if not even higher now.

[Michael Vander Elst, analyst]

Okay. That's good. Then a question on the price negotiations you have with your customers for the midterm. Is that going to be a fixed price again or is there going to be some more variable input in there just in case that input cost and gases and chemicals rise further. It's going to be more flexible?

[Rudi De Winter, executive]

There will be a fixed price with a component linked to inflation.

[Michael Vander Elst, analyst]

And is that very different from what you had, say, in the past 2 years?

[Rudi De Winter, executive]

Well, the past 2 years, yes, we didn't have long-term agreements.

[Michael Vander Elst, analyst]

Okay. Okay. So that inflation component should protect you from whatever cost inflation you may encounter?

[Rudi De Winter, executive]

Yes.

[Operator]

Thank you. No question at this time. Please continue. We still have one question.

[David O'Connor, analyst]

It's David O'Connor here again from Exane. Maybe just one follow-up on the long-term agreements with customers. As you mentioned, 2 years ago, you didn't have this scenario. Today, you do given the supply-constrained environment. And that goes to 2024. What's your sense from your discussions with customers that these long-term agreements are here to stay going forward? Do you get the sense that they're just to cover this current supply crunch? And once we get out of this kind of it will revert back to the classic kind of ordering pattern of customers? Or is this now the new kind of playbook going forward?

[Rudi De Winter, executive]

All customers and system houses are so severely hit by the short channel and logistical nightmares resulting of it that it is a paradigm change where, again, people see that semiconductor manufacturing is not just something ordinary. And that the manufacturing of specialty products like we do is a very, very essential part of the value chain of a semiconductor business. And people realize this now how difficult it is to get chips or more chips or other sources for chips. And so people realize the value that we bring and that's really a paradigm change. And I think, yes, that will definitely be maybe the case for the next couple of years, maybe this decade, but yes, we don't know how the next decade will go, of course.

[David O'Connor, analyst]

Understood. Understood. And if I could just squeeze in one quick one. On the 2024 guidance or sorry, the target, what's the implied silicon carbide revenues within that?

[Rudi De Winter, executive]

I would think something in the range of $150 million or so.

[Operator]

Thank you. No question at this time, please continue.

[Rudi De Winter, executive]

Are there any further questions?

[Operator]

No question at this time, please continue.

[Rudi De Winter, executive]

So if there are no further questions pending, then I would like to thank everyone for participating today and looking forward to speak to you again maybe in one-on-ones in the next couple of days or hear you again at the end of the second quarter to report on the half year results. Thank you very much.

[Alba Morganti, executive]

Thank you. Goodbye.

[Operator]

And that does conclude our conference for today. Thank you for participating. You may now disconnect. Speakers, please standby.