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X Fab Silicon Foundries EV
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Good morning, ladies and gentlemen, and welcome to X-FAB's quarterly conference call. [Operator Instructions] This call is being recorded on Thursday, April 27, 2023. I would now like to turn the conference over to Mr. Rudi De Winter, CEO. Please go ahead, sir.
Thank you. Good evening, and good morning, everyone. In the conference call room today, we have Alba Morganti, CFO; and myself, Rudi De Winter.
So first quarter results recorded revenues of $208 million within the guidance, and up 16% year-on-year and 13% up quarter-on-quarter. The revenues were limited by production capacities, while we are building up more capacity.
X-FAB's core markets, automotive, industrial and medical accounted for $185 million, up 28% year-on-year, further increasing the share of total revenues of core markets to 89%. This is also a new quarterly record.
Demand remained strong throughout the quarter, with order intake amounting to $227 million and a book-to-bill of about 1.1. The backlog at the end of the quarter came in at $208 million (sic) [ $508 million ].
X-FAB's Automotive business continued to grow strongly reaching a record of $121 million in the first quarter, up 35% year-on-year. And in the first quarter, the share of automotive revenues went up to 58% of total revenue. The growth of X-FAB's Automotive business continues to be driven by the French site ongoing capacity conversion to automotive technologies. 89% of the French output was in the first quarter based on automotive and X-FAB technologies.
With the phaseout of the legacy business in France, we reached an important milestone. Now the site will be growing its revenue and profits quarter-after-quarter with automotive business.
Industrial revenue for the first quarter was $47 million, up 13% year-on-year and the electrification trend is also driving growth in X-FAB's Industrial business with an increased portion of silicon carbide.
The extra silicon carbide revenues in the first quarter were $13 million, up 9% year-on-year. An increasing share of customers sourced their own silicon carbide wafers, contributing to a lower total billing. However, this has no impact on the total value added provided by X-FAB to its customers, which resulted in a higher profitability margin for this business.
In the first quarter, customers provided the substrates for about 70% of all silicon carbide wafers produced. While X-FAB's total quantity of silicon carbide wafers delivered in the first quarter was up 56% compared to the year before. We are progressing well with signing up further LTA contracts for silicon carbide, and we signed up now three LTA contracts and we have further four in negotiations.
First quarter medical revenues came in at about $18 million, up 28% year-on-year. Strong medical growth during this period was primarily driven by increased production volumes of a lab-on-a-chip devices for DNA sequencing. Lab-on-a-chip applications are one of the key technologies driving advances in medical and are expected to remain a major growth driver for X-FAB's Medical business going forward.
In the first quarter, CCC (Consumer, Communication and Computer) markets revenue were $22.5 million, down 31% year-on-year. The first quarter still included a small amount of legacy CCC business produced at X-FAB France, which has now been further reduced to virtually zero. And we are in the phase of converting and qualifying the corresponding equipments to automotive technologies.
The X-FAB's total CCC business is now expected to stay around this level. In the first quarter, prototyping revenues came in at $26 million, up 7% year-on-year and 12% up quarter-on-quarter. This, by the way, is a good indicator for future business.
Now let's move to the operations update. Given the continued strong demand, X-FAB operated at high capacity throughout the first quarter, focusing on smooth execution, productivity improvements and most important, the implementation of capacity expansion projects. Equipment engineering teams at all sites have progressed well with the installation and qualification of new equipments, which is in full swing now. Long lead time of equipment and delayed equipment deliveries set a pace for the growth, wherein close contact with our equipment suppliers to minimize the delays and accelerate where possible the installation and qualification of equipments.
In the first quarter, capital expenditure came in at about $49 million, with total capital expenditures expected to reach about $350 million in 2023. The first quarter capital expenditure was rather on the low side. However, we plan an increase in capital expenditure in the second half of the year, in line with equipment deliveries, primarily related to the capacity conversion of X-FAB France to the more automotive technologies, the expansion of the silicon carbide in X-FAB Texas and the building expansion in Malaysia. The construction of the [ cleanroom ] expansion in Malaysia is progressing well. And towards the end of 2024, we will be moving in equipment as planned. Now I would like to pass the word to Alba.
Thanks, Rudi. Good evening, ladies and gentlemen. And now let's walk over the financial update. Let me start this section by highlighting that in the first quarter, as Rudi already mentioned, we had some all-time high record numbers. We've registered an EBITDA of $58 million with an EBITDA margin of almost 28%, which was well above the guided range of 22% to 26%.
This good performance was mainly driven by volume growth, but also by the economies of scale resulting from the higher utilization of the fabs, which obviously positively impacted our profitability.
On top, the price increases which we introduced in 2022 has taken effect, contributing to our top line growth, bringing higher margin. In the first quarter, deferred tax assets were increased, resulting in a tax benefit of almost $10 million. In light of the improved profitability, but also of the stable ongoing performance of the underlying entities. And last but not least, of the positive outlook supported by the long-term agreements concluded with some of our key customers, we are currently reviewing the valuation horizon for our deferred tax assets to be more in line with the better expected visibility of the business.
Our natural hedging strategy continues to keep our profitability independent and unaffected by the fluctuation of the USD/Euro exchange rate and it's clearly visible in the EBITDA results because at a constant USD/Euro exchange rate of 1.12 as experienced in the previous year quarter, EBITDA margin would have been 0.1 percentage points higher.
And now let's walk over our cash and cash equivalents. At the end of the first quarter amounted to $350.3 million. So it's down by 5.2% compared to the previous quarter end. Despite this small decrease, which is explained by the scheduled reimbursement of some financial loans, our cash position remains solid and strong and enables us to sustain our growth. The cash flow generated from operating activities was $57.3 million.
And to conclude the financial section, I would like to share our guidance for next quarter. Revenue is expected to be in the range of $205 million to $220 million, with an EBITDA margin in the range of 23% to 27%. The aforementioned guidance is based on an average exchange rate of 1.09 USD/Euro. For avoidance of doubt, we reiterate that our full year 2023 guidance remains unchanged with revenues which are expected to come in at a range of $880 million to $960 million, with an EBITDA margin in the range of 23% to 27%. But in light of the good results of the first quarter, it's more likely that we will be in the higher range of the guidance for the full year.
And now I would like to give the word back to Rudi.
Thank you. So to summarize, the first quarter was marked by record revenue and record profits. The results clearly show how we are different from other foundries who see their revenues dropping significantly while we see a strong growth. I'm very pleased to see the key elements of X-FAB's success coming to fruition. We offer a broad range of technology -- specialty technologies that are needed to address the major challenges of our time, and we continue to see strong demand from our customers. With X-FAB's capacity expansion projects well underway, we are able to increase capacity at our existing sites, setting the stage for strong growth over the next 3 years.
Last but not least, increased volumes and improved product mix with higher value-added products and the ongoing turnaround of our French site continue to contribute to higher profitability. I'm confident in X-FAB's long-term success, and we are fully focused on excellent execution in all parts of our business.
Now I would like to open for questions, Laura.
[Operator Instructions] Your first question comes from the line of Michael Roeg from Petercam.
I have a couple of questions. The first one is for Alba. You just mentioned that given the good start of the year, you expect there's a chance to get towards the high end of the guidance range this year. Did you refer to the sales, to the margin target or both?
Margin.
The margin. Yes. Okay. That's what I assumed. Talking about that margin, and Q1 was very strong, record gross margin, very strong EBITDA margin. And for Q2, you guide for sales to be slightly higher even at the midpoint, and the CCC will not change much within the mix. So I was wondering why then the guidance on the gross margin or on the EBITDA margin suggest a sequential decline?
No, no. In Q1, we -- yes, okay, compared to the guidance, yes, you're right. Yes. Well, we have quite a conservative view and we just want to stay on the safe side.
Okay. Was there anything special in Q1? Maybe an inventory impact or something that will not recur in Q2 for you to be so conservative.
No.
There's nothing major. It was an equipment sale. So -- but that was like $1 million. So it's -- so sometimes, like equipment that we don't need anymore because of the convergence of newer technologies. We sometimes also sell equipment, but that was only in there for $1 million.
Okay. So it's basically a conservative approach for the margin guidance for [ Q2 there. ]
Right.
Okay. Then a couple of questions on silicon carbide. Do you expect your customers to continue to bring their own wafers, just like in Q1?
Well, this is we don't mind -- so it's -- on the one hand, it is also -- and we don't want to have a too complicated [indiscernible] of wafers because that creates also on the operational side complexities.
On the other hand, we -- it's still not easy to buy enough substrates on the market today. We're managing, but -- so we welcome if customers can also help sourcing. But we think that the 70% of where we were right now is on the high end. We think it may be rather decrease to something in below 50% in the long term.
Okay. If they continue to do this, let's say, at 50% or a bit less, does this means you have to -- it means your inventory levels will be lower compared to a situation in which they would -- nobody would bring their own wafers, correct?
So the -- if we source the wafers, we have them in our operational and work-in-progress cost. So we need to finance them. Is that what you are asking?
Yes, indeed. So bringing their own wafer is positive for inventory, but operationally, it may be a bit more complex as you have to make sure that they are on board. But if the agreement, the [ growth process ] per wafer for you is similar.
Yes. So the value add, -- so we are charging for the value adds that we put on the wafers, if it's not so much for the wafers. So this is, of course, a markup because sometimes wafers get lost in production. But obvious -- so that is taken care of by a slightly higher markup on the wafers that we source, but this is a bottom line, much more general on it.
Okay. then only a couple of more questions on the prepayments before I leave others to ask some questions. One of your biggest client announced yesterday that we will send to you about EUR 119 million in prepayments.
Yes.
But you also have other companies that -- other customers that will do that? Could you give us improved indication of how much you expect to receive in total?
Yes. It's in the range of $300 million , maybe slightly above.
300 million plus. Is this a onetime only exercise that will go from 300 to 0 over time? Or once it goes down over time, your customers will send you new pre-payments?
So there are different contracts. And so mainly, we differentiate between CMOS and the silicon carbide, let's say, on the silicon carbide where we have still more investments that we expect over a longer period that we may be keeping the money longer than for the silicon -- for the CMOS type of customers. But on average, the payback is after the 3-year period.
Okay. And then it will end for your CMOS customers. There will be no new prepayments after that.
Well, that will depend on how business go. If customers come back and say, well, we want in '27, and '26, '27 onwards, further significant increases and that require additional CapEx that is not yet initiated, then I would not exclude to ask for further prepayments.
Okay. That's clear. And then do you have to pay your customers an interest fee on the prepayments?
No.
That's pleasant.
Well, it's the same -- it's the usage normally.
Your next question comes from the line of David O'Connor from BNP Paribas.
Maybe Rudi, one or two from my side. Maybe firstly, on pricing. Can you talk about what you're seeing from a pricing perspective as you look through the kind of second half of this year across automotive and industrial? And is there -- within those LTA contracts that you have, is there some price erosion in there for customers?
No, there is no price erosion. Basically, the LTAs are a flat price [ in, ] with a clause that would allow price adjustment if based on index evolution. So, but -- the pricing as such is [indiscernible].
And there is also an energy clause in the [indiscernible] in case of [indiscernible] costs, we have it, too.
Automotive and industrial. [Technical Difficulty] Yes. So it's all of LTA contact channel.
Okay. So from China, [indiscernible] on winning attention?
Well, the -- on China, the demand is very much correlated with the end markets in Yuan. So Chinese applications for automotive, they're strong consumer mobile applications, they are weak, just like in other regions. But we're now predominantly addressing automotive, industrial, medical. And so we also see from China further strong demand in for the -- our automotive, industrial and market product mix. We continue also to see good demand for silicon carbide from China. But on the silicon carbide, our main products we're doing not all [ MOSFETs. ] We're doing about 90% of the production that we're doing is for [ MOSFETs. ]
Okay. Understood. And is that silicon carbide demand from China, is that automotive or industrial related?
Well, it's hard to tell because you do not see the difference on the products when there's an automotive product or in some cases, you can, but in many cases, so it's hard for us to track. We have recorded most of like 90% of our industrial or our silicon carbide business as industrial. However, it's -- I'm not sure if this is totally accurate. It will be -- it is very difficult to see the difference from our end and we do not always share it or they could sell the same products in as well automotive and industrial applications.
Okay. Understood. That's helpful. And maybe last question from my side. Can you remind us what the current revenue and EBITDA margin is at X-FAB France? I think I missed it at the start of the call. And the target for the how are we going to [exit] this year.
Well, we do not disclose the specific news or margins production side. But we are -- Yes. We're just in the transition. So we are -- we stopped producing the older technologies. We're now in fully ramping up the automotive technologies. So we are still on a low level, but it's all automotive business. And from now on, over the next 3 years, the goal is to triple or more the revenue from the site in France.
Okay. Understood. Are we at a cash breakeven level in X-FAB France at the moment?
No. And in particularly, considering all the investments, definitely not.
Okay. And over the next 3 years, can that get to a kind of corporate average?
Yes. So that's what we're heading for. Yes. So in 3 years, we will be there.
David, maybe you might have seen in the press release that the X-FAB France's first quarter revenues, 89% of them were based on X-FAB technologies. So this is the big -- well, that shows you the improvement of the ramp-up in France.
Your next question comes from the line of Robert Sanders from Deutsche Bank.
I just have the first question, would be just thinking through the implications of what [ SMIC ] is doing, which is they seem to be traveling down on the lagging edge as per ASML's conference call. So I was just wondering how much of your customer base would be willing to move to SMIC? Were they to be willing to offer fantastic pricing? Or is it just a very small fraction? And then I have a follow-up.
Well, I don't know what they're heading, but the -- what I can tell you that we are X-FAB, we are a specialty foundry, and we have all specialty technologies that takes years to develop and also takes several years for customers to design products on. So I don't see there any threat or change in the next many years. I think they might be going that way. There might be affecting business from other foundries, but I don't see this as a threat or [indiscernible] so.
Got it. And then on the -- just following up on the pricing question from before. So I was under the impression that from 2021 to 2024, you were seeing a kind of roughly 30% uplift in pricing, but most of that was kicking in, in the quarter you just reported. So is there still a residual impact from LTAs in 2024, just from rolling into the P&L? Or is it kind of that we're on a new run rate and that's not going to be such a big tailwind in '24?
Yes. So there is -- there are different portions of the business. There is still a little bit of hangover from deliveries from 2022 in 2023. So there's maybe -- but the majority of the business in the Q1 was on the new pricing.
Got it. So the agreed long-term pricing is basically flat for -- at the current level as similar to what [ Melexis ] was saying.
Yes.
Okay. And then on silicon carbide, can you just talk a bit about -- you were talking about the substrate prices are still being tight. But I think you've talked about Chinese substrate players being quite competitive now companies like [ Sanan. ] So what is the difference in pricing? Is it something like $500 from China, $800 from Western vendors? Is that how you should -- do you have flexibility to increase your mix of Chinese? Or is it really up to the customer?
Well, we have the flexibility, of course, we need to qualify the substrates. So today, we are looking at those options, but we're not in production with substrates from China, but we are discussing and testing, so it is too early to tell about specific pricing that we see there.
Okay. And then the last question would just be on potential expansion plans in France and [ Korbe. ] What is the status today? And when could you give an update? And what kind of money [could] you be looking at? That would be great to get an update.
So we -- the expansion in [ Korbe ] is predominantly a conversion of the mobile RF-SOI technologies into automotive high-voltage technologies, where we are adding capacity and debottlenecking the production line.
So as previously explained, we -- the legacy technologies are now part of the revenue. And so all the revenue that is there is now automotive and X-FAB technologies. And over the next -- from now to the next, so let's say, 2025, we should -- the plan is to triple the revenue and the output of the factory. So that consists of equipment that we're running RF-SOI technologies before that we are converting and qualifying on the automotive technologies, and we are adding more equipment for automotive, additional equipment that wasn't there before.
Got it. And anything from the chip side, as anything -- could we...
I cannot comment on that. Well, we are discussing options, but that's too early to report anything on.
Thank you. There are no further questions at this time. I'd like to turn the call back over to Mr. Rudi De Winter for any closing remarks.
Thank you, Laura. So thanks, everyone, for attending today. Maybe we will meet on the Capital Markets Day. I would like to point out that we're having on seventh of June in Paris, and otherwise, maybe hear you again on the 27th of July for the second quarter results. Thank you very much, and have a nice evening. Thank you. Goodbye.
Thank you, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day. Presenters, please stay on the line.