X Fab Silicon Foundries EV

PAR:XFAB

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome everyone to the X-FAB Quarterly Conference Call. My name is Matt, and I will be your operator today. [Operator Instructions] I'd like to advise all parties that this conference is being recorded.

And with that, I'd like to hand it to Mr. Rudi De Winter. Please go ahead, sir.

[Rudi De Winter, executive]

Thanks, Matt.

Welcome to the X-FAB second quarter 2022 results. Today, we have in the call Uta Steinbrecher, Investor Relations; and myself. Alba Morganti, CFO, is excused for medical reasons, and we wish her a quick recovery.

In the second quarter, X-FAB generated revenues amounting to $189 million at the upper end of the guidance, up 17% year-on-year and 6% quarter-on-quarter. Revenues in X-FAB core market reached $155 million, up 20% year-on-year and 7% quarter-on-quarter. Their share in the group's total revenue further increased to 82%. Remember, 5.5 years ago, automotive investment and medical was only 48% of the group's revenue, and we turned it around to more sticky, long-term business.

We recorded strong double-digit growth in the second quarter across all our key end markets and achieved record revenues in the automotive as well as industrial. Revenues were supported by favorable product mix, price increases as well as growth in quantities. Silicon carbide revenues continued to grow strongly in the second quarter amounting to almost $13 million and 78% year-on-year and 5% quarter-on-quarter.

In addition, the successful ramp of volume production of X-FAB automotive 180-nanometer technology at X-FAB France contributed to the automotive growth in the second quarter. This brought a share of the French site's revenue based on X-FAB technologies up to 52% while the legacy business further decreased as planned.

In the second quarter at X-FAB's CCC business recorded revenues of $33.6 million, up 4% year-on-year and 3% quarter-on-quarter. The prototyping revenues in the second quarter came in at $20.5 million, flat year-on-year and down 17% quarter-on-quarter. This is mainly due to several customer-specific projects having reached production milestones, and thus, now being accounted for -- as volume production.

Demand continues to be strong throughout the past quarter. This is however not reflected in the second quarter of bookings. In light of ongoing negotiations relating to price increases as well as long-term agreements with customers, X-FAB paused accepting firm orders for 2023 until the commercial conditions are fixed. Progress is being made to achieve the target to cover about 70% of X-FAB long-term -- or X-FAB business with long-term agreements, typically 3 or more years.

Due to the persistently high demand, the allocation of capacity had to be continued throughout the quarter, and X-FAB remains in close contact with its customers to agree on minimum quantities required to ensure supply chain stability on the customer's side.

Now I'm going into the operations update. The operational excellence and productivity improvements continue to be a primary focus at all manufacturing sites to meet the customers' demand. The delivery of new equipment as well as the ongoing activities to have been installed and qualified were key to eliminate production both tonics and increase wafer output.

X-FAB proceeded with its capacity expansion programs across all sites to prepare for the planned long-term growth that we see forming up with the long-term agreements. Therefore, we kicked off a major expansion project at our factory in Malaysia, in line with the high demand for automotive 180-nanometer technologies. X-FAB plans to invest more than $500 million in Malaysia over the next 3 years to significantly increase manufacturing capacity of this technology. Now the investments are completed, the site's processing capacity will increase by about 50%.

Full year capital expenditures are expected to come in at about $200 million for 2022. In the second quarter, they were totaled $37 million, down 25% from the previous quarter. This is partially due to the longer than expected delivery schedules for equipment due to current tight supply chains. Thanks to risk mitigation measures formed X-FAB has put in place to ensure a reliable supply of raw materials, so there were no supply bottlenecks impacting production in the second quarter.

X-FAB also continued to expand capacity for silicon carbide as well as silicon carbide epitaxy, thus responding to the accelerating demand. Quarterly bookings for silicon carbide came in at about $15 million, up 21% year-on-year and down 31% quarter-on-quarter, following an extraordinary strong previous quarter.

With respect to the booked quantities of wafers, the second quarter bookings were in fact, 10% up compared to the first quarter. Relatively, more bookings were made based on consigned substrates, and therefore, the U.S. dollar amount is less. We, however, do not mind customers to consign wafers as excess margins are predominantly under device processing, and it binds less capital.

The development of standard silicon carbide processing blocks, we call it SiC blocks, which allows our customers to benefit from faster technology releases and a reduced time-to-market keeps drawing attention from -- an interest from new customers, resulting in increased customer base for silicon carbide.

Now let's move to the financial update. The second quarter EBITDA was $42.5 million, with an EBITDA margin of 22.5% within the guidance. Despite strong revenue growth, the EBITDA margin went down 0.5% compared to the previous quarter. Our rising costs continue to put some pressure on margins. But additionally, there was an exceptional item concerning the award of an arbitration between X-FAB and a supplier. X-FAB made a provision for this portion of the award. This relates to the full interest payments in the amount of $12.4 million in the financial results as well as the full legal fees of $1.4 million in G&A.

And [ firstly ] this related to a case with a supplier when the supplier, based on a document signed in 2018 claimed X-FAB had to buy a certain amount of material within a defined time period. Due to the then existing market circumstances and ongoing discussions with that -- about quality of the supplied material, X-FAB did not order the allegedly requested amount in the set time frame, and the supplier started an arbitration. We made the provision for interest payments as well as legal fees, totaling [ $13.8 million ]. And X-FAB was requested to pay [ a $6.8 million ] to the supplier, provided that the supplier is [ required ] to deliver the material. This is a one-off financial impact and it does not influence the X-FAB fundamentals.

In absolute terms, EBITDA was 3% up quarter-on-quarter and down 2% year-on-year due to a favorable one-off effect in the second quarter last year related to $6.5 million received in context of COVID-19 related government support. Excluding this, the EBITDA increased 15% year-on-year. And if you further exclude the one-off from the previous mentioned [indiscernible], the real operational EBITDA went up 19% year-on-year here.

Euro sales was 42% during the second quarter. And the current weakness of the Euro had a negative impact on revenues. At a constant US dollar exchange rate of 1.2 as experienced in the previous year, revenues of the second quarter would have been $10.5 million higher, and the EBITDA margin is not impacted due to our good natural hedge.

Now the outlook for the third quarter revenues are expected in the range of $182 million to $192 million with an EBITDA margin in the range of 20% to 24%. This guidance is based on exchange rate of 1.02 U.S. dollars to Euro, meaning an additional headwind of the exchange rates. We can also further narrow down the full year guidance to revenues in the range of $750 million to $790 million, and the EBITDA margin remains in the range of 22% to 25%. The full year guidance is based on an average exchange rate for the full year of 1.06 [ according to the Euro ].

All that I can say in the current geopolitical and economical environment that is marked by a high level of uncertainty, I'm very glad about the business X-FAB is in. We continue to see unprecedented strong demand for our technologies, which is mainly driven by the accelerating electrification. This holds particularly true for the automotive market, X-FAB has a very strong presence. Going forward, there is a very high focus on production execution, and I would like to thank X-FAB employees for their engagement to maintain production lines running at full steam despite the challenges arising from higher absence rates as well as increased logistical challenges.

With this, I am ready with the introduction, Matt, and I'm ready to take the Q&A.

[Operator]

[Operator Instructions] And the first question is coming from [ Michael Prince ].

[Unknown Analyst]

I want to ask about this exceptional item. Was it reported before? [ Was there, in fact, news ] about it? And explain more about the further risk. As far as I understood, you spoke about [ $36 million ]?

[Rudi De Winter, executive]

[ Right. There was a profit ] in the annual report, and we refrain from any -- well, It's obviously reviewed by the auditor. And that we refrain for any further comments because we are bound to confidentiality. And we don't want to influence the ongoing case.

[Operator]

And the next question is coming from Robert Sanders.

[Robert Sanders, analyst]

Just a question regarding the [ difficulty -- seeming difficulty to cover the 2023 stores ] with the LTAs. Is that a function of a disagreement about pricing or volume or terms or translation plans? Or is this kind of more of a negotiation tactic? And how relevant is the booking in the context of strong demand?

[Rudi De Winter, executive]

There is absolutely no problem to cover 2023. [ If anything, probably it's the opposite, we're far and possibly ] overbooked. And demand is much higher than our production capacities. This is just that we do not want to book [ sort of little half agreements ] on the commercial terms before we enter a booking because we don't want to fill up the backlog with a revision of the pricing. And we like to think eventually, [ it's going -- that increases ].

[Robert Sanders, analyst]

But is there any change in the customers' appetite for tolerating price increases next year?

[Rudi De Winter, executive]

No.

[Robert Sanders, analyst]

For example, [ S&C Micro ] is saying that it's a bit harder to put through price rises next year than it is in the current year.

[Rudi De Winter, executive]

No. I would say that, certainly, I would like to point out that the [ LTA agrees that we're -- they're not inclined the same ] bookings. And so the [ very value ] core bookings is -- some orders with price, delivery date and items. So this would be described to what kind of [indiscernible]. So the LTAs, they typically describe capacities and commitments to buy those capacities over a certain time frame but they're more specific on the product and therefore, we do not account any bookings.

[Robert Sanders, analyst]

Okay. And on the -- on this disagreement around material supply, I think I remember in one of your reports, you're talking about kind of comparing for light materials from a certain supplier. You're saying that the quality was not up to scratch. But also, of course, the demand didn't materialize for you guys either at that time. So is the likely outcome going to be a cash payment? Or is there a chance that you could just say that you'll take -- now that the demand is strong, you'll take different but better quality materials? And so that sort of cash outflow will be -- at least you'll get something [indiscernible].

[Rudi De Winter, executive]

Yes, sure. But I still can't -- refrain to further comments because the case is ongoing.

[Robert Sanders, analyst]

Fair enough. I guess my last question would just be around CapEx. Can you just talk a bit about CapEx next year versus this year and past the year after? What are you thinking at the moment?

[Rudi De Winter, executive]

I believe that the CapEx might probably further go up next year. A portion of the LTA agreements will also require prepayment for the -- for booking the allocations and that will also help us significantly with the financing of the additional expansions. So we typically ask around 10% to 15% or 16% of the total volume of our 3-years contract.

[Robert Sanders, analyst]

Got it. And the amount of money then in the next few years going towards France versus Malaysia, it sounds like most of the -- this consideration is going to [ fellow ] activity. Is that right?

[Rudi De Winter, executive]

No. The -- we're expanding in all the sites. We're thinking expansion in Malaysia is -- from [ an initial ] CapEx perspective, the largest one this.

[Operator]

And there are no further questions in the queue, Rudi. [Operator Instructions] The next question is coming from Trion Reid.

[Trion Reid, analyst]

Just to follow-up on Rob's question about the CapEx. You mentioned this $500 million over 3 years. Is that -- that's just for Malaysia and on top of the numbers you talked before, and I think you spoke about $200 million this year, maybe even $200 million next year. So maybe you could give a bit more color on your expectations for CapEx sort of this year, next year and the year after.

And then I'm interested in what you would consider to be a kind of new maintenance CapEx level. I think in the past, that was sort of $50 million, $60 million. But I guess, with all of this new CapEx going in, that level will be higher. And the I've got another, just a follow-up question.

[Rudi De Winter, executive]

Thank you. So the CapEx of $500 million is just for -- it's just for Malaysia for the next 3 years. And so for next year, we will be also -- so I guess next year, the CapEx is also -- the way we book this, it also depends on, for instance, negotiations on prepayments and so forth as the lead for equipment. So our typical model is that 30% of the equipment is paid [ at ordering that was used from the past ]. However, we sometimes like 2 years lead time of equipment, so it's not really be to ask the 30% for some equipment at the end of the year.

So therefore, there is new, different arrangements. And depending on how they come that would also [ again and again and means ] in the CapEx spending next year and the year after. So obviously, we try to push it as much as possible in the future, in alignment with the deliveries of the equipment. But yes, so for next year, I think that the CapEx will be somewhere in the range of between [ $220 million to now ].

[Trion Reid, analyst]

Okay. And maybe if you can say that the maintenance level was...

[Rudi De Winter, executive]

I didn't answer the question on the maintenance CapEx. Yes, so that will remain somewhat the same as well as the [ $60 million ] as we -- or something like 7% also of revenue. Anyway, it's -- the more we do expansions with new equipment and so forth, and then, of course, we'd need immediate maintenance CapEx.

[Trion Reid, analyst]

Okay. Very good. And then the second question was just on the prototyping revenue, which have -- it can be lumpy, I guess, you mentioned some prototype returning into volume production. But I guess that's happening all the time and we haven't had this [ fall of ]...

[Rudi De Winter, executive]

[ Well, we have said -- yes. ] We have 2 different business models. On the one hand, we have our standard technologies where customers, they're [ prototyping -- and making an asset and do the prototyping ], which is, yes, one business model.

The other business model is where we develop customer-specific, yes, technologies. And we did this, particularly the case in [indiscernible] and then the silicon carbide whereas every customer with a specific solution.

And then when these projects, they are in this development progress. And they're -- shortly before production start, it's quite common that there are larger quantities that would -- [ BOEs and scoring of ledgment ] are made to steady the maturity and robustness of the process. And so we got quite some -- of some of that in the silicon carbide that moved into production, and [ that's where a bit of demands -- they call that moving ] production.

[Trion Reid, analyst]

Okay. And what does that means for sort of future expectation of prototyping, I guess...

[Rudi De Winter, executive]

Yes, I think it's not [indiscernible]. The level where we are now is a good level. It was somewhat higher the previous quarter, but yes, so this is -- cost somewhere around that.

[Operator]

And we have another question from Robert Sanders.

[Robert Sanders, analyst]

Just to continue the questioning about pricing. I mean there was the quite a lot of news going on in Asia that China-based foundries are cutting pricing by about 10%, consumer-facing foundries [ being displayed driver and not necessarily that ] sort of stuff. I guess my question is at what point does that sort to affect at least the consumer part of your business? I know that you're generally [ single-sourced and all of that ]. But I mean when can market pricing start to affect your business? When should we expect that?

[Rudi De Winter, executive]

I do not expect it to influence our business. So the technologies that we are showing are quite unique and also these consumer projects -- or even the credit for consumer markets, they -- I do not see that pressure. We will -- I expect that -- our consumer business to further go down in the next few years and maybe reach something like 15% or between maybe 13% and 15% of our revenue, while we see stronger growth in furthering our core markets. So it is particularly the work that they're doing in France and also legacy business that will -- that is still running today, but that will further decrease and -- going into 2023.

[Robert Sanders, analyst]

And [ that interest ], I'd be interested, given your experience [ with less, well, like ] when do you think orders from your [indiscernible] industry will start to be in line with production? I guess all I've been asking is because IHS is quite well, it's quite [indiscernible]. Orders are equivalent to [ 120 million cars ] at the moment in this year, there's only [ 80 million cars ] produced. So I guess [indiscernible] sort of think -- just to understand when you think there -- that there would be enough replenishment and [indiscernible] that we could see kind of the demand for these orders are more matching the production in the field?

[Rudi De Winter, executive]

Well, it's a -- if I see my discussions with IHS is after some of these businesses, this is not going to happen for each shop in 2023. It's sold. And also we are booked and customers are eager for more quantities in 2023.

[Operator]

The next question is coming from Michael Roeg.

[Michael Roeg, analyst]

I have a couple of smaller questions. The first one is on Malaysia. Once you have expanded the capacity by 50% in 3 years from now, what would be the extra sales potential from that?

[Rudi De Winter, executive]

That's something in the range of $170 million for us.

[Michael Roeg, analyst]

Okay. And in terms of product portfolio, would this carry gross margins that are roughly similar to the group average? Or is this something higher or lower in terms of mix?

[Rudi De Winter, executive]

This -- because the additional capacity comes with quite high depreciation, so the cost structure in Malaysia is good. So that we can somewhat -- I think, slightly better than average. We basically -- obviously, we liked it than what we have today in Malaysia. The one we did [indiscernible] also very good margin.

[Michael Roeg, analyst]

Okay. And the second question is on the gross margins in the second quarter compared to the first quarter. The gross margin was more or less select, but your sales were much higher in the second quarter. And typically, with higher sales, you think a bit more leverage. And your French fab had also more on technologies, which I also perceived as being higher gross margin than legacy technologies. So could you explain a bit the dynamics why the margin was flat in spite of the positives from sales and on technologies?

[Rudi De Winter, executive]

That will be the -- on the assets, although it's a mixture of -- the additional sales is a mixture of price increase, quantities and product mix. Out of the results are naturally some more headwinds on costs, in particularly, for instance, in Germany on electricity and also additional costs related to spare parts, so the machine-based yarn. It's harder and harder to source the required spare parts. We still manage it, so it does not impact the auto yet too -- so much. However, they come at higher [ costs ]. And then there other materials, chemicals, gases and so forth, all these items so -- but also more expensive. So therefore, we also negotiate in higher prices for our system so that for the 1st of January next year, we should have a much better [indiscernible].

[Michael Roeg, analyst]

Okay. So there will be no further price increases in Q3 and Q4 compared to the base level of Q2?

[Rudi De Winter, executive]

Well, there are. So there have seen price increases in the past. And because of the large backlog, it takes a time to [indiscernible]. So there will be further granular benefit from increases that were initiated already. But -- so we stopped the clock, that's why our bookings in Q2 were -- was not lower to make sure that at the 1st of January, we do not further increase the backlog and reset the clock and have another situation [ again very soon ].

[Michael Roeg, analyst]

Okay. Clear. Then my final question. Well, you already mentioned energy prices in Germany. What kind of contingencies do have supposed that energy supply in Germany becomes more -- a bit more difficult for the obvious reasons?

[Rudi De Winter, executive]

Well, we can't do multiple, so we are negotiating with the energy companies and the local governments and so forth to get priority over other users and because the semiconductors are essential everywhere. And if factories are down, it will have a ripple effect in the whole of the automotive industry. [ Some of the medicals and its -- was dependent ] on electricity. And so of course, there are outages or shortages. I need to see how they deal with that. And that we're on top of it, but we cannot [indiscernible].

[Operator]

And there are no further questions in the queue, Rudi.

[Rudi De Winter, executive]

All right. Thank you very much, Matt.

I would like everyone to thank for the conference call today. And I [indiscernible] and are looking forward to meet you, 27th October for the closing of the third quarter. Thank you very much, and have a nice evening.

[Operator]

Thank you so much, everyone, that marks the end of your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.