X Fab Silicon Foundries EV

PAR:XFAB

Earnings Call Transcript 2022-Q3

[Rudi De Winter, executive]

Thank you, Greg. So in the conference room here today, we have Alba Morganti CFO; and myself, Rudi De Winter. So welcome to the third quarter results 2022. X-FAB business continued to develop strongly and our customer demand remains at higher levels despite current political and economical volatility.

The third quarter revenues amounted to $188 million, within our guidance, so it is up 11% year-on-year and flat quarter-on-quarter. The current euro weakness created a headwind for our top line. At constant exchange rate, revenue would have been up 19% year-on-year and 2% quarter-on-quarter.

Revenues in our core market, automotive, industrial, medical came in at $157 million, this is an all-time high, and is up 17% year-on-year and 2% quarter-on-quarter. They represent now 83%, reflecting the continued very strong end market.

Our automotive revenues in the third quarter were 19% up year-on-year and are expected to develop strongly going forward due to the rising trend of vehicle electrification. The high-voltage CMOS as well as the silicon carbide revenues continued to develop well. In the third quarter, silicon carbide revenues reached a record level of $17.4 million, up 76% year-on-year, clearly outperforming the overall silicon carbide market.

In the third quarter, X-FAB also recorded all-time high industrial revenues of $46 million, up 22% year-on-year. The strong and consistent growth in this market is mainly driven by the industry's transition to electrification and more renewable and environmentally friendly energy sources.

Third quarter revenues in the medical market were down 6% year-on-year due to the normal fluctuation of the medical prototyping revenues, which were down 32%, while the medical production revenues were up 5%. Our combined CMOS and MEMS capabilities fit very well for the need of lab-on-a-chip end market. This will drive the growth of X-FAB medical business in the long term. In the third quarter, the growth in the medical volume production revenues was mainly driven by lab-on-a-chip applications for DNA sequencing, temperature sensors for contactless temperature monitoring as well as chips for ultrasound equipment.

X-FAB's CCC business recorded revenues of $30 million, down 11% year-on-year and 9% quarter-on-quarter. The decrease relates to the legacy business still being produced at X-FAB France, which has recently been decreasing at a faster pace and is expected to be fully replaced in the first quarter 2023. The portion of the French site revenue is based on X-FAB technologies went up to 56% in the first quarter.

The quarterly bookings came in at $217 million with particularly strong order intake from automotive. Third quarter bookings already reflect the increased price levels effective in 2023. The prototyping revenues remained strong at $22.8 million, down 11% year-on-year and up 11% quarter-on-quarter.

On the operations side, the factories continue to run at full load, and we are gradually progressing with the expansions. In times of universally limited resources, we are managing the supply chain well, and it did not lead to interruptions.

The silicon carbide business gained further traction driven by X-FAB's streamlined onboarding process. The number of new customers has been increasing further, and X-FAB keeps attracting new customers. In response to the strong demand, X-FAB accelerated its activities to expand silicon carbide processing capacity and plans to more than double the current run rate by end of 2023. The delivery of additional tools to increase silicon carbide epitaxy capacity is still expected this year.

We are clearly the #1 in the silicon carbide foundry space. And based on our own U.S.-global market assessment, X-FAB should now have 6.5% market share on silicon carbide wafer processing, including all IDMs and foundry together.

On October 2, 2022, unfortunately, our Malaysian site experienced a facility incident and related power outage of 8 hours. Thanks to the high level of commitment of the team on site, the damage was contained and comprehensive repair and requalifications of productions started immediately. The incident is expected to impact the fourth quarter revenues by approximately $50 million, which is considered in the respective guidance.

Quarterly capital expenditure came in at $40.9 million, up 87% against the same quarter last year. The full year capital expenditures are expected to come in at about $200 million, but could eventually be lower due to prolonged and uncertain lead times for delivery of new equipment.

Now I'd like to pass the word to Alba.

[Alba Morganti, executive]

Thanks, Rudi. Good evening, ladies and gentlemen. And now let's walk over the financial update. Let me start this section with the final outcome of the arbitration proceedings related to a supplier, which we already fully disclosed in our press release dated 6th of October this year, which had a one-off negative impact of about $37 million on our third quarter earnings. As a direct consequence, our EBITDA was $9.2 million with a margin of 4.9% versus the guided 20% to 24%. If we exclude this nonrecurring item, which was recorded under other income and expenses, the EBITDA margin would have been 24.4%. And of course, our third quarter operating profit EBIT was also negatively impacted by this one-off effect and came in at minus $9.9 million. If we deduct this one-off effect, our Q3 EBIT would have been of almost $27 million. The impact of the arbitration has now been completely and fully recorded in our books.

Let's now walk over our cash and cash equivalents, which at the end of the third quarter amounted to $327.5 million, which means an increase of 30.6% compared to the previous quarter-end. While the current euro weaknesses created a headwind for the top line, the natural hedging of the business keeps our profitability largely independent from the fluctuation of the U.S. dollar-euro exchange rate. We can clearly see this independently in the EBITDA results because at a constant U.S. dollar-euro exchange rate of 1.18 as experienced in Q3 2021, the EBITDA margin would have been 0.3 percentage points higher.

Our guidance for Q4 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%, reflecting the temporary impact of the incident occurred earlier October in our fab in Malaysia, which caused a power outage at our site. The aforementioned guidance is based on an average exchange rate of 0.98 U.S. dollar-euro. Our full year revenues are expected to come in, in a range of $735 million to $745 million.

And now to conclude, I would like to highlight that for next year, our Q1 2023 revenue is expected to come in at a range of $205 million to $220 million, following full operational recovery of our Malaysian site in Sarawak, but we also reflect a price increase which will be effective from January 2023 onwards.

And now I would like to give the word back to Rudi.

[Rudi De Winter, executive]

Thank you, Alba. I'm very excited how well we, as X-FAB, are positioned, and I could not be more convinced of our long-term growth strategy. With the technologies and the expertise we offer, we address exactly those segments of the semiconductor industry that are forecasted to show the strongest growth of the next decade, in particular, the automotive part of our business, and we see this reflected in the consistent strong customer interest with bookings beyond our capabilities to produce.

The urgent need for green mobility and sustainable energy keeps driving demand for X-FAB silicon carbide and high-voltage CMOS technologies while X-FAB also benefits from the rising demand for novel medical applications that increasingly rely on semiconductive technologies as we provide them. Therefore, we have extensive expansion programs running in our factories. I see X-FAB well on track for reaching the $1 billion in 2024, with an EBITDA margin of 30% despite the currently challenging macroeconomic environment.

And with this, I would like to open for questions, Greg.

[Operator]

[Operator Instructions]. Our first question is coming from the line of Mike Roeg.

[Michael Roeg, analyst]

Can you hear me?

[Rudi De Winter, executive]

Yes.

[Michael Roeg, analyst]

Perfect. I have a couple of smaller questions. The first one is on the price hikes that will start contributing in the first quarter. Will your sales in the first quarter be fully impacted by the price hikes? Or is a tale of those price hikes only starting in Q2 or later.

[Rudi De Winter, executive]

There is first substantial step in Q1, and there is further increase in -- as the year progresses, but the biggest step is in Q1.

[Michael Roeg, analyst]

Okay. Because in Q1, you still have some of that older backlog with the older prices.

[Rudi De Winter, executive]

Yes, there is that. And there is also contracts where we have price increases that phased in at other point in time.

[Michael Roeg, analyst]

Good. Then the second question, if you look at your backlog and especially in the mix within your backlog with more silicon carbide and other products, what -- and price hikes, what do you expect the trajectory to be of your gross margin next year? Do you expect it to go up?

[Rudi De Winter, executive]

We expect it to go up. However, the details on that, we'd like to give when we have the full budget done in the -- with the Q4 reporting.

[Michael Roeg, analyst]

Okay. And is the main driver going to be the improved mix going forward, with more silicon carbide, less of the legacy consumer? Or is price hikes more of a contributor?

[Rudi De Winter, executive]

Well, it will be a combination. So it is the product mix. That's really an important item. I expect that our CCC business or consumer, communication business next year to drop into the range of 10%, and so our core business to become like 90% of the revenues. We'll have more silicon carbide to have expect further growth in the medical. And the price increases, they will also further contribute. On the downside, you will have, of course, inflation that will play, but we see it now that these other elements should be more important than the cost increases.

[Michael Roeg, analyst]

Okay. And of course, also, you're signing some new longer-term contracts. Is inflation a component of those contracts that as soon as it happens, you can immediately pass it on?

[Rudi De Winter, executive]

Well, the mechanism is as follows. So it is typically a 3-year contract with a flat price where in the first year, so 2023, the price is fixed. And then in '20, there is price increase possible based on the consumer inflation. And that will then plug in, in 2023 and the respective...

[Michael Roeg, analyst]

Okay. consumer inflation can be very different, both positive and negative versus your cost drivers.

[Rudi De Winter, executive]

Yes, that's how it -- I don't think that the consumer index will be negative.

[Michael Roeg, analyst]

Okay. Good. Yes. Okay. Good...

[Rudi De Winter, executive]

The reference for this consumer index is July 2022.

[Michael Roeg, analyst]

Okay. Good. Then the final question I have is about that hiccup in the Malaysia fab. Were there any wafers damaged during the hiccup and maybe have to be destroyed and...

[Rudi De Winter, executive]

Yes. So typically, if there is a blackout or when the electricity goes out, then the wafers that are in critical processing steps, they cannot be reworked and they are then lost. And that is included in this forecast, of course.

[Michael Roeg, analyst]

Okay. So that's going to be sort of like a small inventory write-down in Q4 through the gross profit, I assume.

[Rudi De Winter, executive]

Yes. That will be -- those will be written off.

[Michael Roeg, analyst]

Okay. Is that something you can quantify?

[Rudi De Winter, executive]

That's -- I think the bigger portion of the impact is -- so the -- that's maybe something in the range of $1.5 million. The bigger portion is the revenue loss, the time to recover the factory.

[Michael Roeg, analyst]

Okay. Yes, the utilization has a bigger impact on -- than the write-down.

[Operator]

Next question is coming from the line of David O'Connor.

[David O'Connor, analyst]

Maybe firstly, just on the CapEx. Rudi, the $200 million that you expensed this year in CapEx, how much of that is revenue capacity that's coming online in 2023?

[Rudi De Winter, executive]

Good question. So there is also prepayments for deliveries that are coming later. So I would think that something like 70% of that is capacity that comes online in 2023.

[David O'Connor, analyst]

Okay. Understood. And then maybe kind of longer term on CapEx again. You talked previously about the $1 billion CapEx plan over 2023 to 2025. Can you talk a bit more around how you plan to fund that in terms of prepayments versus from cash balance or operating cash flow. And maybe also then you indicated half of that is kind of from Malaysia. Can you give us a bit more detail about where the rest of that is going? And then I have a follow-up.

[Rudi De Winter, executive]

Yes. So first of all, there is the cash that's on the accounts. So we have around $300 million cash on the account, then we are going to move -- well, the operational cash will also become bigger and bigger, the operational cash flow. And then there is a prepayment of the customers that -- well, what I think previously estimated something like $250 million or so prepayments that should come in. And that altogether should work out. If needed, we can take additional loans, credit line, but to give a bit more, yes, leeway.

[David O'Connor, analyst]

Okay. Okay. Understood. That's helpful. And then maybe just a question on the LTAs. I think previously you mentioned you're up to maybe 50% of the business on that, and we're targeting upwards of 70% longer term. Can you update us on where you are in working through those contracts towards that 70% sold?

[Rudi De Winter, executive]

Yes. So we are focusing with our LTAs, primarily on the 200-millimeter CMOS capacity that were also -- investments are significant and the capacity very tight. And there, we have signed up around 70% of the capacity of the 200-millimeter CMOS production. And that is for the period '23, '24, '25. So also 70% of our anticipated capacity in 2025. So with these expansions that come in is already also sold under these LTA contracts.

[Operator]

The next question is coming from the of [indiscernible]

[Unknown Analyst]

The first one is on the Malaysian outage. The revenue lost, is that -- was lost? Or do you expect some spillover in your guidance in the first quarter of 2023? And -- or is the $205 million to $220 million not including any of that? And the second question is on your 2024 guidance in your management comments, the $1 billion. How much -- what's the percentage of LTAs in this $1 billion? What kind of numbers do you bid or are you aiming for?

[Rudi De Winter, executive]

Yes. So first, on the revenue loss, so the $15 million is a revenue loss in Q4. There is -- we anticipate that we can recover a bit over the -- gradually over the year next year. But maybe something like a $10 million is really lost. That actually, we cannot make up any anymore because we're running at maximum capacity.

And then the other question was of this $1 billion in 2024, how much is covered by LTAs already? So the -- I would say it's about 55% because it's from the $1 billion, so we have less LTAs on -- so as I explained, we are focused with our LTAs on the 200-millimeter CMOS capacity. That represents roughly 75% of the total revenue by them and -- or maybe 70% of the -- or closer to 70%. And of that 70% is covered by LTA. So it's roughly half of the revenue. We are also continuing to work on LTA contracts, but have not yet concluded for our silicon carbide. So I expect that this -- that will be topped up by more long-term agreements, but are not -- we're still working on that.

[Operator]

The next question is coming from the line of Robert Sanders.

[Robert Sanders, analyst]

Yes. I just had a question about the French fab, which is 200-millimeter CMOS. So I understand that your Malaysian fab is almost completely dominated by Melexis. And so that's obviously covered by these long-term agreements. But what about the implied margin of what you're getting in the French fab? The French fab is obviously more expensive to run, probably a bit more inefficient, and has certainly been loss-making over the years. So what is the margin that you're now capturing within these long-term agreements relative to the historic margin of that fab?

[Rudi De Winter, executive]

Well, the pricing, so we do not distinguish between the fab because the technologies, the products, the services that we deliver are equivalent and there are customers who are buying identical products from the fab in Malaysia and the fab in France. So we -- they are at the same selling price. And now if we look at the fab in France, if the fab is -- as I said, because we're in Malaysia, we're now running close to $300 million revenue. If we have the same revenues, which we anticipate roughly in 3 years, in the fab in France, the cost structure is very similar, except the salaries or the labor cost is the only differentiating element.

[Robert Sanders, analyst]

As I understand it, the capacities of both fabs is relatively similar. But historically, your ASP was way, way lower in France. If you're going to be ending up producing roughly the same mix, whether it's 0.13 or whatever, and your ASP goes up, surely the French fab can go from like $150 million to $300 million of revenue potential very quickly.

[Rudi De Winter, executive]

That's correct. Over that time frame, we [ promise ] to bring the French fab in revenue close to $300 million in 3 years.

[Robert Sanders, analyst]

Got it. Got it. So -- and those agreements that you've signed, if a competitor like one of the Chinese players knocks on the door of that company, your customer that has signed up to that agreement, what rights do you have to recover value from that customer because there would be -- cynical people on this call might just say, "Look, a long-term agreement at some point will not be worth the paper it's printed on." So will you -- how are you going to defend that sort of...

[Rudi De Winter, executive]

Well, we'll just defend it in court if we want. It's then just -- well, it's clear that if a customer says, "I do not honor the contract and I go somewhere else," then for sure, we will in court.

[Robert Sanders, analyst]

Got it. Got it. Could you just -- can you comment a bit on the situation in Texas now, so in terms of how much capacity you have in silicon carbide? I think in the past, you talked about having a corridor of 5,000 per month in the fab itself, I think, it's a much -- it's more like a 15,000 facility. So where are you with the transition of that facility to presumably eventually being fully silicon carbide?

[Rudi De Winter, executive]

Yes. So the run rate today as we -- is some like 3,000 wafers that we ship per month. And the capacity that we have in place is now approaching 5,000. So beginning next year, we'll probably -- so we are starting more wafers than what come out because we are ramping up, but there's -- yes, it's gradual slow. So -- and by end of next year, we'll be more than double. So we'd probably then should run something like 7,000 wafers a month on silicon carbide.

And we -- towards end of '24, we might again be roughly doubling that, maybe end '24, beginning '25. It's a matter of building the capacity up because of the lead times of the equipment and some facility work that needs to be done. The factory has a capacity of 26,000 wafer CMOS. However, we need to add additional equipment to do the silicon carbide, and that -- those equipments are being ordered. They're ramping up. And that's -- so we will see a strong progress over the next -- that continues over the next year.

[Robert Sanders, analyst]

Is the right math, by 2025, this market is 2 million wafers a year annually? At 7% share, you would be needing to do $12,000 a month. Is that the kind of math that you're thinking about?

[Rudi De Winter, executive]

Yes, that's about right. Our ambition is maybe a bit higher even, but that's about right, yes.

[Operator]

There are no questions in the queue. [Operator Instructions] The next question is coming from the line of David O'Connor.

[David O'Connor, analyst]

Great. Thanks for the follow-up. Just following on from Rob's question earlier. I remember previously, you guys talked about an EBITDA breakeven for the French fab in Q4. Just checking, are we still on track for that? And can you just level set as well on you're exiting this year the revenue from the French fab and that kind of how you progress to that $300 million? What are the major kind of milestones in that progression and also on the kind of EBITDA margin from this breakeven to the kind of group average?

[Rudi De Winter, executive]

Yes. Thank you. So the -- as I explained, just towards 2025 that we expect to be in this $300 million range for the French fab. The trajectory also, we have an investment program that is running there that in total roughly $170 million. That is to convert the existing capacities for mainly RF SOI to produce the high-voltage processes of X-FAB and the high-voltage SOI process. So that is gradually being rolled out, and that should -- these expansions should be fully in place in 2025.

[David O'Connor, analyst]

Okay. Understood. And in terms of the run rate exiting this year, the run rate of the French fab, I think you mentioned that the GF business is going away. So how should we read into that in terms of the run rate from French fab just exiting this year?

[Rudi De Winter, executive]

Yes. So the run rate right now is roughly on schedule for the X-FAB core technologies. However, the GlobalFoundries business is dropping faster than expected. This is driven by the overall weakness in the mobile phone market and so forth. On the one hand, it's okay, a bit of lost revenue. But we know it would go away anyhow, so we don't regret it too much and we are focusing now even more of our people on to the ramp-up of the X-FAB core technologies. So that's what's happening there. The run rate for Q3 or something in the 100 million -- on a yearly level, something like 100 million -- or [ 25 million ].

[David O'Connor, analyst]

Okay. Okay. Understood. And in terms of the EBITDA breakeven for Q4, is that still on track?

[Rudi De Winter, executive]

Well, I said they were somewhat behind there because the GlobalFoundries business is disappearing faster than expected. So if you look at our -- how we saw this year at the beginning of the year and how the year actually turned out is that the mobile -- while automotive and our core business remain -- is very strong and all at maximum capacity, however, the consumer business, consumer and mobile business, that turned out lower than we anticipated at the beginning of the year. And so, yes, they are a bit -- that keeps it a headwind, in particular, in the factory in Corbeil. It's actually the only factory where we had such mobile exposure. But all -- this risk is, yes, disappearing, and so the business next year should become more and more predictable.

[David O'Connor, analyst]

Okay. Understood. And your expectation for the -- that RF business for GF next year?

[Rudi De Winter, executive]

Is virtually 0.

[David O'Connor, analyst]

Okay. Okay, got it. Got it. Okay. Actually, if I could just squeeze in one more, just separately on the bookings. Some of the -- some of your larger peers here in the U.S. reported some weakness on the industrial side of things. Can you just talk to your bookings? Are you seeing any kind of pushouts at all from any customer or changes in kind of the linearity of orders, anything that you would see that kind of want more caution from customers?

[Rudi De Winter, executive]

No, no, we don't see any weakness in our core markets. The pushouts and reductions, they are limited to just mobile ICs and market.

[Operator]

We have no further questions in the queue.

[Rudi De Winter, executive]

Okay. Thank you. If there are no further questions, then I thank everyone for attending today, and we'll meet again on the -- for the conference call on the 9th of February for the full year results. Thank you very much. Good evening.

[Alba Morganti, executive]

Thank you. Goodbye.