X Fab Silicon Foundries EV

PAR:XFAB

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and welcome, everyone, to the X-FAB Quarterly Conference Call hosted by Rudi De Winter, CEO of X-FAB. My name is Victoria, and I'm your event manager today. [Operator Instructions] I would like to also advise our parties that this conference is being recorded.

And with that, let me hand it over to your host, Rudi de Winter. Rudi, you may proceed, please.

[Rudi De Winter, executive]

Thank you, Victoria. Welcome, everyone, for the fourth quarter results and full year FY 2022. We have here in the conference room also Alba Morganti, CFO of X-FAB.

In the fourth quarter, X-FAB recorded $183.6 million revenue within the guidance of $180 million to $190 million, and it represents an increase of 7% year-on-year and 2% down quarter-on-quarter. The early weakness in the fourth quarter compared to the previous year continued to have an impact on the top line growth. At stable exchange rate, the revenues would have gone up 12% year-on-year.

Full year revenues ended at $740 million within the guided $735 million, $745 million, up 12% year-on-year. In extra core markets, automotive, industrial, medical accounted for 618 million, up 18% year-on-year reflecting the strong demand in these end markets. Our comprehensive technology portfolio perfectly fits through products enabling all kinds of electrification to decarbonize our world.

Fourth quarter revenues in our core markets ended at $161 million, up 17% year-on-year and 3% quarter-on-quarter. The portion of core business in Automotive, Industrial, Medical increased significantly to 88% of our revenues, which is mainly driven by the automotive business.

Fourth quarter automotive revenues reached an all-time high of $104 million, up 25% year-on-year and up 8% quarter-on-quarter. The increase primarily reflects the ramp-up of the automotive business at our factory in X-FAB France where the capacity conversion from legacy business to X-FAB Technologies is gaining momentum. The proportion of the French site revenues based on X-FAB technologies now increased to 84% where it was 56% in previous quarter.

In 2022, the automotive demand continued to be driven by the transition to electric vehicles and the associated increase of semiconductors in the cars. In the fourth quarter, industrial revenues came in at 42 million, up 7% compared to the same quarter last year and down 9% quarter-on-quarter. In the full year 2022, X-FAB Industrial business recorded a growth of 19%. The shift to renewable energy dropped demand for power semiconductors, which is expected to accelerate further by more stringent regulations for companies across all sectors to reduce greenhouse gas emissions.

The silicon carbide revenues in the fourth quarter accounted for $12 million, up 15% year-on-year. The 30% quarter-on-quarter decline is entirely related to the increased portion of customers procuring their own silicon carbide wafers and consigning them to X-FAB rather than X-FAB selling the silicon carbide substrates. While this has reduced the top line, particularly in the industrial where the silicon carbide contribution is marginally higher, X-FAB value creation remains unaffected, and the fourth quarter silicon carbide wafer output was the same as the strong previous quarter. Full year silicon carbide revenues came in at $54 million, and this is a growth of 61%.

Fourth quarter medical revenues totaled $15 million, up 1% year-on-year and 8% sequentially. In 2022, medical revenues came in at $56 million, an increase of 16%. X-FAB benefits from the growing trend to use semiconductor technologies for advances in the prevention, diagnostics and treatment and monitoring of diseases. The main growth drivers in 2022 were DNA sequencing as well as Ultrasound and contactless temperature sensors.

In the fourth quarter, X-FAB CCC business recorded revenues of 22 million, down 36% year-on-year and down 30% quarter-on-quarter. This is in line with the plan to convert the capacity of X-FAB France from legacy business to X-FAB technologies. Full year CCC revenues for the same region decreased $219 million, down 10% compared to previous year. The freed-up capacity is fully converted or will be fully converted to further ramp up the production of X-FAB high demanding 180-nanometer primarily for automotive applications.

The backlog in the fourth quarter reached a record of $480 million, while quarterly bookings came in at $191 with a book-to-bill of 1.04. Demand remains high and X-FAB expects its core business to grow strongly in 2023. Automotive revenues are forecasted to increase by approximately 35% over 2022. The industrial is expected to grow about 25%, and the medical by about 10%, whereas CCC revenues will further decrease at the rate of approximately [indiscernible] percent. This is supported by the increased feasibility resulting from the introduction of long-term agreements with our customers. To date, 7 LTAs have been signed, covering a large portion of the 200-millimeter CMOS capacity with a total value of about $1.4 billion over the next 3 years, '23, '24, '25.

X-FAB also has started LTA for our silicon business, silicon carbide business. One LT has been signed and 5 more are expected to be signed in the first half of 2023. The prototyping revenues came in at $24 million, down 2% year-on-year and 4% up compared to previous quarter. The amount -- in 2022, the total amount of prototyping was $91 million, up 3% compared to previous year.

In the fourth quarter, all sites continue to operate at high loading-driven ongoing initiatives to increase productivity, as well as to implement capacity expansion measures. X-FAB Malaysia site successfully recovered the power outage in early October.

quarterly capital expenditures came in at $54 million, and the total for the year was $181 million. This is slightly less than the forecast of $200 million, but this is predominantly because of delayed deliveries of equipment. In response to the strong demand, X-FAB is expanding capacity at all sites and plan to invest a total of $1 billion over the period '23, '24, '25 of which approximately $350 million are expected to be spent in 2023. The key investment projects include the capacity expansion in a factory in Sarawak in Malaysia, and continued conversion of capacities to automotive in a French site, as well as for the silicon carbide in our factory in Lubbock, where we will bring the capacity to about 17,000 wafers per month.

The financial update, I would like to pass now to Alba.

[Alba Morganti, executive]

Thanks, Rudi. Good evening, ladies and gentlemen. Now let's look into the financial update. Let me start this section by highlighting that in the fourth quarter, we registered an EBITDA of USD 42.2 million with an EBITDA margin of 23%, which came in at the upper end of the guided 20% to 24%. Thanks to our natural hedging strategy, the current weakness of the euro experienced in the fourth quarter had no impact on our earnings, while our price increases offset cost inflationary pressures. This natural hedging strategy continues to keep our profitability independent from the fluctuations of the U.S. dollar-euro exchange rate, and it's clearly visible in the EBITDA result. Because if you compare the U.S. dollar-euro exchange rate of 1.14, which was experienced in the previous year quarter, the EBITDA margin would have been only 0.2 percentage points higher.

And now let's walk over our cash and cash equivalents which at the end of the fourth quarter almost amounted to almost $370 million, which represents an increase of almost 13% compared to the previous quarter end and confirms a solid cash position to sustain our growth. Cash flow from operating activities was $54.5 million fully covering capital expenditure in the fourth quarter.

And to conclude, I would like to share our guidance for Q1 next -- of this year. The revenue, which is expected to be in the range of $205 million up to $220 million with an EBITDA margin in the range of 22% to 26%. For the full year 2023, revenues are expected to come in, in a range of $880 million, up to $960 million with an EBITDA margin in the range of 23% up to 27%. The afore said guidance is based on an average exchange rate of USD 1.08 to euro.

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

[Rudi De Winter, executive]

Thank you, Alba. So to summarize, so we closed 2022 with a continued high demand, and I see X-FAB very well-positioned for future growth and success. X-FAB is in the sweet spot of the semiconductor market, and our expertise in specialty applications for automotive, industrial and medical continues to get a lot of traction in the market.

In the fourth quarter, X-FAB Automotive business accelerated and set a new record, reflecting the strong customer interest, as well as the progress we have achieved in ramping automotive capacity at our French site. This positive overall trend will continue in 2023, and our key focus is on execution excellence and productivity improvements to meet customers' demand. The introduction of long-term agreements with customers has significantly increased the visibility of our business, providing a solid foundation for major investment projects we have initiated in 2022. We are well on track to not only reach the $1 billion revenue in 2024, but to continue to grow strongly beyond.

Thank you. And so for as an introduction, Victoria, we can now open for questions.

[Operator]

[Operator Instructions] We have the first question from the line of Ries Johannes.

[Johannes Ries, analyst]

Maybe two questions. First, regarding your silicon carbide business. You mentioned this different ways that the customers deliver the wafers. But you said maybe your own value creation is the same. Therefore, the margin must be higher because it's on a lower revenue base, first point. And secondly, you mentioned about this long-term contracts you are negotiation for the selling in carbide business. Can you give us an idea how strong maybe this business can grow going forward in 2 and 3 years after '23? I think in the past, you talk is an opportunity maybe to bring this business to $200 million. Is this still the target, or is there any adjustments to this?

[Rudi De Winter, executive]

Yes, so first of all, indeed, the silicon carbide substrates, we do not manufacture ourself. So we saw -- we buy those, just like we buy silicon substrates. They're rather expensive in the total value chain. And so we have different models. So on the one hand, where we source the substrate, we sell the full service to our customers. And the ones with some customers can sign wafers, and we charge them for the processing. And so in some cases, we also add the epitaxy. So on the epitaxy we are still in a phase of ramping up.

So the -- we will normally have [ four ] more equipment in production in the second quarter this year, so this will contribute more starting in the second quarter. So that's the explanation why the revenue dropped on the silicon carbide, but indeed, our relative contribution and value added there increased. And so that has a positive effect on the gross margin as a percentage.

On the -- with respect to the growth potential, yes, I can confirm that we're still aiming there to grow that business to $200 million or more.

[Johannes Ries, analyst]

$200 million in 3, 4 years, or what could be the time frame?

[Rudi De Winter, executive]

Yes, I think, less than 3 years. So for the '25 horizon, that's the range we need to think of.

[Johannes Ries, analyst]

Second question, in your growth ambitions and [indiscernible], how much is volume increase and how much is price increase?

[Rudi De Winter, executive]

Yes, for 2022, I would think it's -- yes, it's a rough number. I think it's something like 50/50 volume and price increase.

[Johannes Ries, analyst]

And in your guidance for '23, is it the same or...

[Rudi De Winter, executive]

Yes, and the guidance for '23, I would say, is that there is if you compare apples with apples, so it's about -- there is a portion that's coming from price increase. There's a portion volume and there is a portion product mix. So it's about 1/3, 1/3, 1/3.

[Johannes Ries, analyst]

Last question, you invest a lot, you invest $1 billion in coming years. And you've just said you see you're on the way to grow over $1 billion in next year. And to call -- to show strong growth further on. With the investments you're doing, what is the capacity you built for today's pricing or maybe the surprise development you see in the future design wins, maybe me access your customers, for example. What is the potential capacity you can maybe the revenue volume you can handle with this capacity going forward?

[Rudi De Winter, executive]

I think -- well, what's important to note is that the capacity or the CapEx that we spent so far almost brings us to this $1 billion revenue in 2024. So most of the equipment that we need for the revenue generation of around $1 billion in 2024 or above is almost in place that's being installed and qualified and so forth. So this $1 billion extra investment that we kicked off is for the growth beyond that, and with this $1 billion CapEx executed, it gives us a potential or a revenue potential that we can generate, I believe, is beyond $1.5 billion.

[Operator]

The next question is coming from the line of Dave O'Connor.

[David O'Connor, analyst]

Maybe firstly, just on orders really just down 5% quarter-on-quarter. What's behind that Q-on-Q decline like? And what has the trajectory of orders been like through January and to the start of February?

[Rudi De Winter, executive]

Well, I said demand is still very, very high And so we still have a lot of escalations with customers where demand is higher than the output right now, and we try to navigate so that there is no line stops. But there is no inventory or very low inventory.

The orders, you need to -- while we have also a record backlog, so the backlog I mentioned for almost $500 million is about 3x what it used to be like 2 years ago. So this very high backlog is also the reason why customers do not need to throw in more orders and particularly because their capacity for a lot of the customers, the capacity is reserved through their long-term agreements. And that's -- so I expect that these orders, they will not -- actually, the bookings is a technical aspect and will probably just now be in the range of the billings, I think, going forward.

[David O'Connor, analyst]

And maybe just on the backlog that you mentioned, what's the quality of that backlog look like? Just wondering how fungible that is. And would you expect it to kind of decline from here given the fall off on the side?

[Rudi De Winter, executive]

What do you mean with the quality of the backlog? These are firm orders. These are all firm orders with the delivery date and noncancelable. Is that what you are saying?

[David O'Connor, analyst]

Yes, yes, just to understand, are they covered by that backlog? Pretty much fully covered by LTAs. Has it been just...

[Rudi De Winter, executive]

So when I refer to the backlog, these are firm orders from customers that have LTAs, but also a lot of customers who do not have LTAs where they placed an order, and that's noncancelable. So the LTAs, they go beyond the backlog.

[David O'Connor, analyst]

And maybe last question on my side, just on the growth forecast for looking at the different segments, auto, industrial for 2023. On the automotive side, is there new customers coming in there driving that growth, or is that growth driven pretty much by existing customers? And on the industrial side of things, again, what is the -- some peers are guiding industrial more flattish for 2023 given that there's parts of industrial that we're seeing some weakness and more on the B2C side. So maybe on the industrial also is that new customers or which exact technology and applications are driving that?

[Rudi De Winter, executive]

Yes, the customer base at X-FAB is not so dynamically changing. So we typically have very long-term relationships with our customers. We did increase our customer base on the automotive. So we have from about something like 50 or on the high 40s to something like 60 automotive customers. But it's predominantly the relationship with our customers that we are further building out and trying to serve the customers well and supporting their growth. In the industrial, yes, with quite some silicon carbide is also categorized in the industrial, and that is also helping with the growth there.

[Operator]

The next question is coming from the line of [ Guy Seppes. ]

[Unknown Analyst]

Two questions from my side. First is the percentage of the LTAs, what percentage of the guidance that we have for 2023 is covered by LTAs? And the second question is looking back up to power outage in Malaysia, what is the financial impact? And how common are these kind of disruptions? Does it happen every 7, 8 years or is it something that we have not experienced before?

[Rudi De Winter, executive]

Start maybe with the disruption in the factory in Malaysia. This specific event is likely one of a kind. So we haven't had something similar there in that factory, in the existence of the factory. So that was the impact was somewhat better than or less than anticipated so the recovery was very well, but I would assess it still something in the range of $10 million loss of revenue there. Now the -- yes, because the factories are running at maximum capacity, it's hard to recover that because of the demand. So it's more or less the revenue, which is not -- so it will only be recovered in the longer term. I'm sorry, what was the other question or your first question?

[Unknown Analyst]

Covered by LTA, yes.

[Rudi De Winter, executive]

Yes, so I mentioned that we have about $500 million backlog. So this is already our guided revenue of around $880 million to $960 million. This already 60% or 70% of that revenue is covered by orders that customers already have placed. And then the balance there is from the other $400 million roughly. I would say that half of that is also covered by LTAs already. So that means that there is still something like $200 million to book, but I'm very confident that, that will come in as we go.

[Operator]

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

[Robert Sanders, analyst]

So I have some questions on firstly, on silicon carbide. I was just wanting to understand if you ramp to 17,000 wafers a month, should we assume like $1,000 ASP for mainly epi wafer services, or should we assume more like $1,500 as in a mix of substrate plus epi wafer and epi wafer?

[Rudi De Winter, executive]

Yes, so it is a bit complicated because we have the mix of device processing, epitaxy and then substrates. And so if we maybe leave out substrates because the substrates will either buy external and then charge to the customer with a marginal add-on. And -- but on the epitaxy, we will grow our epitaxy capacity over the next year. So I think in the mix, you need to count for something which is closer to maybe $1,500 for device processing and epitaxy.

[Robert Sanders, analyst]

And on the transition to 200 in silicon carbide, obviously, we've had a lot of challenges. But STMicro will ramp up soon. Are your customers pushing for that on the road map or is it something beyond this decade?

[Rudi De Winter, executive]

I would say it's more beyond the ticket or at the end of this decade. So the way I see it is that it isn't really 8-inch substrates out there. And we're in for -- the investments we do in our factory in Lubbock is 200-millimeter capable. However, we do not intend to switch because it's still far out.

[Robert Sanders, analyst]

So the single-wafer epi [indiscernible] you buy are upgradable to do you -- without having to -- okay.

[Rudi De Winter, executive]

Yes, well, the epitax but the implanter, which is a big portion of the investments they are 300-millimeter implanters. So but they're only used 150-millimeter wafers.

[Robert Sanders, analyst]

I'm just trying to tie your guidance to, and I'm sorry if this was asked already, but Melexis basically said that they're going to grow in the teens, but that's almost entirely pricing. So they're not really getting more wafers from you. I understand you had the Malaysian power outage, but is there any particular -- is there something happening in France that you're not ramping as much volume as you would have liked? Because it seems like you should be growing more wafers to your biggest customer.

[Rudi De Winter, executive]

Yes. we're growing the amount of wafers going out, that's clearly there. As explained, so the -- our growth is a mixture of quantities I would say, maybe in quantity in 2023. It should be somewhere around 10%. And then we have the product mix also because we're growing the silicon carbide and so forth, which does not -- Melexis is not a silicon carbide customer. And but we also happen on the product mix where we're going to a richer product mix, more layers per wafer and more value at wafers.

[Robert Sanders, analyst]

And then my last question was just given that -- I guess, what revenue will you have when you ramp the fab, the France fab to full capacity? I mean, what is the current feasible revenue of your current footprint once you fully build it out? And when do you need to think about a secondhand fab, like whether it's 200 or 300?

[Rudi De Winter, executive]

With the revenue we're running last year and what we are aiming at with all the expansions that are mentioned, we should do like 3.5x the revenue. 3.5 in France, yes. Yes, that's France only, yes, yes.

[Robert Sanders, analyst]

Yes, okay. So then you can maybe get to $1.1 billion, $1.2 billion full build-out revenue.

[Rudi De Winter, executive]

Well, as I mentioned before, so with the $1 billion that we are investing in 2023, '24, '25, that is predominantly our factory in Malaysia, where there is additional clean room space and equipment in there. There is equipment and debottlenecking further in a factory in France and then the silicon carbide. We will have revenue capability that cost just over $1.5 billion.

[Robert Sanders, analyst]

Okay, so think about at 300 millimeter fab quite well. Okay, thank you.

[Operator]

The next question is coming from the line of Michael Roeg.

[Michael Roeg, analyst]

In one of the earlier questions, you mentioned that sales growth in 2023 will be split roughly 1/3, 1/3, 1/3 between volume price and mix. Now the price increases that I assume is simply to pass on higher input costs. So there's no margin or gross margin impact from that. But volume growth and mix effect, will they both have a positive impact on your gross margin?

[Rudi De Winter, executive]

Yes, so there is on the price increases, they are -- have to cover the inflation and also to cover the future increased depreciations of the extra capacity that we're putting in -- or the investments that we do for our customers to grow the capacity that will increase the depreciation. And therefore for that, it's one of the reasons for the price increase.

[Michael Roeg, analyst]

And if I look at your bookings, $192 million, slightly lower than the previous quarter, but that already includes sales price increases, correct?

[Rudi De Winter, executive]

Yes, so these are bookings for -- that most of it includes the price increases, yes.

[Michael Roeg, analyst]

Okay. And when will you have the final till of your old backlog in your sales with old prices prior to price increases because that started early last year. You had the problem that you were raising prices, but you still have to convert that old backlog. When is that finished?

[Rudi De Winter, executive]

Well I would say that in Q2, so there may be still some hangover in Q1, but most of it will be converted by end of Q1.

[Michael Roeg, analyst]

So just mathematically, in Q1, we will have a gross margin. And then in Q2 and beyond, there should finally be some positive impact from those price increases, with the gross margin expanding.

[Rudi De Winter, executive]

Yes, that's correct.

[Operator]

Currently, we have no further questions in the queue. [Operator Instructions] Next question is coming from the line of Emmanuel Matot.

[Emmanuel Matot, analyst]

About two questions for me. How do you plan first to finance your $1 billion CapEx budget for the next 3 years?

[Alba Morganti, executive]

So we have -- the first portion will come from the LTA, the cash advances that the customers are paying, started already to pay. It's -- we expect to have around $250 million out of $300 million out of those advanced payments from customers. We will also increase our current credit lines. And a part will come obviously also from the operating incomes of the business. Get us over 3 years, right, so it's -- we are already producing cash. We are cash positive. And this further growth will bring additional flows from operating activities.

[Emmanuel Matot, analyst]

And second question, have you reached the breakeven at the EBITDA level in France during Q4 or it will happen later during the new year?

[Rudi De Winter, executive]

It will happen later in this year.

[Emmanuel Matot, analyst]

What do you need to reach a breakeven? Because in Q4, you moved to a very high level of production coming from your core technologies. So what is the upside to it?

[Rudi De Winter, executive]

That is correct, the core technologies are already at a high percentage. But the overall output needs to further increase. So as I explained before, we expect in France compared to last year revenue and where we want to be with the investments that were all in the LTAs and so forth that we have that we multiply the revenue by 3.5. So there's still 250% growth still to come.

[Emmanuel Matot, analyst]

Because if I remember well, you have a target to reach 30% EBITDA level in 2024. I think the leverage is mainly coming from France. That's correct?

[Rudi De Winter, executive]

Well, in fact, a bit from all the sites. So also the [indiscernible] business brings a higher margin and is ramping up. So in all the sites, the more output we bring, the better the economy of scale and the better the margin, but it is indeed true that the biggest growth is in France. MEMS is also growing well, and we'll have a leverage there of the economy of scale and then the silicon carbide.

[Operator]

Next question is coming from [indiscernible].

[Unknown Analyst]

I read from somewhere that specialty if they succeed and get chips throughout the world in cellphones. They would have been fabricated by X-FAB is there any projection on what kind of refinery that could bring? And is there an idea if you can handle that added capacity and the term that it would be needed? If it really explodes, I suppose.

[Rudi De Winter, executive]

Well, that I cannot comment on this specific case, but we're -- it's a specialty process that we're doing for them. But we are on the conservative side in the planning, this is still -- yes, not fully taken into account.

[Unknown Analyst]

Yes, it's still early, I know. Okay, thank you.

[Operator]

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

[David O'Connor, analyst]

Yes, great. Just one quick follow-up on my side. The CapEx in 2023, $350 million, how much of that is maintenance versus capacity expansion? And of capacity expansion, what are kind of the main buckets there in Malaysia versus Paris versus SiC?

[Rudi De Winter, executive]

There's a lot of questions. I would say on the maintenance CapEx is maybe $50 million or something in that range. So it's really $300 million roughly capacity expansions, but also buildings. So the portion will be the building in Malaysia. That's now really starting to get to speed and should be ready to move in equipment somewhere third quarter 2024. So I do not have a specific breakdown here per factory. But the biggest pockets are Malaysia, Corbeil, France and the Lubbock facility, one of the biggest portions.

[Operator]

Currently, we have no further question in the queue. [Operator Instructions] Seems there are no further questions.

[Rudi De Winter, executive]

Okay, thank you very much, everyone, for attending the call today. And I'm looking forward to hear you again on the 27th of April for the communication of the first quarter results of 2023. Thank you very much, and have a good evening.

[Alba Morganti, executive]

Thank you. Goodbye.

[Operator]

Thank you. Everyone, that concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day. Goodbye.