Siltronic AG

XETRA:WAF

Earnings Call Transcript 2021-Q1

[Operator]

Hello, everyone, and welcome to Siltronic's conference call on its Q1 2021. Please note that this call is being recorded and streamed on Siltronic's website. The call will be available as an on-demand version later today. Your participation on this call implies your consent with this.At this time, I would like to turn the conference over to Petra Muller, Head of Investor Relations and Communications Officer of Siltronic AG.

[Petra Muller, Head of Investor Relations & Communications]

Thank you, operator, and welcome, everybody, to our Q1 2021 results presentation. This call is also being broadcast live over the internet at siltronic.com. A replay of the call will be available on our website shortly.Joining me on today's call are our CEO, Dr. Christoph von Plotho; and our CFO, Rainer Irle. Following our usual procedure, Chris will start with some general remarks, and Rainer will provide some more detail of our key financials, followed by Chris again updating you on our guidance and current market developments. After the introduction, we will be happy to take your questions.Please note that management comments during this call will include forward-looking statements, which involve risks and uncertainties. For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and presentation and in our reporting documents. All documents relating to our Q1 reporting are available on the website.And with this, I turn the call over to Chris.

[Christoph von Plotho, Chairman of Executive Board & CEO]

Thank you, Petra. Welcome, everyone, and thank you for joining us for our Q1 2021 results call. I hope all of you and your families are healthy and safe.Before we dive into our Q1 figures, I would like to give you a short update on the tender offer of GlobalWafers. All requests for approval with the individual authorities as stipulated in the offer document have been filed. And by now, Germany, Austria, South Korea, Taiwan and CFIUS have already cleared the transaction. Approvals are currently pending from the merger control authorities in Japan, the U.S., China, Singapore as well as from the German Federal Ministry of Economic Affairs and Energy. We still expect the transaction to close in the second half of this year.Now, ladies and gentlemen, let's have a look into the business update for Q1 2021. The quarter was stronger than originally expected, and we achieved sales of EUR 316 million, 11% up compared to the last quarter of prior year. ASP was flattish. And while wafer area in Q1 2021 was significantly up, cost per wafer area went down. Exchange rates did not have a major impact quarter-on-quarter. Our EBITDA came in at EUR 92 million. EBIT was up to EUR 54 million. Our net financial assets were EUR 538 million as of March 31, 2021.As pointed out, we saw strong wafer demand in the first quarter. Looking at the end markets, we see smartphone business recovering. 5G migration is accelerating. And as always, new smartphone generations come with more content, more memory and, again, additional cameras. The server business showed only moderate growth, while PC, including Chromebooks, developed nicely. As we can all read in the news in the past weeks, the auto industry is recovering strongly, and we see an increasing share of hybrid and electrical cars.On the industrial side, there is somewhat a mixed picture, as a lot of different applications are subsumed under this heading. Overall, the situation is improving.When we look at the development by wafer diameter, 300 EPI is on allocation, 300-millimeter polished and 200 are strong. And small diameters loading improved. ASP was flat quarter-over-quarter.With this first overview, I hand now over to Rainer for more details on the financials of our Q1.

[Rainer Irle, CFO, Labor director & Member of Executive Board]

Thank you, Chris, and good morning, everybody. Q1 sales were really strong. Wafer area sold increased year-over-year and quarter-on-quarter. Prices were stable quarter-on-quarter, but of course, ASP was down year-over-year. Overall, sales reached EUR 316 million, up 11% to last quarter. Year-over-year, the euro appreciated quite a bit, resulting in headwinds from exchange rates quarter-on-quarter, though we saw relatively stable FX rates.Due to higher wafer area sold, COGS went up by 7.5% quarter-on-quarter to EUR 228 million. However, compared to the higher wafer area sold, COGS increased underproportionally. COGS per wafer area came down due to fixed cost dilution. Our gross profit rose to EUR 88.6 million in Q1, gross margin was up to 28%. Our admin expenses were influenced by advisory services in relation to the tender offer of GlobalWafers. EUR 12 million accrued in Q4 and EUR 2 million in Q1. We booked the cost, but most of the payment is only due after closing.In Q1, nonoperational currency effects were positive at EUR 4 million, and that includes the hedging result, which was positive, too. EBITDA was up to EUR 91.7 million in Q1, a 37% increase versus Q4. This was triggered by the higher wafer area sold. EBITDA margin was 29% after nearly 24% in Q4. Lower advisory costs in connection with the tender offer also contributed to that increase. Depreciation increased by EUR 1 million quarter-on-quarter. And in line with EBITDA, EBIT in Q1 went up to EUR 54 million, with an EBIT margin of 17%, compared to 10% in Q4.The positive contribution from the increased wafer area sold and the reduced cost per wafer area, along with flattish prices and a minor FX impact, led to strong results in Q1.In Q1, we recorded a tax income. Effective tax expense was low, as always, given that most profits are generated in countries with low tax rates. In addition, we recorded a deferred tax income. We apply in principle a careful approach to the measurement of DTAs. However, given the improved outlook, we now believe that the value of certain future tax benefits such as NOLs has improved, resulting in an increase in DTAs that were booked in Q1.Net profit was EUR 58.4 million in Q1, compared to EUR 40.9 million in Q4. EPS came in at EUR 1.67 versus EUR 1.17 in Q4. The dividend of EUR 2 per share was accepted by the Annual General Meeting last week, and we paid dividends of EUR 60 million.Working capital went up in Q1 to EUR 235 million. Trade receivables and inventories increased simply due to higher sales. Trade liabilities went down due to lower [ capital ]. Trade liabilities also include EUR 2 million advisory fees for the tender offer payable after closing.Looking at our balance sheet, equity was nearly EUR 1.1 billion, with an equity ratio of almost 54% at the end of March. The increase is based on the profit and also on lower pension obligations. It appears that long-term interest rates saw their trough, and improving interest rates resulted in the reduced benefit obligation. The pension provision in Germany was discounted at 1.11% as of March, compared to 0.69% as of December. In the U.S., the interest rate was also up. Net financial assets went up by EUR 39 million to EUR 538 million.As of March '21, pension provision decreased by EUR 118 million versus December due to higher interest rates in Germany and the U.S., and stood at EUR 449 million. If we used 3% interest rate to calculate DBO, it would be EUR 850 million minus the assets, leading to a pension provision of only EUR 120 million, more than EUR 3 million less.CapEx in Q1 was EUR 37 million. In 2021, CapEx of around EUR 250 million are planned. We will invest mainly in capability projects, EPI reactors and the expansion of a crystal pulling hall to replace older equipment.Our operating cash flow in Q1 increased to EUR 77 million, following EUR 31 million in Q4. The net cash flow in Q1 was positive at EUR 28 million. While we refunded customer prepayments during 2020, we recently received small amounts for new LTAs signed.And with that, I would like to hand over to Chris.

[Christoph von Plotho, Chairman of Executive Board & CEO]

Well, thank you, Rainer. We are highly optimistic about the mid- and long-term growth of our industry, backed by megatrends like digitalization, modern mobility or connectivity. Of course, there are short periods of moderate corrections, for example, due to inventory or macro effects, but long-term CAGR will remain high.This year, we are also optimistic about the short-term business development and believe that there are more opportunities ahead of us than headwind. Of course, the pandemic with these mutants is still a risk, even though we might really see the light at the end of the tunnel in summer. And of course, the ongoing U.S.-China tensions are not favorable for nobody.But end markets are developing nicely. Smartphones are recovering and the higher share of 5G smartphones proves again that every new phone generation comes with more content. PCs are booming, and especially high-end computing and consoles are practically sold out for the rest of the year. We see some uncertainty on the memory demand of servers. It could well be that customers have to digest some more inventories first. And also Intel's CPU release might have an impact on the demand, and that field shows a mixed picture as always. And in the auto space, players are bullish despite the chip shortage talk.This could lead to some inventory buildup in the value chain. The trend to more automated driver assistance systems and electrical cars is still intact.Looking on silicon area development. On the device level, we also see a positive impact. NAND and power devices should develop nicely and contribute to wafer area development, while DRAM and logic won't contribute that strongly due to the density effect.After a strong Q1, we raised our forecast 2 weeks ago in our [ talk release ]. We estimate that our silicon area will grow by at least 15% and that ASP will stay flattish. The strong euro will, however, slow down our growth path this year. Therefore, we expect sales to increase by at least 10% above the year 2020. Our EBITDA margin should be between 30% and 32%. Also, our net cash flow and earnings per share should significantly increase. The forecast for EBIT, depreciation, tax rate and CapEx remains unchanged.With this, we close our presentation and are now available for your questions. Operator, please open the Q&A session.

[Operator]

[Operator Instructions] Our first question is from Francois Bouvignies, UBS.

[Francois-Xavier Bouvignies]

I have a couple. The first one is on your long-term agreements. So when we look at your peers like Shin-Etsu lately mentioned that they were signing new LTAs with significantly higher price than previously. So I know -- I mean what you said end of last year that you would have some contracts to renew. I think it was end of the year and beginning of this year. So I just wanted to have your perspective on how long-term agreements are trending at the moment and the price.The second question is, at the beginning of the year, end of the year last year, you mentioned about the oversupply of around like 10% in 300 millimeter, if I remember correctly, something around that. And now you see more than 15% into area sold. So I just wanted to check with you how you see the supply and demand outlook in the next 6 to 12 months given your updated guidance.And the third question is on silicon carbide. I mean it's a bit different, but you mentioned your power silicon area share and power is a big part of it, among others. But it seems that silicon carbide is not slowing down in terms of interest and share in the next few years. And you had a review recently. You didn't decide to make any significant investment, but I wanted to check with you if anything is changing given the trend that the market is going towards to.

[Christoph von Plotho, Chairman of Executive Board & CEO]

Well, Francois, thank you for your questions. I will reverse the order by answering. I will start with #3. So we will not rethink our strategy regarding silicon carbide. Yes, you're right, it's impressing growth figures, but still from a very, very low level. And it's like other products like, for example, SOI, it's a niche, and it will stay a niche.And then you need to keep in mind that GlobalWafers sales activities in the field of silicon carbide, and we still believe that we will close the deal in the second half of the year.So consequently, it doesn't make sense, if 1 of the 2 combining partners already has activities, that the other one starts all over.The situation -- the second question, I'm not quite sure whether I got it right. You refer to 10% underutilization which was mentioned by me, which I clearly do not remember. We said in the later part of last year that utilization is north of 90%. In some cases, we even said 95%. It was different whether we talk about 300 EPI or other product categories.One thing is for sure. The basis is simply different. You know that we invested -- we continue to invest in brownfield 300 millimeter. And our total available capacity in the average of the year '21 in Singapore on 300-millimeter products is simply significantly larger than it was prior year. Therefore, this is one of the reasons why we can justify an outlook with at least 15% area growth.You also mentioned 200-millimeter. And I mentioned in my speech that 200-millimeter loading is very high. In some categories, even it's basically close to allocation like 300 EPI is, too. And as far as I remember the calls given by some of our Asian competitors, they see a similar situation that loading is very high to full in 200-millimeter. And as far as I remember, some of our competitors also mentioned that they won't spend money to increase capacity in 200-millimeter.So I expect 200-millimeter to stay tight for the current year and most likely also for the years to come.Your first question was related to LTAs. I know that some of our Asian competitors were talking about significant price increases which are necessary. In the past, we -- in Siltronic, we did put more focus on implementing price increases than talking about it. What was mentioned by the Asian competitors, we didn't see anything of that in the market up to now. So -- and for the rest, you need to refer to mainly the Japanese competitors.Yes, it's true, we have to differentiate when we talk about LTAs about 2 issues. One issue is running LTAs which will expire during this year or beginning next year and we are looking for renewal. There are a few ones. We work on that. We have good discussions with customers. In one case, we even closed the discussions. We have a new LTA with higher prices for the years to come.And then secondly, we talk about the so-called new LTAs, which are related to additional capacities which might come onstream available to the market, most of them most likely linked to a greenfield which is not yet decided. And there, we are in an open discussion with customers.I think in the meantime it's fair to say that customers somehow accepted that these contracts will come at higher prices. And the same story like always. It's about pricing. It's about quantity. It's about obligation. And it's about a new investment. And for a new investment, we are not looking for 2-year LTA. It must be significantly longer than 2 years. So I think this should answer your 3 questions.

[Operator]

Our next question is by Constantin Hesse, Jefferies.

[Constantin Harald Hesse, Equity Analyst]

A couple of questions from my side. So on 200-millimeter with full loading there over the next few years, has there been any movement at all in spot prices there? Because that surprised me a little bit that pricing wouldn't move at all with 200-millimeter full loading. So just some question there.And then second question, just in terms of timing. What I'm trying to figure out is, have you -- are you already having discussions about greenfield? I guess you answered that question when you were answering the LTA question. But the last time you gave us some numbers regarding the demand and the total shell capacity, which I remind -- which I remember being 6.8 million for demand and 7.2 million, I think, for shell capacity. And with the current volume outlook, it seems like that is going to be hit literally, I mean it's going to be at the big -- I think [indiscernible] towards the end of this year. So I'm just wondering in terms of timing here, how will this work? Or has this potentially shifted the shell capacity?

[Christoph von Plotho, Chairman of Executive Board & CEO]

Two questions. Good. Well, thank you. So now let's first answer spot 200-millimeter. So first of all, I want to remind you that in our industry, unfortunately, there is no common definition for spot. When we talk about spot, it's without any contractual obligations. When the Japanese talk about spot, they include also quarterly contracts. And yes, 200-millimeter, in short, everything which is renegotiated will get price increases. This is true for quarterly contracts. This is true for 6 months contracts. And if there might come an opportunity around the corner to sign an LTA for 200-millimeter, it will also be at higher prices.Now let's come to greenfield. So what did we say in the past? We said that in Q4 towards the end of last year, total shipment was 6.9 million wafers, same as in Q1. This year, I do not remember, maybe I didn't even know up to now, the figure from April, but I -- my best guess is it's comparable, around 7 million. And our best guess, excluding Mainland China, is a shell capacity of 7.2 million. And I also said that we assume that this shell capacity will be fully equipped latest by the end of the year. So available capacity towards the end of the year 7.2 million. This is something like 4% more than the shipments of the first quarter and does not reflect really demand growth.Of course, there is a difference between loading in EPI and polished. EPI is on allocation; polished, there is a little room to move, but not a lot.So if you further assume that also next year the market will grow, I can tell you from the 5 players in 300-millimeter, we do not know of any additional capacity which will come onstream. So if we define the year '21 as the shortest year for 300-millimeter, then '22 will be shorter. And this is nothing new. This is something we are saying since '18, when there was a slowdown in the second half of the year of demand due to inventory correction. And we told customers even then, the next shortage will come maybe a little bit later than we thought, early '18. And the next shortage will be more painful for customers.So up to now, we were not successful in really signing deals with customers reflecting the need to invest in greenfield. We continue to work on that. But there is nothing new to announce. And if you talk about timing, I can give you the answer. From today's perspective, the greenfields [ help ] will come too late. And this is not a Siltronic statement. This is a statement for the wafer market.

[Constantin Harald Hesse, Equity Analyst]

That's great. And just on top of that, I mean back in 2017, what -- was the industry already in full shortage? Or -- but that was brownfield, right? So that was different. I mean. Fair enough. Okay.

[Christoph von Plotho, Chairman of Executive Board & CEO]

Yes. You're perfectly right. The -- we got into shortage in late Q3, Q4 2016. That was the moment when we announced price increases. But there, a quick reaction, relatively quick reaction at the beginning of the quarter to around 12 months is to bring additional equipment in brownfield. And as then during that phase in '17, everybody did brownfield. And the later phase of the shortage took a little bit longer. Then, it was around 15 to 18 months to bring additional capacity onstream. Now we talk about greenfield. And greenfield, if we decide today, if we decide to do and we start construction, then probably first wafers out in '24, not before.So for Siltronic, there is no -- we don't have any possibility to increase overall output beyond what we already decided for the year '21, '22 and '23. And we have good reasons to believe that most of the competitors are in a similar situation.

[Operator]

We have the next question by Gustav Froberg, Berenberg.

[Gustav Froberg, Analyst]

My questions are relatively similar to what others have asked on the call as well, but I'll try and ask it in another way.Given what you just said, Chris, about timing of capacity, et cetera, and CapEx and so on, how are you looking to secure further growth beyond 2021, when it seems like you will be hitting full capacity? Do you have any other sort of outputs or ways of adding incremental growth to the business? Or does this now effectively mean that you cannot grow any further given the timing it takes to ramp up capacity, et cetera?

[Christoph von Plotho, Chairman of Executive Board & CEO]

Well, I think it's difficult to -- you should never say no. There's one thing we know: in the sales that we have in Singapore and the Germany for 300-millimeter, there is no open space in the clean room to add equipment, full stop. Of course, we can never exclude that our technology guys or technology ladies also have brilliant ideas, which might contribute to a higher output. That's something you can never exclude. But CapEx-wise, there is nothing we can do about it.And I think your question goes into the direction, "But then Siltronic will lose market share." My answer to that is, only under the assumption that the others can create more output. I do believe the scenario for the later part of this year and '22 is different. There will be more demand than capacity, which basically means that some of demand will not be delivered by the wafer producers.

[Gustav Froberg, Analyst]

Yes. And then just a question on your actual CapEx that you've guided for this year, the EUR 250 million. You talked about some replacement demand for machinery. Could you give us an idea of how much potential output that could increase for you? Or is it more a replacement in terms of gaining efficiency and that it will be better for your margin?

[Christoph von Plotho, Chairman of Executive Board & CEO]

Well, I think, out of the EUR 250 million, basically, no euro will contribute to additional output. The additional output euros were spent in prior periods, and today, we get the higher output. So there is a big portion of, let's call it, the maintenance of business. Then we have capability enhancement, which is leading edge, mainly for 300-millimeter EPI. And also there, we have the same challenges as obviously also competitors have, because they are singing the same song.It's not only about additional equipment for production. It's also additional production -- equipment for measurement. And on top of that, the leading-edge EPI is becoming so demanding then out of the same number of equipments you simply get less wafers. So a certain portion of investment is only to maintain the output of EPI.And then we continue to add EPI reactors, but this is not additional volume sold. This is additional EPI volume sold. And as we need substrates for that, the polished number will be influenced negatively, and that's also true for competitors who are adding EPI reactors.And then last but not least, Rainer mentioned the crystal growing hall in Singapore. This is a story which started sometimes 20 years ago. Because at the very beginning of 300-millimeter, rightly so, Siltronic decided not to invest in the first step into dedicated 300-millimeter crystal pullers. We converted 200-millimeter pullers very successfully, and we use them for many, many years. But with the development of design rules, specifications becoming more demanding, some of this additional specification demand did translate into different crystal requests, which could not be fulfilled with older modified equipment.So our 300-millimeter activity in Singapore already has only dedicated 300-millimeter puller equipment. And we continue to add dedicated 300-millimeter puller in Germany because the specifications, the number of specifications where we can use older equipment is becoming lower, lower and lower, and one day most likely will even disappear.So this is also a lot of money that we spend, but it's not additional output.

[Operator]

Our next question is by Florian Treisch, Commerzbank.

[Florian Treisch, Research Analyst]

I have 2 so -- and expected, around LTA in first place. So the question that you talked about this kind of renewing LTAs and new LTA for greenfield. So my impression was that obviously prices in the new LTA discussions are not yet high enough to trigger a greenfield. For me the question would be, when is the timing you can go for an opportunistic investment, i.e., without strong commitment, i.e., you also certainly have a responsibility for the industry to act at some point in time?And the second question is around, yes, basically, if you are still in the driver's seat. You said when it comes to silicon carbide, you have a second partner inside of the company, which is basically making the decisions. I would say, they are simply one layer higher in the hierarchy.So clearly, why are you still talking about greenfield with clients? Why is that not something which needs to be done only by GlobalWafers and Taiwan will basically decide who will invest?

[Christoph von Plotho, Chairman of Executive Board & CEO]

Well, when -- I [ resume ] your first question, you basically speak about the responsibility that Siltronic has for the market, and I tend to not disagree with you. But I want to remind you that our customers have a responsibility also for the market. And if they don't participate in creating conditions which are favorable for greenfield investment -- it's easy to say it's our responsibility; I think it's a shared responsibility. And I'm pretty convinced -- no, I even know, that customers share that view that it's a combined obligation to the market. It's not only the supplier. It's also the customer. So that's to your question #1.To your question #2, I fear that I didn't get it. Could you please repeat it? I heard something like GlobalWafers, I heard silicon carbide, but I missed the context.

[Florian Treisch, Research Analyst]

No problem. So you said at the beginning of the Q&A, the question around silicon carbide, you said that you are basically two companies in one, i.e., Siltronic plus GlobalWafers. So you will basically come up with a kind of combined silicon carbide strategy.So the question for me is if that is also you can transfer this question to a greenfield investment. So why are you basically still in discussion with the clients, if you assume the deal will be closed in H2 2021? Is that the point where you can say the responsibility is only in Taiwan? So to get a better impression how are you...

[Christoph von Plotho, Chairman of Executive Board & CEO]

I'm sorry. These are completely different issues. One is -- was the question whether we enter a market where are we not present today. We always said in the past that we twice looked into it and we came to the conclusion not to participate. And we don't see a reason to look into it again. And in the call earlier this morning, I added -- and by the way, we still believe that in the second half, the closing will be done, and then the combined company has silicon carbide activities, full stop.With regard to greenfield, it's a completely different animal. Till the closing is not signed, we are competitors. There is no possibility to have, in this phase, common acting.

[Florian Treisch, Research Analyst]

Okay. Yes, I would agree. So for now, but what -- going forward, like 1, 2 quarters from now, then you can act in concert, then the question is who will make the decisions?

[Christoph von Plotho, Chairman of Executive Board & CEO]

Then ask the question in 2 or 3 quarters.

[Florian Treisch, Research Analyst]

Okay. What is your view on that? Will you go for a stand-alone greenfield and GlobalWafers will go for a stand-alone greenfield?

[Christoph von Plotho, Chairman of Executive Board & CEO]

I cannot talk for GlobalWafers. I speak today -- I speak for Siltronic, which I consider today to be a competitor to GlobalWafers and also to the other players in the market.

[Operator]

The next question is by Jurgen Wagner of Stifel.He already left. [Operator Instructions]The next question is by Holger Schmidt.

[Holger Schmidt, Research Analyst]

I have one question with regard to greenfield investment. Could you just remind us with around the necessary total amount of CapEx for such a greenfield investment? And I think you already mentioned it, how long it would take. So it will take until the beginning of 2024. But what is -- what would be interesting is to see the total amount of necessary CapEx for this?

[Christoph von Plotho, Chairman of Executive Board & CEO]

Well, we always talked about the figure, which is around EUR 2 billion. Of course, it depends -- EUR 2 billion. Of course, it depends what the share -- the share split between EPI and polished will be, and it depends on which technology you will install over there. So I think it will be, for sure, EUR 7 billion, it will -- must be EUR 5 billion. And we need to reserve space for 3- and 2-nanometer.And then we have to keep in mind, when you listen to competitors, everybody is at least thinking about greenfield. So I do believe that we will see price increases on equipment. We already see in many places in the world that construction is becoming much more expensive. The steel for construction went in parts of Europe up between 50% and 70%. So I think the figure of around EUR 2 billion is probably too conservative.Yes. And the day we make a decision, then we have a more precise figure, and then we will talk to you about it.

[Operator]

Okay. We have no further questions, so I hand back to Petra Muller.

[Petra Muller, Head of Investor Relations & Communications]

Thank you, operator. Ladies and gentlemen, this concludes our Q&A session for today. Thank you for joining us, and we will hope -- we hope that you will join us again on our Q2 release in July. Goodbye. Stay healthy.