Siltronic AG

XETRA:WAF

Earnings Call Transcript 2022-Q1

[Operator]

Hello, everyone, and welcome to Siltronic's Conference Call on its Q1 2022 Results. 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 Rupert Krautbauer, Corporate Vice President, Investor Relations of Siltronic AG.

[Rupert Krautbauer, executive]

Thank you, operator. Welcome, everybody, to our Q1 2022 results presentation. 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 annual report. All documents relating to our Q1 2022 reporting are also available on our website.

I now hand the call over to Chris for introductory remarks.

[Christoph von Plotho, executive]

Well, thank you, Rupert. Welcome, everyone, and thank you for joining us for our Q1 2022 results call. I hope all of you and your families are healthy and safe.

Let's start with a look at our key financials before Rainer leads you through the Q1 development in more detail. Compared to the fourth quarter of 2021, our sales grew by more than 10% to EUR 417 million. Overall ASP in Q1 was significantly up compared to '21 due to the higher wafer price and a favorable exchange rate. The euro continued its weakness in Q1 with an average rate of $1.12 per euro, providing even more tailwind on our sales.

EBITDA came in at EUR 186 million. EBIT was up 32% at EUR 143.7 million. The result is largely influenced by one-off positive effects resulting from the failed tender offer. We received EUR 50 million termination fee from GlobalWafers. On the other hand, we saw even stronger inflationary effects on COGS, mostly due to rising energy and material costs. CapEx of EUR 206 million was significantly up year-on-year. The investments were mostly related to our major expansion projects, the construction of our new 300-millimeter fab in Singapore and the expansion of our crystal-pulling hall and EPI in Freiberg. Our net financial assets were EUR 709 million at the end of the quarter, up from EUR 573 million at the end of last year.

Demand for silicon wafers is driven by the growing use of semiconductor and all types of electronic applications. Growth of the worldwide electronic markets will continue to drive demand for our wafers. The main growth drivers for semiconductor are content growth in smartphones and automotive as well as continuous invest in digitalization, which reflects in strong rates for server and data center applications. However, we also see some weaker spots in the market. Supply chain hiccups due to the lockdown in China and lower automotive sales are a negative for unit growth. Nevertheless, all major demand trends in end applications continued in Q1.

According to SEMI, wafer area sales in Q1 increased by 1% quarter-on-quarter and by 10% year-on-year. In Q1 we made good progress with our expansion projects. FabNext construction in Singapore is well on track within the original budget. The buildings grow in size every day and we will start installing the clean room in the second half of the year. The expansion of our crystal growing operations in Freiberg is also proceeding well. Smooth execution of these 2 projects is key focus for Siltronic in 2022.

Now, I would like to hand over to Rainer for more details on the financials of Q1.

[Rainer Irle, executive]

Thank you, Chris, and good morning, everybody. Sales increased quarter-on-quarter, mostly driven by higher sales price. The invoiced wafer area sold was slightly higher than in Q4. In addition, we saw a favorable FX development with U.S. dollar further appreciating from 1.40 in Q4 to 1.12 in Q1. COGS went up noticeably in Q1 mainly due to rising costs for electricity, supplies and raw materials. In particular, we saw the impact of higher prices from annual purchase agreements and even higher electricity prices. FX also had a negative cost impact in Q1 as a significant share of our procurement is in U.S. and Singapore dollar.

Despite higher costs, our gross profit rose to EUR 135.6 million in Q1, and gross margin came in at 32.5%. Currency effects were dominated by a stronger U.S. dollar. The weaker euro had a positive impact on sales and margins, but also led to a negative hedging result in Q1. EBITDA was up to EUR 186 million in Q1, a 29% increase versus Q4. This was driven by higher gross profit and the positive one-off effect due to higher -- due to the receipt of EUR 50 million termination fee from the sales of GlobalWafers tender offer. EBITDA margin was 44.6% after 38.2% in Q4. Obviously excluding the effect from the tender offer, EBITDA would have been EUR 136 million with an EBITDA margin of around 33% in Q1. EBIT came in at EUR 143.7 million for Q1 with an EBIT margin of 34.5% compared to 29% in Q4.

The EUR 50 million termination fee was fully taxable in Germany. This is a statutory rate of 29%, resulting in a higher than average tax rate of 18%. It will go down significantly in the quarters to come. Net profit was EUR 114.8 million in Q1, up from EUR 93.7 million in Q4. Earnings per share came in at EUR 3.47 versus EUR 2.79 in Q4, again, with positive effects from the break fee. Dividend payout of EUR 3.00 per share for 2021 was approved by the AGM last week.

Working capital in Q1 decreased quarter-on-quarter to EUR 193.7 million, mainly driven by an increase in trade liabilities related to investments. DSO was roughly stable as always.

Looking at our balance sheet, equity grew again to almost EUR 1.6 billion by the end of Q1. Equity ratio increased to almost 56%. The increase is based on the strong profit as well as a decrease in pension obligations due to higher interest rates. The pension provision in Germany was discounted at 1.86% as of March versus 1.23% as of December. In the U.S., the interest rate increased from 2.51% to 3.22%. This caused our pension provision to decline significantly to EUR 288 million. On a side note, in April, interest rates were up another 40 basis points.

Net financial assets increased to EUR 709 million despite high CapEx. This was mostly due to the very good cash flow from operating activities and customer prepayments received in the last 2 quarters. Net financial assets will decrease in Q2 with a dividend payment of EUR 90 million and high CapEx. CapEx in Q1 was EUR 205.7 million.

Most of the invest is used for the ongoing expansion projects, namely the expansion of the 300-millimeter crystal-pulling hall and EPI in Freiberg and of course FabNext in Singapore. For the full year 2022, we are planning CapEx of EUR 1.1 billion, with about 2/3 of this going into FabNext. As commented before, we will take a conservative approach in financing our FabNext project. The majority of the investments will be financed by existing liquidity, future cash flows and prepayments from key customers. We have already received some prepayments related to FabNext in 2021, and more coming in 2022 and '23. We will continue to pay dividends, and there will be no capital increase in 2022. We will also raise some debt enough to maintain a solid liquidity. This will keep the leverage at less than 1x net debt-to-EBITDA at its peak in 2024. Again, as a side note, we are starting to market a promissory note loan this week. Interest rates have been secured from 4 weeks ago.

Operating cash flow in Q1 was EUR 273.7 million. Despite high CapEx, the net cash flow in Q1 was slightly positive, adjust without EUR 37 million. The increase in accounts payables was helpful. Net prepayments for customer LTAs increased by approximately EUR 100 million in Q1.

And with that, I would like to hand over to Chris again for the outlook.

[Christoph von Plotho, executive]

Well, thank you, Rainer. Silicon demand will continue to rise with growth focused on 300-millimeter wafers and advanced applications. Therefore we target to maintain our strong technology position by driving innovation and continuous improvement. We also continue to work on our cost position, especially in light of the growing inflation effects. And of course, we do everything we can to ensure a smooth execution of our expansion project to support our customers' future demand growth.

Our guidance for '22 remains unchanged despite continued macroeconomic uncertainties. In our quarterly statement, we updated our risk assessment for supply risk due to this terrible war in Ukraine. We are currently not impacted directly, but we are closely monitoring all developments together with our suppliers and the authorities. We expect our sales to grow by 15% to 22% mainly driven by price increases. Our EBITDA margin should increase to between 34% and 37%. EBIT should increase significantly despite the higher depreciation of approximately EUR 185 million. Expected cost increases for the current fiscal year are reflected already in our forecast. Due to the high CapEx, our net cash flow will be significantly negative. Earnings per share will increase significantly.

With this, we close our presentation, and we are now available for your questions. Operator, please open the QA session.

[Operator]

[Operator Instructions] We have a first question. It's from Francois Bouvignies of UBS.

[Francois-Xavier Bouvignies, analyst]

I have a couple, if I may. The first one is on your guidance, a clarification. What exchange rate do you use -- if I remember correctly, last quarter or in March, you said that you were using between 1.12 and 1.18. I just wanted to check if you updated that in the guidance. And the second question is a bit more -- Chris, we are, like you mentioned, seeing some slowdown maybe to some consumer applications, smartphones and PCs. And my question to you is like, are you seeing, first of all, any signs of this slowdown on your side, which I would be surprised because you're a bit far from the end sales, if you like and it would take a bit of time? But how do you think the customers will react to the slowdown? I mean, are we going to see an inventory buildup because, you know what, we have experienced with the shortage? In other words, how long do you think it's going to take for you to really see what's going on in the end demand, given the shortage and relatively low inventories in the supply chain?

[Christoph von Plotho, executive]

Well, that's a very complex question and not that easy to answer. We depend somehow on the information that we get from our customers. So nobody is talking about the slowdown. We had in the end of Q1 and also for Q2, we had some smaller spot quantities available. And we did sell them at premium prices without any problem. As soon as we offered it to a customer, the customer took it. So there is no reason for us to believe that demand will be impacted negatively. And to your first question, like always, there are some details that we do not disclose. We do -- we have an approach in the guidance. We talked about the revenue increase. We talked about the EBITDA. The first quarter was 1.12 like you rightly mentioned and what I said in the call. And on the other hand, we all know that actually it's around 1.06.

[Francois-Xavier Bouvignies, analyst]

So you -- we don't know what currency you use for your guidance for the rest of the year?

[Christoph von Plotho, executive]

Right. Because we also don't know what will happen in the next month.

[Francois-Xavier Bouvignies, analyst]

And if I may have a quick follow-up since it was a short answer, but good answer. The -- how should we think about the inflation costs and related to the -- to your pricing increase? I mean, for example, this quarter, we saw the gross margin, I mean, slightly down quarter-on-quarter, despite a significant price increase quarter-on-quarter. One, I don't know if I try to understand that maybe related to the pricing, to the product mix, also some currency effect, but how should we think about the gross margin going forward in the context of higher inflation? And at the same time, you manage -- you try to increase the prices at the same time. So how should we think about that?

[Christoph von Plotho, executive]

Well, we saw significantly ASP increases in Q1. The reason for that is that many contracts start at the beginning of the year, but we will continue to see additional increases in ASP during the year, but of course, not to the extent like we saw it in Q1. But we will have a continuous increase in ASP going from quarter into the next quarter. And on the cost side, we really -- there are things which are difficult to judge, mainly the energy prices in Germany, and we took a relatively cautious approach. We still believe that the amount of euro created through price increases will be higher than the losses that we will have due to cost increases.

[Operator]

The next question is by [ Jesper Stromberg ] of Berenberg.

[Unknown Analyst]

I have 3 questions, please. First, just on your volume growth in Q1. Would you say that the volume shipments that came out of Siltronic fabs in Q1 was broadly in line with the 10% year-on-year growth reported by SEMI for the overall market? Any color there would be very much appreciated. Then I have a question on customer inventory levels. Could you please update us on how you see customer inventory levels at the moment? And then a final question on your own order visibility and revenue visibility. What level of visibility do you currently have on your own business given the contract structure that you're sitting on at the moment?

[Christoph von Plotho, executive]

Well, thank you for your question. Question number one was related to volume development in Q1. I mentioned the figure of -- which was published by SEMI. And we do not talk about quarter-on-quarter volume development, but we had an excellent operational performance of Siltronic in Q1. And we -- and in line with that, we were successful. But at the end of the day, you remember that we -- since the second half of last year, we were always informing people that last year development was driven by additional volume compared to 2020. And this year, the major gap in revenue will be created through price increases and not volume. So -- and you also know that SEMI said wafer area should grow this year by 6%. We, in Siltronic, doubt that the industry, which means we and our competitors, will be able to ship 6% more compared to prior year. Inventory level at customers, there are a few where we have a relatively detailed look at. There was no significant change during Q1. So it's at a, let's say, healthy level, acceptable level. And your last question was regarding?

[Unknown Analyst]

Just your own order visibility, I know often times you have some pretty good visibility given the contract structure you have. I was wondering if you could give us an update as to how far ahead in the future you're able to see, given your own business?

[Christoph von Plotho, executive]

From today's perspective, we have sold out this year, and we are probably also sold out next year. So this is what we started to communicate to the market even in '21, is due to the fact that demand on one side is supposed to grow specifically in 300 millimeter. And on the other hand, most of the brownfield additions are done. And we all know that greenfield will take some time. We will get the first wafers out of our greenfield investments maybe end of '23, most likely it will be beginning of '24. And I am pretty convinced that the situation at competitors is not different.

[Operator]

The next question is by Jurgen Wagner of Stifel, Europe.

[Jürgen Wagner, analyst]

Actually, I have only one with the yen weakening even against the euro. Do you see the risk that your Japanese competitors might lose pricing discipline, let's say, over the next 12 months, if FX stays where it is today? And if not from them, where do you see competitive pressure potentially coming from?

[Christoph von Plotho, executive]

Well, first of all, we do not see competitive pressure, and we do not see any pricing pressure because demand from customer side overall is larger than the quantities offered. I already said by answering earlier question that every little spot quantity that we offer to the market was sold at a premium price. So therefore we do not see any pressure. And to argue about discipline of competitors is always a challenging task. But please keep in mind, the industry had decades of very difficult financial performance since the first opportunity to increase prices late '16, early '17, everybody enjoyed discipline in pricing and also discipline in adding capacity. So it would be simply crazy to give that up. And pricing discipline, why should there be price aggressive behavior in the market when everybody is sold out? Even if your cost position due to exchange rate improves compared to your competitors, there's no reason to give that to the customer.

[Operator]

The next question is by Constantin Hesse of Jefferies.

[Constantin Hesse, analyst]

Very quick point. Just in terms of the cost headwinds. So you mentioned that you're seeing more permanent cost headwinds stretching beyond '22. So what I'm wondering, just looking into '23, I know that pricing is expected to continue going up, which means we could see some margin improvement in '23. So just to really understand that, is that -- do you expect higher cost versus '22? Or for costs actually to remain at a higher level, which means that the pricing you're going to have next year is still going to yield higher margins? And my second question is, are there any areas where you can potentially gain some cost savings from this year?

[Christoph von Plotho, executive]

Well, we always said it's difficult to predict our market development, and it's also difficult, especially in the actual environment, to predict cost increases. We need to be aware that energy increases -- energy cost increases typically come from more demand and availability. This is not the actual case. The actual case for gas price development, fuel price development, crude oil and also electricity, is simply driven by panic. And predicting panic is something where I would not participate. There are a few things where we have reasons to believe that cost will continue to go up. One case is Singapore electricity because Singapore electricity is based on LNG, and everybody runs for LNG so that the LNG cost will go up next year, is, I think it's not given, but I think it's very likely to happen. On the other hand, what will happen to the energy cost in Germany, I think it's from today's perspective not predictable, because then you would have to predict what happens in Russia and Ukraine, and I think nobody is in a position to do so.

[Constantin Hesse, analyst]

And then any areas you could potentially get cost savings from this year?

[Christoph von Plotho, executive]

We always continue. We continue to have a target on yield, for example. We continue to have a target on productivity and we are relatively successful in doing so. But when energy prices are going up by 60%, then it's, yes, positive contribution from productivity improvements are always welcome, but they will never be able to compensate that increase that we see on the energy side.

[Operator]

[Operator Instructions] Our next question is by Rob Sanders of Deutsche Bank.

[Robert Sanders, analyst]

I guess my first question is around the Chinese silicon and silicon carbide players. I know you're not in silicon carbide, but one of the European manufacturers seems to be qualifying a Chinese silicon carbide player for 6-inch. I was just wondering if you could update us on how Chinese silicon players are progressing on 6-inch and 8-inch at least, and whether they are gaining ground or still not competitive?

[Christoph von Plotho, executive]

Well, let me try to answer it for silicon-based wafers, China, in general. We need to realize one thing here. When the Chinese talk about quantities, they always talk about capacity. And nobody knows whether this capacity only exists or whether it's really used to produce wafers for customers. Difficult to judge. We believe that the capacities in China are completely underutilized, also in 300-millimeter, because they do not show the right performance in the eyes of the customer. So what did we do recently? Recently we offered spot prime volume and spot test wafer volume at premium prices to one of the Chinese players, and they took it within 24 hours. So this indicates to me that the test wafer even at premium prices from Siltronic is still preferred over test wafer coming from Chinese players, and the same is obviously also true for prime wafers.

[Robert Sanders, analyst]

Just out of interest, in principle, is it more difficult to do -- to reach the spec in pure silicon versus silicon carbide at a given diameter? Or is it still harder on silicon carbide?

[Christoph von Plotho, executive]

It's difficult to admit it, but I'm not in a position. I don't know enough regarding silicon carbide to be able to answer that question. But I think the challenge is relatively comparable.

[Robert Sanders, analyst]

And just given all the narrative around recession next year, et cetera. So can you just contrast 2018 and 2022? Last -- in 2018, when there was a downturn in the wafer market, customers just couldn't take delivery of the wafers that they were obliged to take and ultimately they just didn't take delivery in the end, and you kind of compromised on the volume, but you didn't compromise on price. Can you just talk about how the contracts are different now? Whether you have more onerous terms for the customer? And how in that scenario of a downturn, things could be different this time around versus the last cycle?

[Christoph von Plotho, executive]

Well, by principle, in our LTAs, we do not build in a scenario for a downturn. Our behavior won't be different from what we did in the past. When the customer absolutely doesn't need the quantity, we will be willing to listen to their needs, but we will not compromise on the overall quantity of the contract and will not compromise on pricing. So nothing changed.

[Robert Sanders, analyst]

So, even if they can't receive delivery, they don't have the space to take away. That's not an area of compromise.

[Christoph von Plotho, executive]

I think there are plenty of good opportunities in the market nowadays. We are sold out. Spot quantities are easy to sell at premium prices in the market. So we shouldn't talk too long about the risk that maybe sometimes in the future there might be demand which is below offer quantity.

[Robert Sanders, analyst]

Just last question. On the 12-inch capacity, in the past you talked about how much capacity you think there is with brownfield. I just wondered if GlobalWafers' 3 billion plus expansion has changed your view of the amount of brownfield that there is out there to be done? Or do you think it's still the same sort of numbers that you were looking at before?

[Christoph von Plotho, executive]

I think actually we are at installed capacity of 7.8. This is basically the quantity which is shipped according to SEMI data, and we do not expect this figure to change significantly this year, maybe plus 100 or plus 150, but I do not believe that we will reach shipments of 8 million wafers this year.

[Operator]

There are no further questions, and so I hand back to you.

[Rupert Krautbauer, executive]

Well, then this concludes our Q&A session. Thank you for joining us today, and we hope that you will join us again for our Q2 release in July. Goodbye and stay safe and healthy, everybody.

[Christoph von Plotho, executive]

Thank you. Bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.