Siltronic AG

XETRA:WAF

Earnings Call Transcript 2022-Q2

[Operator]

Hello, everyone, and welcome to Siltronic's conference call on the Q2 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, Head of Investor Relations and Communications of Siltronic AG.

[Rupert Krautbauer, Head, Investor Relations and Communications]

Thank you, operator. Good morning, and welcome, everybody, to our Q2 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's 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 today's Q2 2022 reporting are available on our website.

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

[Christoph von Plotho, CEO]

Thank you, Rupert. Welcome, everybody, and thank you for joining us for our Q2 2022 results call. I hope all of you and your families are healthy and safe.

Let's start with a look at the key developments in the second quarter, before Rainer will guide you through our KPI development in more detail. Q2 was another very successful quarter for Siltronic. Sales continued to grow significantly. This is driven by continued high demand for wafers and tailwind from the stronger U.S. dollar. In addition, we also recorded higher sales prices.

Our operations also had a very smooth quarter that allowed us to sell slightly more quantity than in Q1. Recent market data has shown areas of weakness in some end markets. For example, lower smartphone sales and declining PC unit numbers. However, none of this has resulted in changed behavior from our customers as they are still able to rebalance orders quickly. At this point, we do not foresee any change in market dynamics, in particular for 300 millimeter wafers.

Our expansion projects in Singapore and Freiberg are proceeding smoothly according to original time lines. This is a great achievement from the project teams and not a given these days.

We have also taken a few important steps in regards to financing the ongoing expansion projects. We successfully issued ESG-linked promissory loan note, we received more customer prepayments, and we adjusted our dividend policy. This will make sure that our shareholders participate in our success while we generate more liquidity for our expansion projects.

Recent news show a mixed picture for electronic end markets. Smartphone sales, which account for about 25% of total silicon area use worldwide, have declined during the lockdowns in China. At the same time, the trend to more silicon use for device continues. Unit sales for high-end phones seems less impacted than for basic points.

The automotive industry is still suffering from low unit sales due to supply chain issues and is not yet clear by when supply can catch up with demand. Independently, the trend to more electronic functionality per car continues along with the growing share of electric vehicles.

In the area of computing, we still see a strong growth for servers and cloud services, while PC unit sales has started to come down from a very high level. Demand for gaming PCs and consoles is still very high. Despite of the lingering uncertainties, we have not yet seen any changes in order behavior from our customers. This indicates that for now all pockets of weaker end market demand are readily backfilled with orders from other applications. This results in continued high loading for all Siltronic fabs.

Compared to Q1 '22, our sales grew by 6% to EUR442 million. Overall, ASP in Q2 was significantly up compared to the second quarter last year due to higher wafer prices and favorable exchange rate. The euro continued its weakness in Q2 with an average rate of $1.07 per euro, providing more tailwinds on our sales. EBITDA came in at EUR147 million and EBIT increased to EUR103 million.

CapEx of EUR165 million was mostly related to our major expansion projects, the construction of our new 300 millimeter fab in Singapore, and the expansion of crystal pulling hall and EPI in Freiberg. Our net financial assets were EUR597 million at the end of Q2, up from EUR573 million at the end of last year.

Now I would like to hand over to Rainer to give you more insights on our Q2 financials.

[Rainer Irle, CFO]

All right. Thank you, Chris, and welcome, everybody. Sales increased quarter-on-quarter driven by higher sales prices and the strong U.S. dollar. A very smooth operational performance allowed us to sell a little more wafer area than in Q1.

FX development was favorable with the euro further depreciating from $1.12 in Q1 to $1.07 in Q2. COGS went up in Q2, largely due to FX headwind as a significant share of our cost base is in U.S. and Singapore dollars. We also recorded higher unit costs for electricity, supplies and raw materials.

Despite higher cost, our gross profit rose to EUR145 million in Q2, and gross margin came in at 32.8%. Currency effects were denominated by a stronger U.S. dollar. It had a positive impact on sales and margins, but it also shows up as a negative hedging result in Q2. Please note that top and bottom line sensitivity to exchange rates has increased due to the lower exchange rate.

FX and pricing enabled sales to outgrow unit cost increases. EBITDA was up EUR147 million in Q2, an 8.5% increase versus Q1 if we exclude the one-off effect from the termination fee in Q1. EBITDA margin was 33.2%. EBIT came in at EUR103 million for Q2 with an EBIT margin of 23.2%.

Net profit was EUR91 million in Q2, more than 40% higher compared to Q2 last year. Excluding the effects from the sales tender offer, it is also up quarter-on-quarter. Earnings per share came in at EUR2.66 with EUR3.47 in Q1. A dividend of EUR3 per share for '21 was paid out in May this year.

Working capital in Q2 increased to EUR277 million, mainly driven by a decrease in trade liabilities related to investments.

Looking at our balance sheet, we saw significant changes. Firstly, equity grew significantly to EUR1.8 billion by the end of Q2 for an equity ratio of almost 57%. The increase is based on the strong profit as well as a decrease in pension obligations due to higher interest rates.

Pension provision in Germany was discounted at 3.3% in June versus 1.86% in March. In the U.S., the interest rate increased to 4.16%. This caused our pension provision to decline significantly to EUR112 million. Net financial assets decreased significantly to EUR597 million due to high CapEx and the dividend payment in Q2.

All right. On the pension provisions, I think I always told you that interest rate of 1% were, in my view, overstating the real obligation, given that the assets actually have always achieved a much higher return. Now and with a sudden increase in the interest rates, the DBO decreased by about EUR300 million. Siltronic has pension provisions in Germany and in the U.S.

And the largest part of our pension obligation, the blue one, is in the Wacker Pension Fund, which is fully funded. The remaining obligations in Germany and the U.S. are partially funded. The gap between present value of assets and obligations obviously depends on the discount rate.

Based on the recent IFRS rates, the gap is down to only EUR30 million in the U.S. and EUR100 million in Germany. And this, in my view, is now a fair representation of our real pension obligation.

Operating cash flow in Q2 was EUR191 million. Due to high CapEx, the net cash flow in Q2 was negative at EUR123 million, as expected. Net prepayments for customer LTAs came in at approximately EUR89 million. And so far this year, we have received in total about USD 220 million of fresh prepayments.

CapEx in Q2 was EUR165 million. Most of the investment is used for the ongoing expansion projects, particularly the expansion of the 300 millimeter crystal pulling hall and EPI in Freiberg and, of course, our big project, FabNext, in Singapore.

For the full year 2022, we still expect CapEx of EUR1.1 billion, with about 2/3 of that going into the FabNext project.

Financing of the expansion projects is based on multiple instruments. The basis being our existing cash position, future operating cash flows, customer prepayments and loans. We successfully issued an ESG-linked promissory loan note over EUR300 million at favorable conditions.

The interest rate on the loan is tied to Sustainalytics Management Score for Siltronic. This shows the importance of our commitment to ESG targets in all areas of our business. We have also secured a long-term Singapore dollar loan, which will be drawn later.

In addition, we adjusted our dividend policy to balance the cash flow throughout this investment phase. Capping the dividend at EUR3 per share provides additional liquidity for investments. At the same time, our shareholders will continue to participate adequately in the success of the company at an attractive return rate. Based on the adjusted dividend policy, we plan to propose a dividend of EUR3 per share for the current year over the next AGM. We will not raise equity in 2022.

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

[Christoph von Plotho, CEO]

Thank you, Rainer. Looking ahead at the remaining 5 months of this year, we see a mixed picture. Global news are dominated by geopolitical tensions and macroeconomic concerns. At the same time, we have no indications of weakening demand for our products.

We do expect the current trend of this high factory loading and price increase will continue for us, even with more tailwind from favorable exchange rate development. In light of this ambivalent environment, however, we have adjusted our assessment for business risks in our midyear report published today. One of the risks highlighted is related to gas supply security for the German sites.

In order to eliminate this risk, we have established a project team to evaluate alternatives to using natural gas for heating. As of today, we are confident that we can reduce our gas consumption in the short term without impacting our operations. This will be implemented quickly.

Furthermore, we are considering to completely replace natural gas with fuel oil at our Freiberg site within 6 months, and we target to minimize dependency on fossil fuels in the coming years. This will reduce our overall exposure to gas supply significantly. All our focus is now on smooth execution in operations and all special projects.

Independent of all short-term uncertainties, we strongly believe that the long-term growth drivers for the semiconductor industry are in fact silicon wafer demand will continue to rise with a focus on 300 millimeter wafers and [indiscernible] 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 growing inflation effects. And of course, we do everything we can to ensure a smooth execution for our expansion projects to support our customers' future demand growth.

Well, our guidance for the year '22 remains mostly unchanged despite continuing macroeconomic uncertainties. In our quarterly statement, we updated our risk assessment for suppliers due to the ongoing geopolitical situation. We currently do not see any direct impact on our business, but we are closely monitoring all developments together with our suppliers and authorities in particular for natural gas supplies in Germany.

The favorable exchange rate of the euro against the U.S. dollar has a positive impact on Siltronic sales. We expect this trend to continue in the short term, and therefore, we adjusted guidance range for our sales growth to 21% to 27%. At the same time, FX and higher purchasing prices lead to cost increases that are reflected in our forecast. In total, we now expect about EUR140 million in unit cost increases for the year 2022.

The guidance for all other KPIs remains unchanged. With this, we close our presentation and are now available for your questions. Operator, please open the QA session.

[Operator]

[Operator Instructions] The first question is from Francois Bouvignies of UBS.

[Francois Bouvignies, UBS]

Chris, I just have a question on your remarks. Like you said, it's a mixed picture if we look at the market. So we are seeing and hearing some slower demand in smartphone side, consumer-related products like you mentioned, and automotive and industrial seems particularly strong still. And yet you don't see anything at this stage. And we could argue that maybe you are more exposed to the consumer smartphone side rather than automotive and industrial, but we can always debate on that.

But I just wanted to have your opinion about how come you still don't see it at this stage? Or are we going to see it at some point? Is it like a lag time you think, because historically, you always had the lag between the end demand and what you see?

Or is it an inventory situation, some of your customers, and we see the semis starting to build up -- or being able to build up some inventories, some raw materials. So I just wanted to review to which extent it might be inventory related, the fact that you don't see it yet? Are we going to see it? Or anything you can help us understand the mixed data points?

[Christoph von Plotho, CEO]

Yes, Francois, thank you very much for your question. Of course, it's a very complex question, but let me try to take 2 end markets to explain to you what our view is. First, let's start with the smartphone area. So smartphone areas unit sales will for sure be down this year. And I don't know what the right figure is, maybe it's something like minus 5%, maybe it's minus 10%.

At the same time, we see that the slowdown in sales for smartphones is not the same for every, let's say, performance level of the smartphones. We saw, for example, in China, that low-end smartphones went down by more than 10%, but the Apple product only went down by 2%.

So obviously, it's not the same for all the products which are available to the customers. Point number 1. Point number 2 is that we see a continued increase in, let's say, more cameras, more memory, and whatever you want in the smartphone unit, which is, of course, support for us as we sell wafer area. And this is basically then, at the same time, positive support.

So the 5G share is supposed to increase by more than 10% points this year. And if you do the calculation, if you do the math, 10% growth in 5G plus more cameras plus more advanced smartphones, this overcompensates the total number of smartphones sold going down.

So second is the automotive industry. I don't know what the right outlook is for the automotive industry. I know that Europe is, I think, after 6 months, at minus 14%. Some people are still dreaming that they might be at plus/minus 0 towards the end of the year. I think this is still an optimistic approach, but who knows. On the other hand, we know that everybody in the car industry is now concentrating on either electrical vehicles, hybrid vehicles, or high-end vehicles.

So I only take an example for BMW, it's much more attractive to sell 17 series compared to 5 series. And we also saw the very clear strategy from the Mercedes group to focus more on high-end cars, and high-end cars have more silicon area. So even if total new car sales might be impacted negatively, when you compare the year '22 to the prior year, I still believe that the amount of silicon wafer which goes into these cars is at least at the same level as prior year, if not higher.

[Francois Bouvignies, UBS]

Okay. That's very clear. And on the inventory situation, I mean, do you see any impact there that could also explain, maybe not everything, but partly as well like you have an increase of inventory as the supply is maybe finally easing somehow?

[Christoph von Plotho, CEO]

Well, when you look at what our customers or some of our customers are mentioning in their reports regarding inventories, the inventories are going slightly up in some areas, but not to a level where it really creates a problem for them. The thing that we see very clear is 2 major players in 300 millimeter, we have monthly figures for the inventory of our raw wafers in their inventory, and this is basically flattish at a completely reasonable level.

[Francois Bouvignies, UBS]

That was very helpful. And maybe, if I may squeeze one last bit. When we look at the inflation trajectory with a lot of uncertainty, my understanding is you have a lot of LTAs now, I mean, which is locked in terms of pricing. To which extent you have flexibility if the inflation is going more than you expected in the next few months? Do you have any room for renegotiation of pricing or adjustments or index of inflation to limit the impact on your margins? Just trying to understand how you price your LTAs related to potential inflation going forward?

[Christoph von Plotho, CEO]

Well, Francois, let's put it that way. We do not have any LTAs where in the contract it's foreseen that prices might be adjusted because of inflation. And I think there's a good reason for that because when these contracts were signed, inflation was not a subject, not for us and not for our customers. But you're perfectly right, the picture changed. And therefore, we started to handle LTAs slightly different.

In the past, we typically had fixed quantity, fixed period of time, and fixed pricing. Now we still have a fixed period of time, we have a fixed quantity, but we start at a certain pricing level, and during the running time of the contract, it's foreseen to do price adjustments. So the new contracts are somehow different.

So we will have in the future, in more and more cases, possibility for price adjustments, but these possible price adjustments are not only linked to inflation, they are more linked to market price development, because at the end of the day, the price for a wafer is defined by the balance or imbalance between demand on one side and quantity offered on the other side.

[Operator]

The next question is from Robert Sanders of Deutsche Bank.

[Robert Sanders, Deutsche Bank]

Chris, a question for you about this natural gas issue. I mean I think you've been very upfront about the risks. I was just sort of wondering a little bit why you are pushing forward with this kind of risk mitigation when I would have expected kind of the German authorities to prioritize the semiconductor industry when it comes to allocating supply? Have you been kind of told that no such guarantee can be given to you, even though you're in a strategic part of the market?

[Rainer Irle, CFO]

Yes, Rob, I mean, I assume a lot of companies are trying to make the case that they are more important than others. And obviously, we try to do that, we've made it very clear to the authorities what would happen if they somehow limit the gas supply to us. Nevertheless, so far there are no guidelines, and we are not waiting for politics to provide guidelines in fall of this year.

We just decided to take action. So we are now reducing gas consumption. And as Chris pointed out, we are also looking at replacing gas with fuel oil, that should be implemented pretty soon. So that kind of would then free up also gas for other industries. I think it's definitely the right strategy to implement it and not to wait for politics and all the uncertainties in that area.

[Robert Sanders, Deutsche Bank]

And what is using -- let's assume you were to move wholesale to oil in Germany. What does that do to your cost structure and I guess, your emissions as well?

[Rainer Irle, CFO]

Currently, I think it would even slightly save given that the natural gas prices went up so much. So actually fuel oil is a little cheaper now. On the other hand, it has a higher CO2 footprint. So it is definitely not a long-term solution. And as Chris also said, I mean, our strategy is clearly in the midterm to reduce our dependency on fossil fuels, basically to eliminate it, but that would take a little longer.

[Robert Sanders, Deutsche Bank]

Got it. And then on the financing, you've done this ESG, Schuldschein or whatever it is. But from my math, I think you need to do some more debt raise, debt financing over the next kind of 18 months. So what is your kind of minimum gross cash level that you want to keep? Because the way I'm looking at it is you need to kind of raise some debt at some point in the future.

[Rainer Irle, CFO]

Yes. Rob, I think previously, we said something that we would need to raise EUR1 billion of debt to maintain some EUR500 million of cash. Not exactly saying that EUR500 million is the right number. Maybe it's a bit lower, but we definitely want to maintain a significant portion of liquidity.

That Schuldschein was actually not the first thing we did. We already secured interest rates last year for a Singapore dollar loan that we then also recently signed. We just don't draw it yet. I mean our cash position is so high, so we can draw it later in the year or next year. And we are also working on a third instrument that we're expecting to sign pretty soon.

[Robert Sanders, Deutsche Bank]

Got it. And last question would just be around GlobalWafers, right? They've announced this $5 billion plant with backing from the CHIPS Act, or they claim that they will get or they hope to get backing from the CHIPS Act. So is the level of kind of funding out there, whether it's in Europe or in the U.S., something that you can kind of tap into? And would you even consider like expanding in the U.S.? Or is it too early to say kind of thing?

[Christoph von Plotho, CEO]

Well, I think we -- last year, we made a decision to invest a significant amount of money into the Singapore expansion. Singapore expansion runs very, very well, not only in time line, but also when you compare it what our budget was and what the original spending is. So everything is looking great, which is more an exception nowadays than the rule.

Well, we were a little bit -- we were surprised that GlobalWafers announced this investment in the U.S., because we do not see a reason that U.S. is the best place to go to. U.S. is relatively expensive and you have really difficult over there to get educated workforce, not only for running of fab, but also for doing the construction of the fab. On the other hand, I think I read today that also the Congress voted for CHIPS Act of $52 billion.

On the other hand, there were some members of the Congress saying, well, in principle, they do not support this action, but they have to do it because Europe does something comparable in Asia, too. So we were not surprised that GlobalWafers announced the greenfield. We were not surprised about the size that they announced. So there was no surprise to us.

Today, we do not have reasons to go in detailed planning for, let's say, the fact that we might build sometime in the future once FabNext is completely done. But when we had to make the decision for FabNext, we basically came -- in the first thought, we came to the conclusion that we will not go to a new location for 300 millimeter, which basically reduced it to the challenge between Freiberg on one side and Singapore on the other side.

And at that time, when we made the decision, the running cost, there was a huge difference. There was electricity costs, which were in Singapore half of Germany, and there were payroll costs which were in Germany 6x to 7x higher than in Singapore. So it was, I would call it, close to a no-brainer to say FabNext is in Singapore.

Now the picture is different. Electricity prices also increased in Singapore significantly. In Germany, even a little bit more. Today, I think it's difficult to make a judgment what is the future pricing level for electricity, either in Germany or either in Singapore, but I'm pretty convinced that there will always be a slight advantage for Singapore. The payroll situation stays the same.

But then we have Chips Act in Europe and Chips Act in Europe allows to support investments into the semiconductor industry. And when we consider that we might get the same financial support share like Intel does in -- Intel is talking about 30%, then just the location in the European Union, not to say only Germany, is simply becoming more attractive.

And the day where we have to make a decision for what we would call Fab. Next, it's not a given that it will be in Singapore, but it's not a given either that it will be in Europe. It's simply an open discussion and we are looking into that. But there is no time pressure for us.

[Operator]

The next question is from Martin Jungfleisch of BNP Paribas Exane.

[Martin Jungfleisch, BNP Paribas Exane]

Just 2, please. First one is on the volumes. If you could quantify the small increase in volumes that you mentioned came from operational excellence in the second quarter? And if you expect a similar amount also in the third quarter?

And then the second one is on the cost side. You mentioned an increase in cost headwinds from EUR120 million to EUR140 million this year. Can you discuss a bit the visibility that you have on these costs and if the expected headwind already includes a bit of a buffer for further increases and also probably relating to labor cost inflation over the next couple of months?

[Christoph von Plotho, CEO]

So let's first start with the labor cost development. So labor cost development, there was no negotiations in Germany. There was a fixed amount that was phased as a onetime payout to the tariff earlier this year, and there will be different negotiations sometimes later this year.

I think the union representatives will ask for significant amounts of increase. I don't know what the right figure will be, the future will tell, but this will not have a major impact on the currency, it will have more impact on the year to come.

And then I cannot guarantee you that EUR140 million is the final figure, but we have much more better view than we had 1 quarter ago, because now half of the year is done, and to a large extent, electricity is also secured at a certain price level for the second half of the year. So the portion which is open, while we do not know which price we will pay, is getting smaller basically every day. So the EUR140 million is for sure much more precise than the EUR130 million.

And then to your first part of the question related to operations. From the very beginning, we always said regarding '22 that in '21, compared to prior year, we had area growth of 21%. And we always said this will not be possible to repeat in the year 2022. And we said that our estimate is that we are limited somehow to 3% area growth, low to mid-single digits.

And this has not changed up to now in our outlook. And the reason for that is we had one small shutdown in a plant in the first half of the year and we will have two slightly bigger ones in the second half of the year. So therefore, although the second half of the year has three days more, our best belief is that we will repeat volume produced that we had in H1.

[Operator]

Next question is from Gustav Froberg of Berenberg.

[Gustav Froberg, Berenberg]

I have three. Firstly, could you just please compare Siltronic's current situation. I know you talked about seeing no signs of the slowdown, et cetera, and maybe you could compare and contrast a little bit what you are seeing today versus what you saw in late 2018, early 2019, when I guess the picture was quite similar in terms of customer inventories rising and the backdrop being a bit challenging?

Then I was wondering if the broader slowdown in the market, so talking about sort of low end of smartphones, for example, pockets of PC, et cetera, does this, in a way, create some slack in the market, which allows your competitors to maybe reshift around some capacity and essentially making the markets for you more competitive?

And then finally, a third question on the FX. I was just wondering what the full year FX assumption is that you're putting behind your new guidance?

[Christoph von Plotho, CEO]

Okay. I will first try to answer your first 2 questions, and Rainer will be taking number 3. So comparing '18 to the actual situation, in '18, we also saw, towards the end of the year, customers were talking about the raw material increase in the inventory. So this is different from what it is today. Today, we don't see it.

And the other difference is, in the later part of '18, I do not remember any customer who was willing, apart of one, who was willing to take additional quantities at premium prices. There was one exception in December '18, but apart of that, there was nobody doing so.

And since we have the possibility to offer spot volumes from time to time at premium prices, all the quantities were sold at the customer where we offered it. There was only one customer turning down one offer, but this quantity was immediately sold to somebody else.

So how do you want the CEO of Siltronic to have a negative outlook on quantities when additional volumes -- spot volumes are continuously sold at premium prices? So this is the comparison to '18. And while answering that question number one, I forgot your question number two.

[Gustav Froberg, Berenberg]

Question 2 was just more on other parts of the market potentially creating, I guess, some excess capacity with your competitors or maybe even with you as well, is there ability to shift this around?

[Christoph von Plotho, CEO]

Well, I think it's not so much about us shifting it around, it's more at our customers where it shifted around. When, for example, companies like Infineon or ISD, when there is a weakness in whatever end market, they can directly move it to semiconductors for the automotive industry, which is still short. And I refer to my answer to question number 1 that we still see that customers are willing to pay premium prices.

And the conclusion of that is that still everybody is sold out. And therefore, we do not foresee changes in the second half of the year unless there is something big happening which is driven by geopolitics, but this is something nobody can foresee.

[Rainer Irle, CFO]

Yes. And on the FX assumptions, I mean, the exchange is currently at $1.02. Purchase power parity is more at $1.20, $1.25. So kind of -- I mean, I guess everybody believes at the midterm, things will go back to mean. The guidance that we have issued, I mean, is a bit wider given that the year is already half over, given that there are uncertainties. The midpoint of the guidance is probably at an exchange rate of $1.05, but there's obviously -- the guidance, also includes certain variations in sales volume.

[Operator]

The next question is from Constantin Hesse of Jefferies.

[Constantin Hesse, Jefferies]

A couple of questions from my side. Only just to drill a little bit further into '23 and a potential correction there. Just in simple terms, Christoph, I mean the entire industry has been fully utilized since Q3 last year. This year, you're expecting volumes to grow about 6%. So theoretically, if you just do back of the envelope calculation on this, demand will be ahead of supply by about 3%, 4%.

Is it as simple as saying that if we see a 4% correction in '23, that would have basically a very limited, if any, impact to your volumes in '23 since there is no additional capacity coming online in that year? That's the first question. And the second question is...

[Christoph von Plotho, CEO]

Let's try to answer the first question first as it makes things a little bit easier. No, we always commented on the current year, which is first half of '22, that people were saying that semiconductor or the wafer area sold will increase this year by 6%.

And we always said, this is a figure which looks somehow unrealistic for Siltronic and I think, unfortunately, we proved that in the first half of the year, because somewhere, like I said before, low to mid-single digit is the growth that we see in area. But on the other hand, when we look at our market share development, market share development is flattish.

So the conclusion is, if we are at 6%, the market, obviously, including the competitors is also at 6%. So I think our assumption that the picture that we saw for us for the year '22 and the outlook is not different from what our competitors are doing.

Now let's have a look into next year. Well, we do not have any indications where significant quantities in 300 millimeters should come to the market, and therefore, fully sold out, fully loaded the industry, not only Siltronic, but also our competitors will not change in next year.

Maybe there is a little debottlenecking here, one additional equipment there, not at Siltronic, but maybe at our competitors, so I would be surprised if 300-millimeter supply would be able to increase by more than 2% next year. This is from today's perspective, the outlook. So therefore, no, correction is not a big problem.

Recently, Hynix announced that the outlook for wafer fab was plus 12% and they reduced it to plus 5%. My comment on that was that does not have any impact on us because it's impossible that they would get enough wafers for increasing water fab by 12%, and even 5% is not a given. Therefore, I think as the quantity possibility of wafer production will not change next year, I'm relatively relaxed regarding the loading outlook for 2023.

[Constantin Hesse, Jefferies]

That is very helpful. And then second question is very quickly on pricing. So you've had -- you obviously had a very big increase in Q1. You continue to have small increases in Q2. Do you still expect increases in Q3 and Q4? Or should we only expect additional increases in '23 as new LTAs become effective then?

[Christoph von Plotho, CEO]

You know that we typically don't talk about pricing by quarter, but let me try to give you some indication, which should give you the possibility to update your model. I think the first time when we talked about '22, this was in November last year, I said we will see significant price increase in '22, ASP increases compared to '21, but we will also see significant cost increases.

And at that time I said, "But we are sure that the absolute millions created through price increases will be higher than the additional cost." Although we had plenty of negative surprises about cost, this is still true. So the additional revenue created through price increases will be more than EUR140 million, because we said additional cost is EUR140 million. So I think this is a close to perfect indicator for you.

[Constantin Hesse, Jefferies]

Yes. That is fair enough. And then maybe just lastly, to Rainer, with the EUR300 million Schuldschein, the Singaporean loan, and you mentioned a third product that you were about to sign, does that basically fully cover you now for basically all the debt you want to take to invest into the fab?

[Rainer Irle, CFO]

Yes. Never say never, but that's actually the plan we are having today. So these 3 instruments, and that's it for now.

[Operator]

The next question is from Adam Angelov of Bank of America.

[Adam Angelov, Bank of America]

Firstly, just on the -- so you talked about revenue in 2023. How about on cost inflation? Do you think some of the inflation you're currently seeing goes away in 2023? And what visibility do you have there? And maybe I'll go one question at a time.

[Christoph von Plotho, CEO]

Well, I think it's very difficult to predict in the current environment what the development of inflation will be, but we just recently looked at statements coming, giving basically the summary of around 20 banks. And the average is that yes, it will be higher than it used to be over the last years, where it was close to nothing, but it will not stay at the level where we are today. So we expect, based on information or best guesses made from banks, that inflation will not continue at a level somewhere between 6% and plus 8%.

But for us, it's important. We hope that we have a slightly clearer and more detailed picture when we go into the budgeting process, because it's difficult when you need to do budgeting and you don't know where inflation will be. So I think we need to have a better picture once we go into budgeting sometimes October, November.

[Adam Angelov, Bank of America]

Okay. Got it. And then on the wafer inventories you mentioned earlier, is there any difference between logic and memory customers today?

[Christoph von Plotho, CEO]

Yes. That's a good question. We only see details in raw wafers at 2 customers, and these both are memory customers. On the other hand, when I look at logic, in logic, we offered some spot volumes, and they were taken within minutes. And if customers are willing to pay premium prices for spot volumes and they accept it within minutes.

And we have one 300 millimeter EPI LTA, which is somehow fixed for the year '23, but this customer is pushing and pushing and pushing for quantities above the guaranteed quantities which are under contract. So therefore, I cannot imagine that they have high inventory.

[Adam Angelov, Bank of America]

Yes, fair enough. And then just one more, if I could. The sequential kind of evolution in net prepayments that you're seeing, EUR100.5 million, and then down to EUR88.5 million. For the rest of the year, should we expect that kind of trend to continue like a sequential decline? And will the sequential decline be of similar magnitude, or bigger, or smaller?

[Rainer Irle, CFO]

Yes. I mean, we said that we're expecting several hundred million in prepayments. Some of that came last year. Some of that came in the first half of this year. Some of it will come in the second half of the year, and the remainder in the first half of next year. So we will continue to see inflows through early next year. But we also have and inflow is higher than outflows, but we also have every year outflows of -- you can see that something like EUR40 million, EUR50 million per year.

[Operator]

[Operator Instructions] If there are no further questions, I hand back to the speaker.

[Rupert Krautbauer, Head, Investor Relations and Communications]

Thank you, operator. So this concludes our Q&A session. Thanks, everybody, for joining us today. We hope you will join us again on our Q3 release in October 2022. Goodbye, stay safe and healthy, and have a good day. Bye-bye.

[Operator]

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