IQE plc

Good morning and welcome to IQE's full year results presentation. I now have a call over to Chief Executive Officer at Medical Lemos and Chief Financial Officer, Jutta Meyer. Please go ahead.

Thank you. Good morning, everyone. I am delighted to be here with our new CFO, Jutta Meyer, who joined us earlier this year. Before we get into today's result, I wanted to touch base on the earthquake that hit Taiwan on April 3rd. As you know, we have operations in Taiwan, and I'm really pleased to say that all our colleagues and their families are safe and our operations are unaffected. But nonetheless, our thoughts are with the people of Taiwan during this difficult time. Now, let's turn our attention to our 2023 result. We would all agree that 2023 was an incredibly challenging year for everyone, as headlines indicate, with difficult macroeconomic backdrop, including high cost of living crisis and persistent high inflation pretty much across the globe. In terms of geopolitics, we also saw countries flex their muscle to control supply chain and sometimes core materials. Export restrictions put on compound materials in China related to gallium, germanium, and graphite. This indeed added further tension in the global ecosystem supply chain that was already under pressure from the pandemic. The semiconductor industry as a whole was not immune to the downturn either. We did see high level of inventory across the industry, which led to a deeper but cyclical downturn that had been anticipated by many in the industry. As a result, we at IQI felt the knock-on impact from our customers who continue to grapple with these numerous challenges. Despite all these challenging conditions, though, I'm really pleased to say that we have delivered resilient performance in line with expectations, none of which would have been possible without the commitment and hard work of all our colleagues, employees around the world. So thank you for your value contribution to IQV and thanks to our customers. During this challenging year, IQE made good progress with implementing a number of cost-saving initiatives, which puts us in good position to capitalize on the recovery in the second half. Let's now take a closer look at how 2023 shaped up and the H1 versus H2 performances of the business. What's clear is that 2023 was a tale of two halves. During H1, as documented, we were still supporting our customers through the downturn as they addressed the buildup in inventory, which led to a reduction in customer orders and global utilizations. Despite this tremendous challenging environment, we work closely with our customers and successfully navigate this period. When we spoke to you at the half year, we reported 52 million pound revenue that was down compared to corresponding period in 2022. Even though this was a significant reduction in the context of the industry-wide downturn, this was in line with what our peer group experienced. It's important to note that when we spoke to you at the half year, we also forecast a recovery in the second half, double-digit growth versus first half. And I'm happy to report that we saw this materialize as we successfully grew revenue in H2 by 21% versus H1. In the second half, we have seen inventory level reducing in some end markets such as smartphones. We have also diversified our customer base and our product base into wireless markets. We ramped up new products in photonics, such as our new Vixel 3D sensing product that is with the tier one OEM. And we have begun to bear the fruits of our strategy of maintaining our core business while diversifying into new high growth market, such as our electronics, which we will talk about in more detail later on. But first, let me update you on the progress we have made on the key priorities we presented at the half year. Priority number one has been to manage the temporary downturn. Number two was investing for growth. And number three was continually improving our profitability. All of these underpinned by a range of ESG initiatives to deliver a more resilient business. Let me take you through each of these in turn. We've already covered a lot of the macro elements, so I would like to highlight the fact that during the first half downturn, we took measures to strengthen our balance sheet, improve our working capital, and put in place a number of operational improvements, all of which Jutta will talk through later on. As expected, to cope with the downturn, we took a prudent approach to cost savings while retaining our ability to invest for business recovery and future growth. Which brings me on to the next point. We continue to expand our customer base in all end markets. In wireless, we have secured multiple design wins with tier one customers serving the Android ecosystem through our partnership with AWC in Taiwan. In the photonic markets, we have ramped up our new Vixel 2D sensing with the tier one handset OEM. And in addition to expanding our customer base in wireless and photonics, we are diversifying into high value market with our gun power strategy. and indeed our investment in new capacity with the purchase of four additional Gantt reactors. As we said before, we offer our customers an unmatched global footprint that provide a secure and resilient supply chain, which is critical in today's geopolitical world. We have strengthened this position by deploying our Gantt capacity both in the US and in the UK. It's an important point to make because we are in the position to rapidly scale our capacity in the US and in the UK in line with demand to serve our customers close to the end market. Another measure we are taking for the long term is the continuous improvement in our profitability. Throughout our global footprint, we have taken steps to standardize and centralize our operations to improve cost and efficiency. We have also accelerated the consolidation of our MBE infrastructure into North Carolina, which will become our center of excellence for MBE product by closing the Pennsylvania site ahead of schedule. Looking ahead, We continue to work with our customers to optimize our global footprint while continually offering a secure and resilient supply. Let's now talk about the progress we have made with ESG, which underpins everything we do. It's a vast and complex topic, so we are focusing on climate-related risk, reducing emissions, and lowering our carbon footprint, all to our commitment to the Task Force on Climate Financial Disclosure and our science-based targets. More fundamentally, our biggest contribution will come from the very product we are set to build in Danpower, which is so effective at reducing power consumption. This will help the world achieve its net zero ambitions. 2023 also saw us strengthen and improve the diversity of our leadership team and the board of directors. Today, when Mike German looks at his board, he sees 50-50 split between male and female around the boardroom table, something we are really proud of. We talk about strengthening and diversifying the team, and I'm absolutely delighted to welcome Jutta Meyer, who brings industry expertise in abundance, especially in the semiconductor foundry business. Just before I pass over to Jutta, I would like to take a moment to acknowledge the hard work of Neil Warming, who acted as interim CFO in 2023 during the search process. Thank you for your contribution over the course of the year. And now let me pass it to Jutta. Thank you.

Thank you, Amerigo. It's great to be here. It has been a long journey. a journey which actually started when I was bitten by the semiconductor virus about 25 years ago, joining AMD in Dresden, Germany. That journey then led me on to Silicon Valley with Global Foundries, and then later Intel, and now back again in Europe with IQE. I'm very excited to be here and part of the team at IQE. And even though I've not yet hit the 90-day mark, what I've seen so far, either from my daily interactions or the visits to the sites, has left me really impressed. From meeting Mark at the security hut at the gate of our Newport facility through to Lindsay, who showed me the clean room facility in North Carolina, The enthusiasm, warmth, and knowledge of all of the colleagues I have met so far, our leading technology, customer pipeline, and the market opportunities have all given me enormous confidence in what we can achieve in the future. Let's go into the numbers which you know have been impacted by the macro backdrop. 2023 has been incredibly difficult for the entire semiconductor industry and IQE hasn't been immune to that development. Our reported revenue at 115 million has decreased by 31% versus 2022. However, it is consistent with expectations. It reflects the challenging market dynamics experienced in the first half, as previously reported, but also includes a gradual recovery in market dynamics and customer demand in Q4 2023. As America also mentioned, I will go into more detail into the story of the second half later. The adjusted EBITDA came in at 4.3 million, coming in above the expected forecast for the year, which we are pleased to report given the market backdrop. However, this result is still in stark contrast to the EBITDA level achieved in 2022. The semiconductor industry is investment and therefore fixed cost heavy. The significant reduction in consumer volumes as witnessed in 2023 has led to an underutilization of our manufacturing capacity and adversely impacted profitability. In reaction to the downturn, And to counteract the underutilization impact, we've implemented decisive actions to manage costs and create a leaner and healthier company. I will go into more detail on the actions taken later. Adding non-cash depreciation and amortization charges of 24.5 million lead to an adjusted EBIT loss of 20.2 million. Despite the challenging trading conditions, we were able to keep the adjusted operating cash flow of 15.7 billion at the same level as in 2022, mainly driven by strong working capital management implemented across the group with an inflow of 10.9 million. Now going through the results in more detail covering the segmental revenue. Our wireless segment represents roughly 47% of our overall revenue. It represents IQE's long legacy in connect wireless technology in applications ranging from smartphones to 5G infrastructure, enabling the smart connected devices, enhancing efficiencies and functionality. The main accomplishments in 2023 cover partnerships with an Asia-based foundry to supply Tier 1 Android smartphone OEMs. It also covers the increased engagement with leading US wireless customers with sampling and product qualifications. The launch of our industry first six inch Indian phosphide laser platform for AI in data center applications was another accomplishment in 2023. Our wireless revenue was 53.9 million, a 29% reduction year over year reflecting a decline in wireless gallium arsenide epi-wafer sales and a weakness in GaN epi-wafer sales for 5G infrastructure. This reduction has been driven by the softness in a broader smartphone handset market and buildup of inventory and supply chains. Now covering our photonics segments, representing 51% of our overall revenue, As a leader in cutting edge sensing technology, IQE is committed to maintaining technology leadership in advanced sensing technologies, enabling applications in fields such as autonomous vehicles, healthcare, 3D facial recognition, security, and environmental monitoring for enhanced decision making and situational awareness. Main accomplishments in 2023 for multi-year agreement with a global tier one consumer electronic OEM for the development of next-generation 3D sensing applications, as well as R&D partnership with global market leaders for next-generation products. The photonics revenue came in at 59.1 million, down 33% year over year, primarily reflecting the softness in the handset market and the slowdown in Asian telecoms infrastructure, partially offset by strong performance in aerospace and security markets for infrared-related products. Lastly, our seamless segment, representing roughly 2% of our overall revenue, is focused on the integration of compound semiconductors on silicon. Revenue came in at 2.3 million, down 18% year over year, due to elevated inventory levels in the consumer supply chain, caused by weakened demand in consumer goods. When we spoke to you regarding the first half results, we forecasted a recovery, projecting double-digit growth in second half compared to first half. Inventory depletion, as well as the results of our diversification strategy, led to an increase of revenue by 22%. One particular example driving that increase is the partnership with a major Taiwanese foundry who delivers wireless products to leading China cellular and Wi-Fi suppliers for growing Chinese and Indian Android smartphone market. That provides optimism from improvement in the latter part of 2023 and into 2024. The increase in revenue can be also seen in our EBITDA numbers, which improved significantly, and that is driven by improved capacity utilization, impact of cost mitigation actions, and value realization from sales through of aged working capital balances. In turn, the operating cash flow reflects the impact of these cost mitigation actions and tight working capital management. Our cash flow capex and net debt positions reflect the financial discipline in light of the challenging environment. Our adjusted operating cash flow of 15.7 million reflects a strong working capital management implemented across the group, mainly driven by a reduction in inventory levels, careful inventory management, and lower trading volumes. coupled with a reduction in trade and other receivables, successful cash collection, and lower trading volumes. Investment in intangibles. Even though it's down 1.6 million, IQE maintains investment on a combination of intellectual property, IQE's multi-year strategic IT transformation program, in a constrained funding environment. Our CapEx expenditure, increased by 2.7 million to a total of 12.2 million in 2023. This investment reflects a growth and a growing capacity to meet demand and reflects our overall growth strategy with capital expenditure across the global footprint to supply future growth opportunities. The net debt position reflects a reduction of 13 million year-over-year, which is now reflecting a net debt position of 2.2 million, mainly driven by the successful equity fundraise. I will now take you through the detail of the net debt position. This view consolidates the items I covered earlier, providing a summary of the net debt build-up. Specifically, I wanted to pull out insights of the adjustment items to complete the view. The adjustment items of 5.7 million reflect costs associated with the group's wide restructuring program and site decommissioning costs associated with the consolidation of the group's NVE manufacturing facilities. It also covers adjustments relating to share-based payments, recruitment costs, and severance. Beyond that, the underlying items have already been discussed, so let me move on to the next slide. Cash is king. This is something that has been following me throughout my career and is still a term that I'd love to use. With that in mind, for 2023, the successful 30 million equity fundraise, the refinancing of the 35 million multi-currency revolving credit facility, provided by HSBC, coupled with significant cost reductions and cash preservation actions, provided IPE with the necessary liquidity to navigate the semiconductor market downturn and allow for the continued investment in our growth diversification strategy. However, This basis needs to be preserved and optimized, and here are some of the things that we have done and we continue to do in order to do so. Headcount restructuring in 2023 resulted in a 10% reduction of our overall workforce, whilst keeping key talent to support our overall growth. Asset optimization included idling of certain manufacturing assets and reactors to optimize manufacturing capacity, aligning with our lower volumes, and that also reduced our cost base. We also sold excess tools resulting from site consolidation. The non-lateral cost reductions covered all areas, including manufacturing, SG&A, by driving things as second-source supplies and reduction of discretionary spending. Our working capital optimization efforts are continued, even though we did see great results already in 2023. These initiatives are not just a one-off reaction to industry downturn, but will rather become a part of IQE's DNA to continuously drive for margin improvements as we continue on our path for profitability. To add structure and transparency to these efforts, we are implementing a transformation office driving cross-functional alignment. These initiatives give us a strong trajectory into 2024. With that, I'd like to go into 2024 outlook. In short, with inventory levels beginning to normalize and our diversification strategy gaining traction, we are projecting the recovery initiated in second half 2023 to continue into 2024. As a proof point of this recovery, I am pleased to report that IPE's Q1 trading is in line with board expectations. This also gives us the confidence to confirm that revenue and adjusted EBITDA for 2024 are expected to be within the range of any of this forecast for the year. With that, let me hand over to Mirko to cover the 2024 strategy.