Siltronic Ag Ord

Thank you, operator. Welcome, everybody, to our Q1 2023 results presentation. This call is also being broadcast live over the internet on Siltronic.com. A replay of the call will be available on our website shortly after the conclusion of this call. Joining me on today's call are our new CEO, Dr. Michael Heckmeyer, and our CFO, Rainer Ehrle. We are very excited to have Michael on board since this week. He will introduce himself in a minute. Rainer will then guide you through the current trading, key financials, and provide an update on our guidance and current market developments. After the presentation, 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. All documents relating to our Q1 2023 reporting are available on our website. I now turn the call over to Michael for his introductory remarks.

Thank you, Verena. Welcome, everyone, and thank you for joining us for our Q1 2023 results call. This is my first conference call for Siltronic, and I'm very excited to have my new role as CEO. Some of you might know me from my previous roles. I've spent the last 25 years in various functions at Merck, a DAX-listed company. Most recently, I was in charge of the display solutions business, at the same time member of the management of the electronics division, where I gained already valuable insights into the electronics and semiconductor landscape. I consider it a great and unique opportunity to serve as CEO of such a thriving company. Wafers and semiconductors are the basis for future technologies. These products enable advancements in digitization, AI, autonomous driving, and countless other groundbreaking applications that are transforming our lives and the global economy. I'm truly proud to be part of this dynamic environment and to contribute to the future together with the Ziltronic team. I joined the company just a few days ago and already gained some first insights. I look forward to speaking to you in the H123 conference call on July 27th. As you are key stakeholders, appreciate your feedback and input. During the upcoming roadshows and investors meetings, I will enjoy meeting many of you personally. For today, I asked Rainer to take over the lead in this call. So let me hand over to Rainer and thank you for joining today.

Thank you, Michael, and I must say we are all thrilled to welcome you on board here at Zetronic. I promise that you will enjoy the time here. We have the greatest employees, we're a technology leader, and we have a great future ahead of us. But now let's dive into the latest developments at Zetronic. Again, it is all about inventories at our customers and OEMs. Massive inventory built through H2 last year and Q1 this year now requires a massive response. You probably read about the significant wafer start reduction at many of our customers. As usual, customers tell us rather late about their plans. January still looked OK, however. In the meantime, we received many calls from customers asking us for push-ups. Consequently, our earnings were impacted significantly. Compared to Q4, our sales were down by 14% to €404 million. EBITDA was at €125 million, and the margin came in at 31%. CapEx was €260 million, mostly spent with FabNext, our new factory in Singapore. Due to the high CapEx, our net cash flow was negative, as expected, and came in at minus €106 million. Our net financial assets were positive, at €284 million at the end of Q1. Next, construction is fully on track. This is actually a great story. We have such a great team down there to make it possible. The building is basically completed, and the clean room is operational. To give you an idea of the impressive work done by the team, the construction site covers an area roughly equivalent to the size of 25 soccer fields. Around 5,000 people are working on site to get everything ready in time. The picture on the slide gives an impression how large the site is. On the left side, you see our existing FAB, which is connected by a link bridge to the new FAB. We already moved in some equipment and started it up. I'm convinced that FABnext will be a game changer for Citronic. It is our largest and most automated factory at Citronic, which will enable a leap in Citronic's EBTA margin. And now we go through the financials in more detail. We start with sales, which as anticipated, were weaker quarter on quarter due to a decline of wafer area sold. Additionally, the FX headwind from the stronger euro against the dollar put some extra pressure on Q1 results. Overall, sales reached 404 million euro and are in line with our expectations. In Q1, COGS came down to €288 million, €30 million down quarter-on-quarter due to lower wave area salt. Costs went down with lower area salt, however, less than proportional to the volume. We saw inflation in labor costs, raw materials and supplies, as well as in energy costs. Overall, we expect another €50 million unit cost increase year-over-year. low, but good improvement in electricity costs, such increases may actually come in somewhat below 50 million euro. Our gross profit decreased to 160 million euro and the gross margin to 29% in Q1. The US dollar exchange rate averaged 1.07 in Q1, i.e. it was almost 5 cents stronger than in Q4. On this slide, we updated our FX sensitivity and a change in one US dollar cent impact sales by approximately 11 million euro and EBITDA by roughly 7 million euro, as always excluding hedging effects. With the US dollar at 110 and the Japanese yen at 145, we expect a 65 million euro negative impact on sales for the entire year 2023. The stronger euro burdens the tronic sales and gross margin, though we get some of it back through FX hedging. Hedging result was negative, 20 million in 2022, and is expected to be about 20 million euro positive in 2023 if the US dollar was around 110. EBITDA in Q1 came in at 125 million euro and was in line with our guidance. EBITDA margins were 31%, down from 35.6% in Q4. While it is disappointing to see the decline, I would like to give it a different spin. With all the improvements of the last decade, we have elevated margins to a much higher level. Even at times of a cyclical decline, we still run the company at 30% EBITDA. This, in my view, is impressive. EBIT in Q1 reached 78 million euro with an EBIT margin of 19%. EBITDA and EBIT were both impacted by the lower VAT area sold and higher costs for raw materials, energy and supply. Despite the market weakness, a considerable net profit of 73 million euro was achieved in Q1. Earnings per share were 2,20 euro. The dividend payout of €3 per share for 2022 was approved by the MAGM last week and actually paid yesterday. Looking at our balance sheet, equity rose to €2.1 billion at the end of March 2023. Equity ratio was 51%. The increase in equity is a result of the strong net profit. The IFRS interest rate for pension provisions in Germany was 3.66%. In the US, the interest rate decreased slightly to 4.68% at the end of Q1. This resulted in pension provisions of €22 million almost no change. Net financial assets were still positive at €284 million despite high capex. Again, we had strong cash flow from operating activities. We have some 676 million euro financial debt and liquidity of almost 1 billion euro, which will obviously decline in Q2 with the dividend payment and high capex. Operating cash flow in Q1 was 147 million euro, following 190 million euro in Q4. Net cash flow in Q1 was negative at minus 106 million euro as expected. Net prepayments for customer LTS amounted to €22 million in Q1. We expect some additional prepayments in Q23. However, prepayment inflows and returns will be in the same order of magnitude this year. Q23 CAPEX is expected to be slightly above Q22. Most of this amount will be spent for FAPNEX in Singapore. In Q24, this amount is expected to come down by half. Due to the planned startup of FAPNEX in 24, depreciation will nearly double in 24. The financing strategy of the new FAP and other CAPEX has a solid foundation. We primarily use cash on hand and operational cash flows, customer prepayments to fund the project. In addition, we have some financing in place. And to give you a quick overview, there's three instruments in place, and the fourth one will be completed soon. The first one is the ESG link promissory loan note, €300 million that is fully drawn. The second is a €450 million Singapore dollar term loan that is partially drawn and will be fully drawn through this year. Then the €200 million loan from the European Investment Bank, which is also fully drawn. And then in preparation of the ongoing expansion of that next term loan, in a combination with a revolver is currently negotiated. It is intended to serve as a liquidity reserve and will be drawn in 2024. And as I said in the last call, we do not plan a capital increase in 2023. Now let's turn to silicon end markets. I will talk about end markets first and later about inventory growing. Year over year, Smartphones, which represent the largest silicon end market, are anticipated to show weaker unit sales. On the positive side, silicon content in smartphones continues to grow. Therefore, wafer demand is expected to remain stable this year. PCs coming down from high demand during COVID are expected to decline further this year. Server demand remains strong, although we see some pockets of weakness. AI and other high-performance applications massively drive silicon content in servers. Demand for industrial applications is projected to see a modest increase, while the automotive sector, particularly electric and hybrid vehicles, continue to see significant growth. In summary, the overall end markets before inventory correction in 23 anticipated to show somewhat little growth. But due to the high inventory levels throughout this value chain, particularly among our customers and to a lesser extent also at OEMs, wafer demand is expected to decline by slightly more than 10% year-on-year. We have seen such excess inventory before, particularly in 2009, 2012 and 2019. Burning inventories takes time and the three-month cycle times that our customers do not allow quick response. Some customers already reduced wafer starts in Q4. Others just recently decided to reduce output. We do not like it, but eating through these high inventories will delay our upturn by a couple of quarters compared to end markets. And this leads us to our outlook for the second quarter. Citronic's start to the financial year was muted. Citronic expects the market to remain sluggish in the coming quarters. Some customers asked to push out labor shipments, and this will probably affect the entire year 23. In the second quarter, we expect sales on Q1 level and EBITDA margin to come in between 27% and 31%. This is based on an FX rate of 110%. Inventory burn takes time. Therefore, we do not anticipate any improvement in H2 yet. As you may have read, a large memory customer will be reducing wafer starts further, which will put some burden on the second half. Accepting that things will take a while is difficult, but we continue to be convinced that a bright future lies ahead of us. And let me highlight three areas. Area one. The demand is down a little more than 10% due to excess inventory. Once burned, demand will automatically increase by 10%. Some end markets might already be through the worst, while other markets need more time. Memory has just reduced wafer starts further. Reason two, megatrends such as 5G, AI, electromobility, and digitalization continue to be growth drivers for the semi-industry. Consumer sentiment is still muted. Inflation is hard to fight. China is still under shock from the lockdown and a terrible war is looming in Europe. But sooner or later, consumers will come back and content will continue to grow anyway. And finally, costs are coming down. Electricity prices are improving both in Europe and in Singapore. Electricity costs are still elevated, but far below the fear prices of last year. We also see improvements in other cost categories like freight costs. Now, prior to concluding the call, please allow me a few words about myself. As you may have read, today's webcast will be my last one for Zotronic. Claudia Schmidt will take over the role as CFO on July 1st, as I have decided to take on a new professional job. With Claudia Schmidt, Certronic will gain an experienced and highly competent CFO from within our own ranks. Claudia has been with Certronic for over 13 years, and Claudia and I have been working together for almost 20 years at Certronic and at Wacker. Claudia is the head of controlling and treasury. She has played a significant role in shaping key strategic decisions during this time. Having worked closely with her for the many years, I cannot envision a better successor. For me personally, the past 20 years at Citronic and at Wacker have been an incredible experience. When I started in 2003, our EBITDA margin was 20% lower compared to peers, and we started an incredible journey, slimming overhead functions, driving automation to new levels, moving HVM to Singapore, and fostering our technology leadership. The IPO definitely stands out as one of my most memorable experiences. But I'm also proud of the leadership team that we put together a strong basis for future success. I enjoyed engaging with all of you during running calls, investor conferences, and roadshows. And I'm deeply grateful for the trust that you have placed in me as CFO. Obviously, I will be still available for meetings and calls until my departure end of June. But in case we do not speak before, all the best to you. And I'm looking forward to seeing you again in my new role. And with this, we close our presentation and we are now available for your questions. Operator, please open the Q&A session.