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.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchdown telephones. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. And the first question comes from Robert Sanders from Deutsche Bank. Please go ahead.

Yeah, good morning. Best of luck with your new role, which I'm sure will be a huge challenge, but we're looking forward to seeing what you can do there. So my first question would be on utilization. So it looks like your utilization, your loading is about 60% at 150 and about 80% at 200 and 300. So what I'm interested in is how you think the pricing situation is going to play out. Are you seeing... customers wanting to drive concessions on pricing, particularly those with shorter-term contracts, and I have a follow-up. Thanks.

Yeah, thank you, Rob, for the wishes. I tried to do my best. On the utilization, I mean, if waivers starts are down 10%, then utilization is down 10%. So utilization is down 10%. Luckily, actually, we do not see pricing pressure. And that's kind of a bit different from the prior slowdown in 2019, where we saw pricing pressure. But so far, it is more about customers just pushing out. And I guess all customers we talked to know that Wafers will probably still remain to be very tight. next year. So they try to be friendly to us. They ask for push outs, but they have not been talking about prices so far.

Got it. Okay. And then on the CapEx, it looks like it's a little bit lower than your previous statements. So is the situation you're going to ramp at full speed to phase one and then perhaps revisit depending on demand as we move through this year, the speed of phase two, or is there anything I should read into to what you're saying about CapEx? Can you just remind us on first wave out and what capacity phase one will give you? Thanks.

Yeah, Rob, I was trying not to change the language that we have been using, so absolutely no change. We go full speed. We just cut the first wafer actually last week, but it will be a longer process to qualify everything and then kind of, I mean, we still expect the first wafer to ship basically on January 1st or on January 2nd. And so no change there. We never disclosed the exact output, the capacity of phase one. So we want to continue not to disclose that. But there's no change in strategy. And then maybe later this year, there needs to be a decision on the ramp speed for phase two. But I think this is something to be done in fall of this year.

Just one quick follow-up on that. On depreciation, how do you think depreciation and amortization will start kicking in from that fab next year and the year after? Because I think depreciation is roughly 200 and something million this year. How will it trend in the next two years? Does that mean, I understand it doesn't affect your EBITDA, but does it affect your gross margin? And what sort of step up in depreciation should we see? And that's it for me. Thanks.

Yeah. Okay. So depreciation will basically double next year. I mean, if you look at our balance sheet, more of half of the long-term assets are assets in construction. So that will all hit next year, become operational, and then depreciation will stop. I think the new factor will have a positive impact on EBITDA margin from day one, because even at a slow production output, it will be already very effective. Though, obviously, it will put a burden on EBIT with the higher depreciation. And that will take a little to come back, because depreciation really comes from day one for all of the factory, for all of the clean room, and for all of the equipment that is already there. And then kind of with the loading increasing over the first years with the ramp, then more and more EBITDA will be generated. And then EBIT will kind of come back to all levels. And in the end, probably at higher levels than we see today.

Thanks a lot. And the next question comes from Adam Angeloff from Bank of America. Please go ahead.

Yeah, hi, thanks. I'm just echoing the well wishes and all the best for the next role, Rainer. So firstly, just wanted to get, you know, I know visibility is low today, but your initial views and maybe if you're having any of these conversations with customers on 2024, given, I guess, a limited or no expectation for the market to recover in H2 2023, and we have all this new capacity coming online in 2024, just what you're hearing from from customers there. And then secondly, just on the pricing developments, I was curious just maybe if you could go into a bit more detail on your answer to the last question. I would have thought maybe spot was slightly weaker than where we were a few months ago, and LTA pricing may be a bit more resilient. But if you could just go into that in more detail, that would be great. Thanks.

Yeah, sure, LTA. Adam, thank you. So, kind of, I mean, if you read through customers' presentations and also from our conversations with customers, everybody is expecting a significant uptick in 2024. I mean, if you look through the earnings calls, I mean, for example, a large logic manufacturer, they see already the draft now. uh though typically we see it six months later because you know the inventory needs to be digested but there's clearly a lot of positive signals into into next year and again i mean if this year is down 10 for inventory adjustments you would expect next year to pick up just from that uh by 10 new capacities you said i I think the amount of capacity coming online from customers next year might be even a bit higher than capacity coming online from beta manufacturers. We believe we are somewhat ahead of competition when it comes to expansion. As you remember, we are the first ones to decide on Greenfield, and the project is actually executed very, very well. We will be able to ship from the new line really early in January 1st, and we think we are ahead. And we do not expect that there's more capacity added on our side, that our customer side. It's rather the other way around. Now, we said that pricing for this year would be up a little, and we stick to that comment, particularly from new LTAs coming online. But there is no weakness in quarterly contracts. It is really less, I mean, volume is down, but we have not had customers asking for price reductions or kind of, you know, I give you more volumes if you lower the price. We really don't see that because the customers are expecting this to be a very temporary weakness and the market to come back next year. And then they need a significant amount of waivers.

Okay, got it. That makes sense. And just a quick follow up is the plan roughly still to ramp up next over four years?

Yeah, Adam, I this is nothing that we need to decide today. So we have kind of phase one, we will continue to go as planned. And then if we what we do kind of in 26678 is something that that can be decided later. uh we can continue as plans uh meaning that we will ramp it um until 28. uh but kind of depending on the market assessment in the second half of the year we could also slow them down by a year or two got it very helpful thanks and the next question comes from gustav froberg from bernberg please go ahead

Hi everyone, thank you for taking mine as well. Also to just reiterate some previous comments, Ryanair, best of luck in your new role. So on to questions, I just really have one and I think you've alluded a little bit to it earlier and it's on cycle dynamics and I'm just trying to compare the current cycle as you see it with the one we saw in 2019. um when we basically saw ebitda decline uh year on year in 19 we saw further decline in 2020 and given what you see today and what you know today um how do you think the um timings of of the cycle will work this time around do you think that the inventory digestion is greater than or less than what we've seen previously um yeah just just basically any color around cycle dynamics compared with the past would be very helpful thank you

Yeah, sure, Gustav, and thank you for the kind words. It kind of feels a little like 2019, though the market is down even a little further. The big difference is really that we do not see pricing pressure. But the starting point is the same, right? End of 2018 was particularly strong. Customers were still taking spot volumes. And that's kind of the thing that we saw end of last years. I mean, customers took spot orders, spot volume, and they also said they would take more spot volume in Q1 this year. And then suddenly kind of inventory went up and in inventory data and inventory always comes late and kind of, you know, we realized very late that there is an issue. And then customers reduce wafer stocks. And then kind of we are behind there. I mean, our cycle is like six months behind the semi-cycle because it takes a long time till we are told to reduce wafer starts, actually result in lower wafer salt. And so also the uptake takes six months later on our side. But really, I mean, it feels like the last cycle But the big difference is that there is no pricing pressure. And I truly believe that the reason is that, I mean, first of all, we have a lot of great LTAs, but also on the shorter term, we do not see pricing pressure and customers really expect that that wafer supply might actually be pretty tight next year.

That's great. Thank you. Just to follow up on the LTAs, could you remind us of the percentage share covered by LTAs currently, please?

Two-thirds, roughly. No change.

Okay, great. So same as before.

So the next question comes from Jürgen Wagner from Stiefel. Please go ahead.

Yeah, good morning. Thank you for taking my question. I have a... Yeah, on solar wafers, even the current... initiative of our green government to subsidize electricity significantly. At what point would you consider the production of solar wafers being an economic alternative? I know that you previously said it's not an option, but now things seem to change in terms of production costs. Thank you and all the best.

Yeah, thank you. I think we will see each other soon. So, yeah, I mean, solar vapor, I think the last solar vapor we sold in 2008, and this is really not a business for us. I mean, this is kind of, I mean, I saw solar vapor manufacturing in China. I saw these huge holes where they have thousands of pullers to produce a very, very cheap product. And, you know, the manufacturing cost of a solar wafer, maybe 10% of an electronic rate wafer, or maybe even less. This is really nothing we are interested in. And, I mean, personally, I obviously follow that discussion with a lot of interest, but that is definitely nothing we would ever engage in.

Okay. Thank you.

As a reminder, anyone who wishes to ask a question may press star followed by one on their touchtone telephone. And we have a follow-up question from Robert Sanders from Deutsche Bank. Please go ahead.

Yeah, just picking up on the pricing commentary you made, I mean, if pricing is stable and the industry is worried about tightness next year, why don't either customers continue to build up inventory or you run your factories flat out in order to take market share next year because you'll have the volume and no one else will. I mean, that's the bit I don't quite follow.

Yeah, Rob, I think customers already build inventory and they know, realize that their warehouse full and they have to reduce, you know, and then also on our side, I mean, you always, I mean, you're thinking about, oh yeah, that's pre-produced. I mean, kind of the The capacity that we don't use today has been gone, but history clearly tells that good leadership means to cut immediately and don't transfer the problem. If you let it go in Q1, then you might have a problem in the second half of the year. So it's clearly good leadership is having flexibility in the company being able to cut quick, but also to restart quickly. So we are ready to ramp up production quickly as soon as the demand comes back. But it's always difficult to predict the exact timing. We actually reduced our manufacturing output in line with market demand. And I'm 100% certain that that is the right thing to do. because otherwise he would just push out the problem.

Got it. And the only other thing I wanted to just ask was around prepayments. So Simcoe makes a big deal that none of their expansion is contingent on prepayments. What they argue is that companies like you and Global Wafers are kind of obligated to ramp at full speed because of prepayments. So can you just sort of contrast and compare –

what you're doing with prepayments with a company that is just building to demand as they see it is there an obligation for you to kind of build up regardless of the demand picture yeah i'm not sure if i mean i'm surprised to hear that comment i'm not sure that makes a lot of sense i mean it's where our lta's sell wafers not not a specific So, I mean, if we would realize that the overall demand is growing less than we had expected and we have sufficient existing capacity, we would not be obliged to expand the factory. That's why I said before, kind of, you know, if we later realize this year that the demand picture for the next five years is probably lower than we thought before, we could very well slow down the expansion. Though, I mean, Rob, I actually do not see that. So I would, as of today, think that we would continue to lamp. But, you know, the LTH just obliges to sell vapors, but it does not sell from which factory necessarily. Got it. Thank you.

And the next question comes from Martin Jungfleisch from B&B Paribas Exxon. Please go ahead.

Yeah, good morning. Just a quick question on the margin guidance. I mean, do you expect sales basically flat quarter on quarter on Q2, but margins down at the midpoint? And if it's not pricing, what is the primary driver for this? Is it forex and personnel costs? And then maybe generally on costs, I mean, obviously the market is not something you can control, but what are you doing in order to keep profits at a certain level? Is there any levers that you have a certain stronger influence on? Thank you.

Sure, Martin, yeah. So the margin Q2 is down very little and the biggest driver for that is exchange rate. You're right. And I mean, then there's a small minor things, for example, kind of, you know, to be first in first out in January, you still use a lot of material that you actually bought last year. and you know in q2 then you only consume material that you bought this year but that is small effects but that is reason for for the guidance um now profitability is is sluggish and uh we do a lot of things like like i said we know we don't pre-produce we we rather try to reduce the work for force temporarily uh to also see the reduction in in uh in labor costs and in what's probably most important during these times, keeping the productivity up. So, you know, reducing temporary people, reducing our accounts and so on. And then also on there, you know, we saw significant inflation in our material costs last year, also in electricity. We are trying to take the right decisions now to make sure that electricity costs come down next year. We see some reduction already in spot prices now. And, you know, we try everything we can to, you know, to change the course of the supply costs. So rather to see, I mean, first, no further increases, but then maybe going into next year, some first reductions.

Great. Thank you. And all the best, of course, for the future. Sorry, future. Thank you, Manu.

And we have one more follow-up question from Adam Angela from Bank of America. Please go ahead.

Yeah, thanks. Just a quick one. I was wondering if you could go a little bit deeper into logic foundry versus memory, both on the inventory side and then I guess as a result on the demand side as well would be great. Thanks.

Yeah, I can. I mean, we cannot make any specific comments on the individual customers, but obviously they're If you look at a large logic company, they, in their own communication, seem to be through the worst, and they see improvement starting in the second quarter already, Foundry obviously is kind of, you know, always sees a bit more of a reduction, but if I read the transcripts of some of the Foundry customers correctly, they also seem to be a bit more positive about the second half of the year. And then in memory, I guess we would all say that they were slow to accept that they have to reduce wafer starts and that they kept producing and Memory is probably the area where we see the highest inventory levels. So that will be the area where it takes most time to actually get back into growth. Makes sense.

Thanks.

As a reminder, anyone who wishes to ask a question may press star followed by one. So it seems there are no further questions at this time, and I hand back to Verena Stütze for closing comments.

Thank you. This concludes our Q&A session. Thank you for joining us today. We hope you will join us again in our H123 release on July 27. Have a good day. Goodbye.