Siltronic Ag Ord

Hello everyone and welcome to Siltronic's second quarter 2023 results conference call. 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 Verena Stutze, Head of Investor Relations and Communication of Siltronic AG.

Thank you, operator. Welcome, everybody, to our Q2 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. This is the first quarterly call of our new management team, consisting of our CEO, Michael Heckmeyer, and our CFO, Claudia Schmidt. Both will introduce themselves in this call and will give you an overview on our Q2 financials, our guidance, and the current market developments. After the presentation, they 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 Q2 reporting are available on our website. I now turn the call over to Michael for his introductory remarks.

Thank you, Verena. A warm welcome also from my side. For those of you who did not have the chance to hear my short welcome message during our Q1 call, my name is Michael Heckmeyer, and since May, I am the new CEO of Siltronics. As you might have read in the press announcements, I hold a PhD in physics and most recently worked for Merck for almost 25 years in various management positions. By my side today, also for the first time as a member of the Siltronic Executive Board, is Claudia Schmidt, our CFO since July 1st. She has been with Siltronic for almost 14 years. Today's financial results will be presented to you in a new structure and in a different way than in the past. This reflects our ambition to give you a clear and transparent picture of our company. Besides this, Claudia and I will further develop Siltronic on the basis of a strong track record. Therefore, you can expect more evolution than a revolution from us today. As some of you might have seen in the first slide, the central theme of today's presentation is sound basis for future growth. What does this mean and what can you expect from us today? We'll of course explain the figures for Q2 2023 to you in detail and give you an outlook for 2023 as a whole. A year which shows a very pronounced weakness in demand from the semiconductor industry with a noticeable impact on our financial performance. But what is more interesting for all of you and also for the value of our company is to look beyond this year. Most experts including us see very promising prospects for strong medium and long-term growth in view of several megatrends that we enable with our products. Today we will shed some light and share our perception of this and how we are preparing for the next upswing and will shift our company from an investment to the next harvesting phase. Today actually is my day 83 on my learning curve at Siltronic and this learning curve couldn't hardly be steeper. On my journey through the Siltronic world I have learned that our group is European But nevertheless, a truly global company resides in Burghausen, Freiberg, in Portland and in Singapore. During my field trips, I met hundreds of Siltronic employees and I'm impressed by the unique skills, the deep technological understanding and commitment of everybody. They are proud to work for a high-tech company with such a pronounced and strong innovation focus. This was also confirmed and underlined by many customers I met on my tour. who made the special importance of Siltronic as the only leading Western wafer producer very clear to me. Based on this, and being one of the technology leaders in this industry, Siltronic offers fascinating products with huge future potential. We will make sure that we are prepared for the future and invest to further develop our USPs. So that's what we do at Siltronic, to leverage our USPs to take our company to the next profitable growth level. Ladies and gentlemen, I think we all agree that siltronic is an important player in a market that is central to the future of the global economy. Already mentioned is our market position, with an estimated market share of roughly 14%, a position which has not changed in the recent downward trend. The future of the semiconductor industry and wafers are the fuel for this industry, is driven by megatrends such as artificial intelligence, digitalization and electromobility. I can promise you today that Siltronic is primed to seize the future opportunities resulting from these developments. But now let's have a look at developments in Q2 2023. A quick summary of the quarterly highlights. The operating figures are in line with expectations. Despite difficult conditions, pricing is stable Our profitability is solid and in this year we will see the investment peak. Our market share is stable and our investment focus tab next is on schedule. Claudia will now present all important details on the financials of Centronic before I will report back with the outlook for the full year 2023 and beyond. Claudia, please.

Thank you, Michael. A warm welcome also from my side. I'm very honored to represent Seltronic today for the first time as the new CFO of the company. As you may know from the announcement a few months ago, I have a long history with Seltronic since I joined the company almost 14 years ago. Before joining the board, I was head of controlling and treasury. Now let's go through our financials. As expected, sales in Q2 were stable quarter on quarter. We saw a little pressure from FX but in general, the main sales parameters were unchanged. I'd like to underline that prices remained stable in the course of the year, despite a significant year-on-year decline in volumes. EBITDA came in at €119 million, 5% down quarter-on-quarter. Compared to Q1, we saw some negative effects from inventory changes and higher costs for raw materials and supplies. Given that these materials are strongly dependent on energy costs, our suppliers increased the prices for 2023. In the first quarter, we still benefited from prior year stocks, which were priced lower. Regarding energy prices, the picture is mixed. In Germany, we see and can partially profit from a downward trend for power and natural gas compared to last year and also quarter on quarter. In Singapore, where electricity prices are largely set in the previous year, we see an upward trend. Most of the prices for 2023 were fixed in 2022, and likewise, the prices for 22 were already agreed in 2021. Looking into next year, we expect some positive impact from lower energy prices in Singapore as well as in Germany. On the upside, our FDX hedges from last year, which were at favorable rates, resulted in a positive hedging result of €6 million in Q2. At a EURUSD exchange rate of 1.10, we expect a positive hedging result of roughly €20 million in 2023. With these effects, our EBITDA margin of 29.4% in Q2 was below Q1, but still at a very solid level given the current weakness in the industry. EBIT declined by around 10% quarter on quarter. In addition to the EBITDA effects, depreciation showed a slight increase as expected. Net income came in at 61 million Euro, down 15% quarter on quarter. Due to substantial capital expenditures, our cash and securities have declined significantly. This led to a decrease in interest income compared to Q1. In total, the financial result was slightly negative in Q2. Looking at our balance sheet, total assets sum up to roughly 4.1 billion euro. All the changes compared to the end of 2022 are mainly attributable to our high investments. In the first half of this year, capex totaled 626 million euro. As a result, our fixed asset share increased from 58% to 70% of total assets. Consequently, our cash and securities have clearly decreased from over €1 billion to just under €600 million. The equity ratio remains stable at 50%. The provisions primarily comprising pension provisions were almost unchanged. Financial liabilities, including loan and lease liabilities, were relatively stable. No further loans were drawn in the first half of this year, so the total of all loans is still at around €650 million. In H1 2023, we've received customer prepayments amounting to €78 million. Total prepayments sum up to €611 million at the end of June. will be the peak of our investment phase. Therefore, as mentioned before, our capex year-to-date already amounted to €626 million. We expect a similar amount for the second half of this year, bringing our total capex for 2023 to around €1.3 billion. These investments primarily cover the FabNext project in Singapore, the completion of the expansion of the Crystal Pulling Hall in Freiberg, as well as capability enhancements. The capex increase compared to the previous guidance is due to some price increases in our FabNext projects and a slightly earlier capitalization of some equipments. With the progress of investment projects, you gain a better view on the timeline regarding delivery, installation, and final inspection of assets, and thus to the capitalization date. For 2024, we expect the capex to come down by more than half. Michael will provide some further details on this later. Depreciation this year is expected at around 210 million euro, and we assume it to more than double in 2024. Due to the high investment level, our net cash flow will be substantially negative in 2023. To finance these high investments, we have a conservative approach in place, ensuring we always maintain an adequate liquidity reserve. In addition to our existing cash and future operating cash flows, the financing is supported by customer prepayments as well as debt financing. For this debt financing, we have four financing instruments in place. The promissory note loan and the loan from the European Investment Bank, in total 500 million euros, were already fully drawn last year. The Singapore dollar loan was partially drawn in 2022 and the rest will be drawn in Q3 this year. In addition to the three existing loans, we have secured a syndicated loan in Q2 consisting of a term loan and a revolver totaling €380 million. The SIN loan amount is slightly higher than initially announced in Q1 as it was oversubscribed The commitment from the participating banks was very high. We expect the first drawdown of the term loan in 2024, and the revolver will serve as a liquidity reserve according to our plan. Let's take a closer look at our cash and debt situation, looking at the bridge at the left side. By the end of 2022, Siltronic had net financial assets of 374 million euros. We generated a solid operating cash flow of €232 million in the first half of this year, but this cash flow was not enough to offset the high payments for capex of €588 million and the dividend payment of €90 million. As a result, our net financial assets turned into net financial debt of €83 million. With this, I hand back to Michael.

Thank you, Claudia. And as announced, we now come to the outlook for the full year 2023. Let me briefly highlight the characteristics of the current market weakness. Firstly, there's a market weakness with the strongest market decline since 2009, with a high level of excess inventory, which led to volume shifts from our customers. Our customers have learned from the recent booming years how important it is to keep the value chain flowing. in order to remain capable of delivery. In our opinion, this has led to the fact that unlike in previous week phases, we see a reliable, stable price environment in 2023. Another fact that helps us and also clients in planning is our high proportion of long-term agreements. Our definition of an LTA includes a contract that is longer than one year. For Siltronic, approximately two thirds of our sales are based on these LTAs, with already most defined prices and volumes. But last and not least, we have seen a lean overall cost structure and you can see a high profitability despite the current market weakness. Centronic has succeeded in sustainably raising the APTA margin from historic levels in the mid-teen area in the years up to 2016 to regions of around 30% and even in an extremely difficult market environment. A look at wafer demand in the silicon end market shows that only demand from the PC sector will decline sharply in 2023. For smartphones, we expect weaker unit sales, but on the opposite side, and positively, silicon content continues to grow. Same is true for servers and automotive, where we see a nice content growth. In total, the overall market will tend to stagnate or decline slightly. So apparently things wouldn't look so bad for the wafer market if there weren't massive destockings at all levels of the value chain. This is a late consequence of the supply and materials bottleneck in the past few years. This effect, which is also massively happening with Siltronics customers and OEMs, is likely to lead to a decline in global wafer demand of around 15% in the full year 2023. Having said this, let us now turn to the outlook for the reminder of fiscal year 2023 and the year as a whole. The second half of 2023 will also be negatively impacted by the continuing weakness in demand, mostly due to the high excess inventory within the semiconductor industry. As some wafer volumes were postponed quite light this year, Steltronic will feel the impact more in the second half of 2023. Therefore, we expect H2 to be lower than H1, with Q3 probably the weakest quarter from today's perspective. A decline in volume of around 15% overall is to be expected in full year 23. Prices, nevertheless, are expected to remain stable. Accordingly, the Executive Board of Siltronics is concretizing its full year forecast. and now expects consolidated sales to be 14 to 19% below the previous year's record level of 1.8 billion euro at an FX rate of the euro against the US dollar of 1.10. The EBITDA margin will also be significantly lower in 2023 at 26 to 30%. In addition to the reduced sales volume, Inflation-related rising costs of below €40 million, negative exchange rate effects and the absence of a positive one-time effect from the termination fee of €50 million in 2022 will contribute to this decline. CapEx will be around €1.3 billion and depreciation at approximately €210 million, as Claudia already mentioned. And no surprise, net cash flow will be significantly below 22. Furthermore, our tax rate is expected to be around 10% in 2023. So the figures for 2023 are soaring, but the market is as it is. And the big question that concerns us all here is what will happen in 2024 and when will we see the turnaround in the industry? I hope you didn't expect a very detailed answer from me today. I'm afraid I have to disappoint you. My crystal ball is just as good as yours. Nevertheless, I would like to give you our market assessment based on our most important market channels. Whilst memory inventory is still elevated, we see first positive signs from logic players, especially for artificial intelligence. And the power segment is still performing strongly with nice content growth. We are closely watching the consumer sentiment in China because this is a key end market. And furthermore, especially in Europe, the inflation is still a burden. It's also not secret for you as market experts that the typical time lag for the waiver industry to see improvements in demand from a general market turnaround is approximately two quarters. But what I know is that general mid- to long-term positive trend for waiver demand is intact. Driven by Megatrend's artificial intelligence, digitalization and electromobility. Let's have a look at the facts and figures for the growth driver artificial intelligence. We all saw the flashing AI announcements. Positive is that servers specialized for AI needs up to 8 times more silicon content than conventional data center servers. However, today AI servers only represent less than 5% of the total servers shipped worldwide. Therefore, the silicon content is growing, but from a small base. I believe that AI is just at the beginning. Market experts see high annual growth rates of more than 30% in the next years. Therefore, the server and market will be one of the key drivers in the years to come, but won't change the total picture for this year. In general, our world is becoming increasingly more digital and connected, which is also driving wafer demand. This is also true for electromobility. For electrical cars, we see 60 to 100% higher wafer area compared to conventional cars. In general, we see a nice content growth in cars due to the ever more assistant and entertainment systems. Despite not knowing when the exact timing for the next semiconductor boom based on these megatrends will start, Siltronic will be ready to participate. In my meetings with external partners, I have noticed that Siltronic is often perceived merely as a memory supplier. To be clear, on this slide you see the 22 market split between memory, logic, power and others. The Siltronic split almost mirrors this market mix. you can see we have established a well-diversified and resilient product mix in recent years. At the end of my presentation, I would of course like to give you a brief update on our FedNext, from which we expect an upside for additional revenues and earnings, most probably from fiscal year 2025 onwards, depending on the actual timing of the market turnaround. FedNext is fully in track, but we see a slight increase in capex for 2023, As communicated, production will start in early 2024. In view of the expected even accelerated market weakness in the second half of 2023, we have slightly reduced the ramp speed for 2024 and 2025 according to market reality. Our focus is on qualifying customers in 2024 to be prepared for growing demand. Again, here we can rely on a very high share of our LTAs which will be roughly 80% during the rent phase. Ladies and gentlemen, I would like to briefly remind you of the advantages and potential of FEDNEXT for the future of siltronic. Our new production site is state-of-the-art on the way for industry and has a high epi-share. We will have a very high automation rate and we will see substantial economies of scale. To sum this up, our site in Singapore will be the most cost-efficient siltronic FED in the mid-term reaching margins of above 50%, which we promised for FedNext in the mid-term. And anyhow, this will have a substantial positive impact on our group margin. Let me finish today's presentation with a quick summary and a strong commitment from Claudia and myself to create substantial value for all our shareholders and stakeholders. This commitment is based on a strong optimism regarding the potential of the wafer industry in general and Siltronic in particular. We are still in a huge investment phase and we can finance this and fuel future growth due to our very solid financial strength. We have strong customer relations with a very high share of long-term agreements. We have a very strong technological position and a clear innovation focus which will help us to develop further in the future. Therefore, we see significant sales and earnings upside with and when the market turnaround starts. And based on what I just said regarding our major expansion project, Ciltronic is about to tap into substantial additional potential. Thank you very much for your attention today. With this, we close our presentation. And Claudia and I are very happy to answer your questions now. Operator, please open the Q&A.

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 1 on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by 2. If you are using speaker equipment today, please leave the handset before making your questions. Anyone who has a question may press star followed by 1 at this time.

one moment for the first question please the first question comes from the line of adam angelov with bank of america please go ahead yeah hi thanks for taking my questions and i'll just go one at a time so firstly i understand it's difficult today um to have strong visibility into 2024 um but just thinking you know through 2023 if it's like i mean h2 is down versus h1 um As you look into 2024, would you think that H1 could be flat versus H2 2023? And I guess another way of asking is, what is the actual progress you're seeing in the reducing of inventories at your customers? And that's the first one.

Yeah, thank you very much. And this is a very important question for us as well. I think you will appreciate that today we moved away from the principle of giving quarterly guidance only and give you already our visibility and guidance for the full year 23. So I think we did a step forward and really work on transparency and give you what we know. 24 visibility, I have to say, is still limited. But as you are referencing to inventory levels in the industry, I can reiterate that there are different levels of inventory levels in our three core segments. For the memory side, we still see elevated inventories. In particular, some of the memory players did pull the brake pretty late in this situation. So I think we will see a hang-on of memory inventory also potentially into 24. With regards to logic, I think there is clear progress visible with regards to elevated inventory levels already in the second half of 2023, and we expect this to normalize in 2024. And the power segment is on a pretty robust inventory level anyway. So pulling this all together, we don't know when the market turnaround will come, fueled by inventory reductions. But I think there's a strong hope in the industry that 24 will see an increase in this industry again.

Got it. That's very clear. Thank you. And then just on the FabNext ramp, so you did mention there's flexibility there and maybe it's been slightly delayed versus your prior expectations. Just trying to think about, you know, presumably you will already have some spare capacity in 2024. So, you know, moving ahead with the ramp at the beginning of 2024, what's the kind of, you know, rationale behind doing that and not delaying it further? Just wondering what I'm missing there. Thank you.

Yeah, thank you. And again, very, very important question. Fed's next ramp was planned with full speed for 24. We still see a huge customer interest and work on qualifications with these customers. So that means there is definitely no reason to further delay than what we anticipated in this communication. So we work with customers, try to work on key qualifications. That means we do a little more moderate ramp up But currently, there is no reason at all to push this out further. So 24 will be the ramp here for FabNext. That's very clear.

That's right. Thank you very much.

The next question comes from the line of Konstantin Hesse with Jefferies. Please go ahead.

Good morning. Thank you very much for taking my questions. just um just to follow up quickly on the inventory situation um i mean you mentioned that you believe q3 might be you know the bottom at this point what gives you kind of the confidence on the back of that i mean i know tsmc hinted towards bottom in q1 micron into towards bottom in q2 so if you could just elaborate a little bit on your confidence there that would be great that's my first question please

Thank you. From our perspective, let's have in mind maybe two things. When you talk about our customer space, there's always this kind of supply chain delay until we see it in the wafer industry. When we talk about low quarter Q3, this is basically fundamental based on our customer situation. the volume shifts we experience from our customers in a very direct manner. This is the visibility we currently have. I'm sure we see a softer H2 than H1. Based on our current view, Q3 will be the trough in 23 for us. For us, that does not mean that's a trough for everybody or for the industry. based on the effects I just mentioned.

Understood, thanks. And second question is on the regulatory environment. I mean, there's obviously a lot going on in renewables, but, you know, clearly also quite a bit with regards to potential subsidies in Europe concerning, you know, overall semiconductors. I'm just wondering, is there anything, be it either in Singapore or in Europe or even in the US for that matter, that you could benefit from, either via subsidies in the future or anything specific that you could draw upon that would be positive? Thanks.

Yeah, thank you very much. Again, great question. I think in Singapore we did benefit already from some particular subsidies and particular tax benefits for our FedNext. I think we anticipated some of this already. Looking at the wider landscape, of course, there's a huge playground of chip X chip act money and public funding. So far still tronic did not tap into this, but let's say we are open to look into opportunity.

Okay. So today there's nothing concrete out there that is pretty obvious where you could benefit from.

That's right.

Yeah. Okay, great. Thanks. My next question is just on cashflow. I mean, going forward, the CapEx cycle is now kind of behind us in terms of the greenfield. From 2024 onwards, could you potentially consider cutting the dividend a bit to pay back your debt faster? Because obviously you've ramped up quite a bit of debt there. I mean, you're obviously pre-cashing cash generative quite a bit, actually, in future years as well. But just looking at the conservative perspective,

culture around by balance sheet in the past it's electronic which could you consider it cut it to the dividend to pay that faster I Constantine this is Claudia I would like to take your question hi sure in general our financing is secured so currently we we do not expect any changes in our dividend policy and Also, currently, we do not need any further loans in our planning. So there are no discussions ongoing there.

Okay. That's fine. I'm just thinking in terms of the debt position that you've clearly ran, and your capex is, of course, declining now. So in terms of the debt repayment, there is nothing that you need to necessarily change to pay it back over time?

No. It's all included in our planning, and there's no additional need at the moment for a change here.

Great. Last question just on China very quickly. Any developments there with regards to them developing 300 millimeter? Anything that you've seen that could be relevant?

The China question I take, Konstantin, China is a market for us, as you know. I think we talk about our market share, which is a little over 10% in China. We don't see particular moves in the 300-millimeter area, but China is growing as a market and also as a semiconductor space. That's very clear. A watch case for us is definitely the US-China situation. What I can say currently, Siltronic is not concerned by the recent announcement of some rare earth materials bans from China. We only have very tiny amounts of these materials and secured sourcing from outside China already. But it's a watch case to a certain extent, and we're pretty close on these developments.

That's great. Thanks, Michael. Sorry, I actually meant Chinese competition. Sorry, I should have been clearer. Because clearly, even today, the wafer market is dominated by the top five. But just wondering if you've seen anything that looked interesting in terms of Chinese competition arising in, well, 200, obviously, but 300.

We see activities of Chinese competitors, particularly in small diameters. working on 200. We don't anticipate a serious competition in 300 millimeter so far.

Great. Thank you.

The next question comes from the line of Gustav Froberg with Badenberg. Please go ahead.

Thank you very much for taking my questions. I have two, please. First on LTAs and the sort of, I guess, work that you're doing with customers around keeping price steady, but being accommodative on volumes. Given the slowdown expected in the second half and the fact that we don't really have good visibility on when the overall market will pick back up again, does there come a time when your customers need to take the volumes that they have contracted for under your LTAs? Or is it so that you can kind of further extend when they take the full contract value of your LCA? That's my first question, please.

Yeah, thank you. And this is a very, very difficult and important question at the same time. So typically what happens in this contract is the following. I think, as you know, we have very few customers. And then you go into detailed talks. And we always try to accommodate the particular customer situation at the same time, of course, being very clear on Siltronic's position. So typical conversation would be taking out some volume for a certain period of time and then add it to the end of the contract. So that's a typical pattern we're pursuing. At the same time, also then prepayments, which are in place, which we have to repay at a certain point in time, are also shifted accordingly to the volume shift. So we see a kind of proportional activity typically. So that's a pattern we're kind of following. And this is agreeable to our customers.

Okay, super. So no actual point in time when they need to fulfill their obligation. You can still be flexible.

I mean, if this hangs on forever, we will have more serious conversations. But what we see with some positive signs for next year, we're confident that those volumes will be picked up at the end of those contracts, as I just described.

Okay, that's great. Perfect. Last question is on Subnext Ramp. You are still ramping it up, it seems, in 24, albeit at a slightly slower pace. But my question is more, given the profitability or prospects for profitability at FabNext relative to some of your other factories, for example, in Europe, can you shift utilization around sort of globally within Siltronic to maybe allocate more capacity and ramp FabNext faster? and then have lower utilization elsewhere as a way of boosting your profitability, or is that not possible?

So the short answer is yes, and we're doing that continuously already. That's, I think, what global production networks are doing anyway, moving volumes to places which is most beneficial for the overall group. So we do that on a continuous basis. And with that, of course, we can play with the detailed loading. There is a little caveat is, of course, which kind of product is exactly qualified at which customers. And that's exactly what we want to assure with the RamboFab Next. that we have a relative broad qualification at key customers, particularly for the two segments, polished and epi, so that we have as much flexibility as possible. But this is what is done anyway in Siltronic continuously.

That's super. Thank you very much.

The next question comes from the line of Robert Sanders with Deutsche Bank. Please go ahead.

Yeah, hi. Thanks for taking my question. On FabNext, I have 300K installed by end of 25. If I just take the old 4 million per K thumb rule for Greenfield, if I gross that up to make it 5, given inflation, that means that the peak capacity of FabNext in phase one would be 400K. Are these kind of numbers, I mean, you're saying your capex is coming down, so So it feels like, is that right, that at full capacity we're talking about 400k wafers a month and have a follow-up thing?

So thank you very much. I mean, to be fair, we never communicated a capacity number for FabNext. What I can share with you today, I think, is there was an initial ramp plan, which in the first year did end at about 150k per month capacity. And we're tempering that down to the 100 plus level. That's what I can share today. This has no capex impact in 24. The machines are already there, commissioned, and will just come. So we're just tuning the 24 ramp and adjust it to the market demand. We didn't communicate a full capacity picture of the FAB, and we don't do that today.

Okay, but obviously you've mentioned the potential profitability of this site. At what point during the ramp could you achieve this profitability? Obviously, there needs to be a kind of minimum efficient scale to achieve that kind of profitability.

Yeah, and it will depend then on the capacity mix of our global sites. The more capacity we can install and realize in FabNext, of course, this will have a positive impact on our group profitability. What I can say next year, this will be pretty marginal as we start from zero to the level as I just described to you. And then we see more beneficial effects coming in from 25 onwards.

Got it. And then just a question on costs. You're talking about inflation still being an issue. How does the outlook look for input costs into next year as you stand today. I'm talking about things like salaries, utility costs, raw materials. What are you seeing? Are you starting to see some moderation or is it, it could be another year of cost and inflation? Thanks.

Yeah, hi Rob. Here's Claudia again. I would like to take this question. Perhaps you remember last year we had a price-driven cost increase of almost around 130 million euros. This year we will be low, 40 million euros, and we see that we've reached, let's say, hopefully the peak of those cost increases by mid of this year. We see some relief in energy prices coming in Germany and for next year also in Singapore. So looking into next year, we don't have the full picture by now, but we expect some relief in energy prices, as I just said, and perhaps also in energy-related materials. But at the moment, we can't tell more on that.

that and just last question would just be um customer inventory uh if you look at sumco's latest presentation they talk about customer inventory in both logic founder and memory being being very very high um is that what you see uh from your customers is there a limit um that they are reaching just because they can't hold on to any more inventory or or what are you seeing thanks a lot

Yeah, thank you. And as a policy, of course, we don't comment on competitors in detail. But what I can say or more reiterate is that we see different levels in industry. Memory pretty inflated still. And that will hang on for a while. In the logic segment, we see some good developments. Inventories coming down. And two logic players just published their view in the last couple of days. So you might have a check with those statements. But we see logic on a more reducing track already. The power segment, I think I said it already, never was elevated too much, so they're still in a kind of healthy arena in this inventory situation.

Great, thank you very much.

The next question comes from the line of Martin Jungfleisch with BNP Paribas, saying, please go ahead.

Hi, good morning. Thanks for taking my questions. I have two, please. The first one is coming back on the LTAs. Can you comment if customers are increasingly asking for shorter-term contracts today when LTAs are expiring? Or do you expect the LTA share to remain relatively unchanged today? And then do you see any larger LTAs expiring in the coming quarters? And if you see any risks on lower pricing there?

That's the first question. Sorry, we had a bit of noise in the line. I think you should repeat your question. Sorry for this, but it wasn't clear to me what the question is.

Yes, sorry, the line is pretty terrible. On the LTA side, if you can comment if customers are increasingly asking for shorter-term contracts today when LTAs are expiring. And also, if you see any larger LTAs expiring in the coming quarters and if you see any risks on lower pricing there.

Now I got it. Thank you very much. And this, of course, is a critical question. Our LTAs are pretty long-term, particularly around FedNext. We talk about contracts that go into 28 to even 2030. So we see a pretty stable LTA situation. There's nothing major coming to an expiration. And to be honest, we didn't realize any trend that customers wanted to negotiate shorter LTAs or kind of changing their behavior in this respect.

Okay, great. And then maybe a second question on also follow up on the cost base and margin outlook. So the implied H2 margin guidance suggests a good 400 basis point decline compared to P2. Is that sequential decline mainly driven by lower expected volumes and fixed cost absorption? Or are there any significant cost increases that you would highlight that are quarter on quarter?

No, that's exactly the point. With the lower volumes, you will have a much lower fixed cost dilution. So that will put pressure on our margin in the second half of this year. No additional cost increases in H2 expected.

That's helpful. Thank you.

Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your telephone. There are no further questions at this time. I hand back to Verena Stooges. for closing comments.

Thank you. This concludes our Q&A session today. Thank you for joining us. We hope you will join us again for our Q3 results released at the end of October 2023.

Goodbye and stay safe.