Siltronic Ag Ord

Good morning, everyone, and welcome to the presentation of Citronic annual results for the 23 financial year. Please note that this call has been recorded and streamed on the Citronics website. The call will also be available as an on-demand version later today. Your participation in this call implies on your consent with this. At this time, it would be my pleasure to turn the conference over to Verena Stütze, Head of Investor Relations and Communications of Citronic AG. Please go ahead, ma'am.

Thank you, Francie. Welcome, everybody, to our full year 23 results presentation. This call will also be webcast live on Siltronic.com. A replay of the call will be available on our website shortly after the end of the call. Our CEO, Michael Heckmeyer, and our CFO, Claudia Schmidt, will give you an overview of the management team, our financials, our guidance, and the 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 full year 23 reporting are available on our website. I now turn the call over to Michael for his remarks.

Thank you, Verena, and a warm welcome also from my side. I would like to start today's call with an executive board topic. Tiltronic has ambitious growth plans and will therefore also adopt its leadership structure and organization to be ready to deliver on this promise. Therefore, I'm pleased to announce that Supervisory Board has appointed Mr. Klaus Buchwald to the Executive Board of Siltronic, AG with effect from 1st of August this year. He will assume the position of Chief Operating Officer. Mr. Buchwald has been appointed for initial period of three years and will primarily be responsible for operations and supply chain engineering and IT. Klaus is 55 years old, holds a degree in Mechanical Industrial Engineering, has been working with Infineon for more than 21 years, most recently as Senior Vice President Operations of the Green Industrial Power Division and Executive Vice President Corporate Supply Chain. Thanks to his in-depth knowledge of the semiconductor industry and the value chain, he is the ideal addition to our Executive Board. Throughout his professional career, he has successfully developed and implemented digitalization initiatives, including the implementation of AI in operations. Please join us in welcoming Klaus to the Silatronic team. Let's move on to the next slide with a brief summary of today's key messages. Mission accomplished is the message related to our performance in 23, where we were able to achieve a solid margin despite significant decline in wafer demand. Even though in 24 the end markets will see some pickup, there are still some large inventory levels, particularly at our customers. This leads to an uncertain environment for financial guidance. Nevertheless, we are ready to harvest the expected market upswing, which will be driven by megatrends, and we confirm our midterm targets for 28 that we presented to you at our capital market stay in November, with a sales ambition of more than 2.2 billion euros and an EBITDA margin target in the high 30s. I would like to continue with a quick glance on our 23 figures, which will be presented to you by Claudia in a minute. Our full year sales, EBITDA margin and cutbacks were within our guidance. we were able to keep a stable ASP despite the mentioned volume drop. Due to the ongoing market weakness and the upcoming refinancing discussion, the executive board proposes to the AGM to reduce the dividend for the past financial year to 1.2 euro, as already communicated on February 12th. Claudia will now give you a deep dive into our KPIs before I report back with some updates on the market development and the outlook for 2024 and beyond. Claudia, please.

Thank you, Michael. A warm welcome also from my side. In the next few minutes, I will present an overview of our financials. At the end of my speech, I will provide you with an update on our sustainability development. Now let's jump directly into the analysis of our results, which I continue to characterize as solid in a challenging environment. As Michael mentioned before, our 2023 figures were in line with our guidance. Space decreased by 16% year on year to 1.5 billion euros, mainly due to a significant volume decline caused by the high inventories at our customers and OEMs. Therefore, it's even more positive that our ASP on the Euro base remains stable compared to 2022. Some negative FX effects were offset by slightly positive mix and price effects. In Q4, sales increased by 2% quarter on quarter as a result of a product mix shift. Volume and FX impacts were neglectable. Our EBITDA23 came in at 434 million euros, the EBITDA margin reached a robust 29% level. However, this was significantly lower than the adjusted 34% in 22, excluding the one-time income of 50 million euros from the Global Wafers tender offer. The main reasons for this decline were, on the one hand, the lower volumes, which resulted in a decreased fixed cost dilution. On the other hand, as previously announced, we had to deal with inflation-driven cost increases of roughly 30 million euros year on year. Raw materials, supplies and labor tariffs were up, but on a positive note, we saw some declining trends in freight charges and energy costs as a net effect of lower prices in Germany and higher prices in Singapore. The cost impacts mainly occurred in the first half of the year, In H2, the cost remained largely on H1 level. But nevertheless, the full year impact was around minus 2 percentage points on our EBITDA margin. A tailwind on our 23 EBITDA came from a favorable FX result of 17 million euros, mostly from currency hedges, benefiting from a very positive FX environment at the time of the hedges. On a quarterly basis, as already expected, The positive FX impact of 10 million euros in Q3 was not repeated in Q4, where we've recorded minus 1 million euros. Therefore, the Q4 margin came in lower at 25.5%. Looking into 24, please do not expect a similar positive hedging result as in 23. We forecast a positive impact from lower energy and material costs, but this will be compensated by a lower hedging result and rising labor tariffs. The EBIT 23 decreased to 231 million euros year on year, reflecting a higher depreciation, mainly as a result of our investment activities in Germany. Our financial result 23 was close to zero, but I would like to give a brief explanation as we have seen opposing trends here. On the one hand, we had a high income from financial investments due to favorable conditions in the capital markets. On the other hand, our record spending has substantially reduced our cash and securities over the course of the year, and the interest expense on debt has constantly increased. Those developments will continue into 2024. The tax rate for 23 was ultimately 13% but we saw strong fluctuations between the quarters, which were driven by the site mix and deferred taxes. With all these effects, the net income 2023 reached 201 million euros. Looking at our balance sheet, total assets summed up to roughly 4.5 billion euros by the end of 23. The changes compared to the previous year are mainly caused by our high investments. In 23, capex totaled 1.3 billion euros. As a result, our fixed asset share increased from 58% to 77%. Consequently, our cash and securities have significantly decreased from more than 1 billion euros end of 22 to less than 500 million euros end of 23. Our working capital ratio at the end of last year was at an all-time low. This was driven by favorable DSO in Q4, a decrease in receivables due to the lower sales level, and the capex-related increase in trade tables. Looking into 24, we will likely see the opposite effect. Trade receivables higher and trade payables significantly lower as we will reduce the capex-related overhang from 23, along with a significantly lower capex level. The equity ratio is at a very healthy level of 47%. Financial liabilities in 23 increased year on year as we have drawn the last installment of our Singapore dollar loan in Q3. Therefore, loans amounted to a total of roughly 800 million euros at the end of last year. In the reporting year, we've received customer prepayments of 79 million euros and 40 million euros were refunded. Total prepayments at the end of December amounted to 589 million euros. 2023 was the peak of our investment phase, with a total capex of 1.3 billion euros. This included the FabNext project in Singapore, the expansion of the Crystal Pulling Hall in Freiberg, and our steady-state capex. That next will continue to be the core area of our assessment in 24, but the total capex level will be reduced to below 600 million euros, driven by a planned reduction in project spending and a more pronounced focus on capex management. Let's take a closer look at our cash and debt situation by looking at the bridge on the left side. At the end of 22, Siltronic had net net financial assets of 374 million euros. We generated a solid operating cash flow of 488 million euros in 23, which was lower than the high capex and dividend payments. In Q4, we've received an investment grant of 84 million euros, which positively influenced our cash flow. In total, our net financial assets turned into net financial debt of 356 million euros. A note for your cash flow model 2024. As already mentioned, capex-related payables were very high at the end of 23. We expect to reduce this overhang significantly. This means that payments for capex in 24 will clearly exceed the indicated investment level. And regarding the investment grant, There will be another tranche of roughly 30 million euros in Q1 2024. A short wrap-up of our financing situation. You already know this picture from our capital markets day. The SIM loan, here the light blue part, will be drawn this year. From 2024 onwards, refund of our customer prepayments will exceed the inflow, and from 2025 onwards, we will start to repay our debt financing. Despite our significant reduction in capex in 24, we still expect a clearly negative net cash flow this year, driven by the muted wafer demand, an increase in working capital, and still high payments for capex. We will therefore have a refinancing need in 24 and will now start to determine our refinancing options. And to anticipate the question, we currently have no plans for capital increase. Now I'd like to touch on a topic that is becoming ever more important, sustainability. On the sustainability dashboard, you can see our ongoing commitment to environmental responsibility. Let's dive into our progress. We've been working actively to reduce our carbon footprint, resulting in a noteworthy 22% reduction in scope one and two emissions since 2021. However, our journey towards achieving our ambitious target of 42% reduction until 2030 is ongoing and will be even more challenging with the start of operations at CEP next. Our main levels are firstly, the purchase of renewable energy. Example here is our solar power purchase agreement, which started in January this year. Secondly, the in-house generation of renewable energy Our solar plant at our site in Portland will start commissioning in Q2. And thirdly, the reduction of specific energy consumption. For instance, with the adjustment of cooling water requirements and the optimization of production processes, sustainable reductions have been achieved in recent years. Water usage intensity is a ratio between the amount of water used in production to the wafer area. a large share of water consumption is independent of production volume. Although we had a lower loading in 23 and FabNext was under construction, we achieved a rapid reduction of minus 1%. Given the fact that in 2022 at full utilization, we already achieved a 14% reduction, we are very optimistic for a future declining trend. Regarding the circular economy, significant advancements have been made, meaning that we are already halfway to our goal. With this, I hand back to Michael.

Thank you, Claudia. Ladies and gentlemen, let's now take a look at the short and mid-term outlook for our industry and Siltronic. We are very confident that there will be significant turnaround and upturn in demand for waivers in the near future. But unfortunately, the timing of this remains still uncertain. At least for the first half of 24, as wafer supply is still confronted with large inventories of chip manufacturers, almost offsetting end market growth for the time being. This is reflected in the information on the next slide. When looking at the end markets, wafer demand is expected to increase by 7% to 8% in 24. Encourageably, all end markets are anticipated to expand. The highest growth rates are forecasted for servers fueled by AI and in the automotive sector where electromobility is a key driver. However, the impact of excess inventories, particularly at our customers, dampens this growth, resulting in a more modest overall increase of about 2%. Although there are signs that the demand will pick up in the second half of the year, there's still a great deal of uncertainty. We still do not know when we will see the turnaround in our industry. And I stated several times before, we will not be the first to see it since the typical time lag for the wafer industry is approximately two quarters after the end markets improve. Let's now take a closer look at our market assessment for the three wafer segments and our most important market channels. Whilst memory is improving slowly, none slower than DRAM, which is driven by high bandwidth memory through AI. The inventory situation in logic is still elevated, but getting closer to normal levels. The power segment continues to cause problems with rising inventories. Be reminded that those segment dynamics are complemented by individual customer patterns, and that the pitch for this can deviate substantially due to inventory mix and valuation. All in all, still a mixed bag, and we all have to keep a very close eye on developments. Looking beyond 24, we continue to expect a dynamic upward trend for overall wafer demand, and in particular for our key segment of 300 millimeter and power wafer. For 200 mm, we expect a small growth and for diameters up to 150 mm, a decline. But as you know, these are small and not strategic for us. I'm sure you're all familiar with this chart and the megatrends that are expected to drive the upward trend. After our record investment in 2023, we are set and ready to harvest as soon as we see the market turnaround based on our global production footprint. We continue to be very pleased with the progress of our new state-of-the-art 300 mm FAB in Singapore. Commissioning has begun and several thousand waivers have already been shipped to customers, mostly for qualification purposes. D&L will start beginning of Q2 and production is ramping up, according to our communicated ramp plan. Like in every new FAB ramp, there are substantial ramp costs, for example, for labour, material and energy, which will burden our EBITDA margin by up to three percentage points in 2024. This quantifies our quality of remarks during our CLT in November. With high cost efficiency and expected EBITDA margin of more than 50%, which will have an increasingly positive impact on our group margins, Singapore will continue to be one of our key value drivers once market demand picks up as forecasted. Let's now turn to the guidance for the business year 24, which we already announced four weeks ago. Due to the ongoing weakness in demand, we expect 24 sales to be in the region of 23. The first six months of 24 are likely to be affected mostly by the postponement of delivery volumes, meaning that sales for this reporting period are expected to be around the level of H2 23. The forecast is based on the EURUSD exchange rate of 1.10. On a positive note, average selling price is expected to remain stable. The EBITDA margin before ramp cost will also be in the region of the previous year. As indicated, the ramp of our production Singapore will reduce our margin by up to 3 percentage points. The high level of capital expenditure in recent years will nearly double depreciation compared to the previous year. As a result, EBIT will be significantly lower than in 23. Capital expenditure will be more than halved. Today, we precise our CapEx guidance to be smaller than 600 million euros. Therefore, we will realize pronounced improvement in net cash flow, although it still will remain significantly negative. I would like to conclude this presentation with confirmation of our midterm ambition for 2028. We expect a significant sales growth to more than 2.2 billion euros and an improvement of the EBITDA margin to the high 30s within the next five years. This confidence is driven by the increasing importance of global megatrends such as artificial intelligence, digitalization, electromobility and will lead to sharp rise in demand for semiconductors and therefore also for wavers. We are ready to harvest the growth potential with our global production network and especially due to the ramp of our highly profitable FAP in Singapore. One of our USPs is being one of the technology leaders in our industry and keep our R&D focus to stay ahead in the curve. This and our strategic positions in leading edge power and 300mm will enable us to drive sales and earning growth in the future. Last but not least, we will remain a solid balance sheet and financing structure which will continue to provide a sound foundation for future growth. Thank you all very much for your attention. With this, we close our presentation and Claudia and I will be happy to take your questions. Francie, please open the Q&A session.

Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one. If you wish to remove yourself from the question queue, you may press star and two. Anyone who has a question may press star and one at this time. Our first question today is from Daniel Shafai from Citi. Please go ahead.

Good morning. Yes, I was just wondering on the sales dynamic for the first half of 24. So looking global wafers recently guided for first Q being kind of the trough and that the second quarter should show mild growth. Do you see similar patterns going forward when you say that the first half will be under pressure or do you still see potential that the second quarter could be the trough as well?

Thank you, Daniel, for this question. We don't quarterly sales dynamics today and particularly I must not comment on details from peers in industry. However, we still know that we see volume shifts back and forth and quarterly phasing is not fixed for Q1 and Q2. So we would refrain from giving more details here, but confirming that we also see H1 on the H2 level of last year, and then H2 to show the increase that will comply then with the full year guidance.

Okay, thank you. And just maybe on the re-acceleration in the second half, what gives you the confidence that we will see this re-acceleration in the second half? Yeah.

It's basically the logic we always convey. We showed the end market dynamics from other sources that we see improvement there. And then we add what we always said, the typical two quarters of delays to those dynamics. So that is when it will trickle down to the wafer industry, which needs to be considered in the framework of inventory situation. Yeah, but that altogether gives us the idea that the second half can show the growth dynamics we explained.

Thank you.

The next question comes from Constantine Hessel from Jefferies. Please go ahead.

Hi there. Good morning. Thank you very much for taking my questions. I have three. The first one, maybe just asked a little bit differently. What kind of risk do you see today potentially of further postponements? I mean, I do, you know, obviously, when you read everything that's being reported, memory seems to be improving. Obviously, inventories are coming down. However, you're saying now that power inventories are going up. So based on previous experiences, I'm just wondering, what is the current risk level that we could potentially see another significant postponement in volumes at this point? Or is this rather probably not going to happen from this point on? That's the first question.

Hi, Konstantin, I understand you asked the other questions after my answer. Is there a particular pronounced risk? I mean, when we look at customer developments, some of them post some revenue increase. If you watch that very carefully, it's more price than volume based, typically. So that's something we must not confuse. inventories are still elevated at some of our customers that's a risk how quickly can that really be depleted on the positive side we know from previous turnarounds once it's picking up it can go very quickly and deplete inventories extremely quickly so I would say what we guided four weeks ago and confirmed today is let's say the best knowledge pulling all this So I would say it's a healthy guidance in terms of risk, but also opportunities.

Okay. Thank you. And then the last two questions, just on the SIN loan, is this a floating rate loan or is it a fixed loan? And then on the refinancing, can you just give us an idea of how much you're looking to refinance? Thanks.

Hi, Konstantin. This is Claudia. The SIN loan is a variable loan, so the fixed rates, the interest rates are not fixed in this loan. So on the positive note, we can benefit from hopefully decreasing interest level in the upcoming months. And regarding the financing, refinancing, we are just starting to check the amount, the options that we have, which will very much depend on the general environment that we see this year. We will decide as soon as we have the options on the table.

Maybe ask differently, what is the cushion that you want to have in terms of cash? Is it still 500 million?

Yeah, we don't have a target of a certain amount, but yeah, We have a conservative financing approach, and we always maintain an adequate liquidity reserve. And with the, let's say, decreasing invest level, we could adjust that a bit down, but we haven't made our mind on a fixed amount. But yeah, we are still very conservative with our approach here.

OK, thank you.

The next question comes from Gustav Froberg from Berenberg. Please go ahead.

Good morning, everyone. Thank you for taking my questions. Also, I just have two, please. The first is on ASPs. Could you explain to us a little bit the confidence you have in your ASP estimates for this year and your comments that ASPs are expected to be flat? And then second question is around mix. Q4 was up a little bit quarter on quarter due to mix effects. Could you talk a little bit more about some of the mix effects in the quarter and maybe how we should think about the potential to shift into a more favorable mix for 2024 as well? Thank you.

Thank you, Gustav. ASP confidence, I think it's a very clear situation that we currently see continue. We have our 300 millimeter core activities and here you know, substantial part of the business is covered with LTAs and these even have some potential price increases here and there when they are going to the next level. So that's the positive side. On the lower end of things, we have significant price pressure on the small diameters. This is small, not strategic business for us. And then we have, of course, mixed effects and some other small things. But in total, I mean, that is the ASP, right? It's the average selling price. In total, we are... pretty confident that we see a continuation of what we experienced in the last couple of quarters, also into 2024. With regards to your second question, Q4-Q3 mix, we typically don't give an awful lot of more details, but as you know, we have always epi-polished mix, which is one of the areas where we continuously try to improve our mix to the high end. But I think we cannot talk about more details about last year Q3, Q4 effects, which were anyway not huge.

Okay, great. Just to follow up, if I may, on that, how do you see this mix developing in 24? Could you give any comments there, or is it the same answer?

I mean, saying ASP is stable would include mix effects. So it's all kind of under that umbrella. We also have small mix effects, but the key dynamics are in the different diameters, as I just outlined.

Super. Thank you very much.

The next question is from Martin Jungfleisch from BNP. Please go ahead.

Good morning. I have three questions. The first one is just coming back on pricing on the LTAs. Can you disclose if you have any LTAs in 300mm expiring this year? Second question is on tax rate guidance. I don't think you have given one, so just if you could provide some color on this one. And then the final question is on refinancing. Could you also discuss a bit if a convertible would make sense or would be an option as well? Thank you.

hand over to Claudia for the second and third question. Are there any major LTAs expiring this year? Short answer is no. Okay.

Then I take over for your second question regarding the tax rate guidance. We decided not to guide for tax rate this year. Why? It's obvious that our profit before tax will decline this year. So the sensitivity of the tax rate will increase. So it's rather difficult to make a valid guidance for this. And with the lower profit before tax, also the importance of tax will decline. So with our guidance, we concentrate on the important lines in your model. And regarding the refinancing and the convertibles, It's an option, but it's not very high on our agenda, I would say.

Thank you.

The next question comes from Jürgen Wagner from Stifel. Please go ahead.

Good morning. Thank you for taking my question. Actually, it's on the new FAPNEX in Singapore. How much capacity will you gain this year and next year? And yeah, related to that, the 50% margin which you mentioned today for this FEPP or EBITDA at some point, which REMP level is required to achieve that? Thank you.

Thank you, Juergen. 24 capacity and REMP is exactly according to plan. So we said very clearly it will be 100 plus K waivers per month by end of 24. We are fully on track to deliver that and let's say very nicely and positively engaged with our customers to work on qualifications. By the way, in June, we will have also a more formal opening ceremony of that FAB, which is another important milestone for us. 24 capacity, we didn't disclose detail and will actually really depend on the market situation. So we said very clearly we could continue, but we also could speed up based on market needs. And if we do significant step changes, we have the lead time of 18 to 24 months, which then would trigger additional CapEx, additional machines. So that's pretty much what I can say. When do we reach the 50%? It depends on the market situation. But we need, of course, a substantial ramp situation to have that margin contribution. So it will not happen in 2024 and also most likely not in 2025, except we are super surprised by market developments.

Okay. Thank you. And a follow-up or a second question on China. What are you currently seeing with respect to local competition, so local wafer manufacturers? Thank you.

Yeah, China is a good market for us. We have quite some nice business there. On the other side, I don't see a lot of change to, let's say, competitor dynamics compared to what we previously said. I mean, you know, we talk about the small diameters. Already in the call here, China is very active, put a lot of effort in small diameters and a lot of pressure on that market. So there's a substantial pricing situation there, which I mentioned already. In 200 millimeters, we still feel pretty differentiated and ahead of the game with our 200 millimeter flow zone activities in particular. And 300 millimeter, and especially in the high end and leading edge corner, not a lot of change. So we feel it's a long, long way to go for the Chinese to be able to deliver, let's say, appropriate quality. And here, geopolitics is even helping, let's say, the established Western and other wafer suppliers as The Chinese industry doesn't get advanced machines, advanced equipment, et cetera, on the chip side, which is also kind of dampening substantially advanced developments in a local for local sense. So not a lot of new dynamics here, but of course, it's an ongoing watch case for this country. We are quite happy with our China business.

Okay. Thank you very much.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star and one. And the next question comes from Florian Traj from Kepler. Please go ahead with your question.

Hi, good morning, everybody. Thanks for taking my question. Not too much left to be fair, but just taking your comments around EBTA margin, DNA ratios, it sounds to me extremely likely that you will go negative on an EPS level. So do you have any commitment on paying a dividend at all, or does it mean 30% to 40% payout on a negative EPS equals zero dividend for 24? Or as I said, do you have any kind of commitment towards your larger shareholders? Thank you.

Hi, Florian. This is Claudia. We stick to our statement that we will stay to our dividend policy. That's just this year that we made this cut off to 1.20 euro per share. But for the upcoming years, we didn't change our dividend policy.

But you would confirm if it is a negative EPS, it would mean zero dividend?

That means zero dividend, yes.

Okay, thank you.

The next question comes from Marie Garneval from Bank of America. Please go ahead.

Good morning. I was just wondering on the development of this ramp-up cost that you see happening in 2024, having this three-point impact on the EBITDA margin, Do you expect the bulk of it to be recorded more in H1, or would it be more on the gradual basis as the FabRAMP? Thank you.

Hi, Claudia here. Yeah, we start depreciation for FabNext in the second quarter, so ramp-up costs will show up from Q2 on, and it will be distributed over the years, so there is no major impact in the first half or in the second half. It's just a gradual development of the ramp cost.

Thank you. That was our last question for today and I hand back to Verena Stütze for closing comments.

Thank you, Francine. This concludes our Q&A session. Thank you for joining us today. Our next release date is May 2nd when we will publish our Q1 results. Stay healthy and let's talk again soon. Bye.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.