Siltronic AG

Welcome, everybody, to our Q2 2021 Results Presentation. This call is also being broadcast live over the Internet at siltronic.com.

A replay of the call will be available on our website shortly following the conclusion of this call. Joining me on today's call are our CEO, Dr.

Christoph von Plotho; and our CFO, Rainer Irle. Following our usual procedure, Chris will start with some general remarks, and Rainer will provide some more detail of our key financials, followed by Chris again, updating you on our guidance and the current market developments.

After the introduction, we will be happy to take your questions. Please note that management's comments during this call will include forward-looking statements, which will involve risks and uncertainties.

For discussion of the risk factors I encourage you to review safe harbor statement contained in today's press release and presentation and in our interim report. All documents relating to the Q2 reporting are available on our website.

And now I turn the call over to Chris for introductory remarks.

Thanks, Petra. Welcome everybody and thank you for joining us for our Q2 2021 results call.

I hope all of you and your families are healthy and safe. I would like to start with a short update on the tender offer of GlobalWafers.

All requests for approval with the individual authorities are stipulated in the offer document has been filed and by now only approvals are pending from the merger control authorities in Japan, the United States and China, as well as from the German Federal Ministry of Economic Affair and Energy. We still expect the transaction to close in the second half of this year.

As we published yesterday via the talk release, we have decided to build a new 300-millimeter fab in Singapore. The new fab will include ingot growing as well as polished and epi wafer facilities.

The market is already tied today, and it will get even tighter in the foreseeable future as the wafer industry is currently close to being fully loaded. Customers have encouraged us to invest in greenfield, and they are willing to provide certain support.

We intend to secure the utilization of a large part of the new capacities to long-term agreements with customers, including prepayments. The terms are currently being negotiated with customers and we see good progress.

The construction is planned to start this year. Our central R&D hub in Burghausen will provide technology support and report of land expansion.

We expect first wafers out of the fab beginning of the year 2024. We have also decided to increase our 300-millimeter ingot and epi capacity in Freiberg which will allow additional epi wafers output already in 2023.

Because of the expansion, our CapEx in 2021 will be significantly higher than anticipated at the beginning of this year and we're now around €400 million. Based on current planning, CapEx for the new fab will be around €2 billion until the end of 2024.

This project is the most important one for Siltronic in the last 10 years. It is the landmark project, which will enable Siltronic to convert its leading technology into significant additional value creation.

Now let's have a look at the business development in the second quarter. Wafer demand continues to be very strong.

From an end market perspective, smartphone demand was softer due to some Q1 pull-in effect, some seasonality and also ship shortages, but higher content driven by 5G migration is still intact. Server business showed good growth and PC including Chromebooks are still growing.

The auto industry continues its recovering path, but it's limited by supply shortages. The share of hybrid and electrical cars, it's further growing.

On the industrial side, orders are very strong. When we look at the development by wafer diameter, 300 epi is on allocation and the rest of the business is fully loaded.

ASP was flat quarter-over-quarter. Before I hand over to Rainer for more details on the Q2 financials, let me summarize some KPIs of the strong second quarter.

We achieved sales of €341 million, this is 8% up compared to the first quarter. ASP was flattish.

Wafer area was significantly up and cost per wafer area went down again. Exchange rate did not have a major impact quarter-on-quarter.

Our EBITDA came in at €108 million with an EBITDA margin of nearly 32%. EBIT was up to almost €17 million.

Our net financial assets increased to €528 million as of June 30, 2021. Now let me hand over to Rainer for a detailed walkthrough of our financials.

Yes. Thank you, Chris, and welcome everybody.

As Chris pointed out, Q2 sales were strong. Wafer area increased year-over-year and quarter-on-quarter.

Price was stable quarter-on-quarter, but of course ASP was down year-over-year. Overall, sales reached €341 million, up 8% from previous quarter.

Year-over-year, the euro appreciated quite a bit residing in headwind from FX. Year-over-year sales were up 6%.

At stable FX, it would have been up some 13%. Quarter-on-quarter we saw relatively stable FX rates.

Due to higher wafer area sold, COGS went up by 3.7% quarter-on-quarter to €236 million. However, compared to the higher wafer area sold, COGS increase was under proportionate.

Cost per wafer area came down due to fixed cost dilution and productivity improvement. Successful cost saving measures have reduced manufacturing costs, which have also decreased somewhat as a result of FX improvements.

Our gross profit rose to €105 million in Q2. Gross margin was up to 30.8%.

Our admin expenses were burdened by advisory costs in relation with the tender offer of global vehicle. Costs were roughly €2 million in Q1 and €2.7 million in Q2.

As I pointed out, strong euro had negative effects on sales and gross margins. On the other side, in Q2, non-operational currency effects were positive at €3.8 million, basically a result of a positive hedging.

The positive contribution from the increased wafer area sold and the reduced cost per wafer area along with flattish prices and the minor FX impact led to strong results in Q2. EBITDA was up to €108 million in Q2, a nearly 18% increase versus Q2 and a bit more than we had expected.

This was triggered by the strong market and high area sold. EBITDA margin came close to 32% after 29% in Q1.

Depreciation increased by just €1 million quarter-on-quarter. And therefore, in line with EBITDA, EBIT in Q2 went up to €17 million with an EBIT margin of 20.4% compared to 17.2% in Q1.

Financial results improved too, and the tax rate continued to be low. Net profit was €64 million in Q2 compared to €58 million in Q1.

Earnings per share came in at €1.83. The dividend of €2 per share was accepted by the Annual General Meeting, and we paid a €60 million dividend in May.

Working capital went slightly down in Q2 to €232 million. Trade receivables and inventories increased due to higher demand and higher production volumes.

Trade liabilities went up due to higher CapEx. Looking at our balance sheet, equity was nearly €1.1 billion with an equity ratio of 54% at the end of June.

Equity increased nicely compared to December 2020 with high profit minus the dividend and lower pension provisions. It was roughly stable quarter-on-quarter.

The pension provision in Germany was discounted at 1.14% as of June versus 1.11% as of March. In the U.S., the interest rate went down slightly.

Cash flow was strong and net financial assets went down by only €10 million, though we paid €60 million dividend. As of June 2021, pension provision came in flattish with a slight decrease of €12 million versus March.

If we use 3% to calculate DBO, we would be at around €830 million, and we would have just a pension provision of €84 million. CapEx in Q2 was significantly up quarter-on-quarter at nearly €53 million.

Other than MOB, we continue to invest in capability, epi capacities and we started the expansion of a crystal pulling hall to replace older equipment in Freiberg. Our operating cash flow in Q2 increased to €105 million.

The net cash flow in Q2 was positive at €43 million. Up to now, we received additional €60 million of customer prepayments in 2021.

And with that, I would like to hand over to Chris.

Well, thank you, Rainer. Basically, our outlook on end market is unchanged from the first quarter, and we are highly optimistic about the mid- and long-term growth of our industry backed by megatrends like digitalization, modern mobility and connectivity.

We see that a clear shift from silicon demand in the main applications with logic and power growing the fastest. Handys and smartphones are still the largest consumer of wafer area followed by personal computers.

Smartphones are recovering, but were impacted by pull effects and ship shortages in the first quarter. Higher share of 5G smartphones proves again that every new phone generation comes with more content.

We expect the number of smartphones sold in 2021 to come back to the pre-crisis level, while the content is keeping to grow. Continuous home office in the study from home pushed PC demand.

While a large part of the growth is from Chromebooks with less NAND content, we see a very strong demand for high-end gaming PCs and consoles. Servers are growing, but have some uncertainty around the new CPU releases and related to memory demand.

Purchasing behavior and possible inventory buildups need to be watched. On the industrial side, orders show overall a strong order intake, but it is partially mixed across product categories and regions with – in regions are different.

With the auto industry demand is recovering but limited by ship shortages. This is mainly related to MCUs and display drivers.

The trend towards hybrid and electrical cars seems to accelerate further, though from a very low base. Digitalization and defend to more assistant driving systems continue.

We also added the fast-growing wearable segment, which is nice to have, but again, it is growing from a very low base. We stick to our outlook from 2021, but increased CapEx and consequently with a lower net cash flow.

Due to the first steps in capacity expansion plans this year, we now estimate that our CapEx will be around €400 million, up €150 million from the outlook that we gave in April. In April, we expected net cash flow to significantly improve.

Due to the higher CapEx, the net cash flow will obviously come in lower. We expect it to be slightly positive but significantly lower compared to prior year.

The forecast for the other KPIs remains unchanged. With this, we close the presentation and now – and are now available for your questions.

Operator, please open the Q&A session.

Hi, everyone and good morning. I have two quick questions, if I may.

The first one is, maybe, Chris, simply on the timing of these announcements, I mean, obviously, you are in the process of being acquired. And I mean we all know that you are independent before the close.

But you announced like a greenfield and potentially a greenfield depending how you want to call it in Germany. So why wouldn't you wait for the deal to close in H2 to have such a big announcement going with a brownfield in the meantime and to have all the cards in your hands before announcing such big project for Siltronic?

And have a follow-up after first something different, if I may.

Yes. I already read through some comments early this morning.

I'm surprised that some of the people are really surprised about the announcements. We've talked since quite some time that we are doing a feasibility study and everybody knows that the feasibility study can't last forever.

This is point number one. And point number two is we all know that the markets are very soft and there is a, let's put it that way, big pressure coming from customers to increase capacity.

And I think you mentioned the alternative brownfield, there is no brownfield alternative because all the shells, not only at Siltronic, but we believe also that competitors is already completely filled with equipment. And by the way, theoretically, there are two outcomes possible on the [indiscernible] offer from GlobalWafers.

It will be closed in the second half of the year or it won't be closed. In the first scenario, the combined company needs additional capacity in 300-millimeter based on leading edge and this is obviously provided by Siltronic.

And if for whatever reason, the deal doesn't go through Siltronic needs additional capacity. So the decision to invest in Singapore and 300-millimeter is therefore somehow independent on the closing outcome.

Okay. That's very clear.

Great, thank you. And maybe just the second question is how much do you need in terms of price to make a greenfield investment profitable or make a good return on investment if you prefer that way?

What is the minimum price you need for to justify the investments from current levels?

Due to competitive reasons we do not disclose these details. But I think it's a given, we said from the very beginning – we started to say early last year that we will most likely see in an environment in 2021 where price increase are possible.

Fortunately for us, the demand side developed better than we anticipated towards last year. So everything which was negotiated since then went through with price increases and contracts that we signed for, let's say, the year 2022 and 2023, which of course independent from the output of the new fab also saw price increases.

So, yes, the negotiations are doing fine. And yes, we see price increases and we will continue to see price increases.

Okay. But, Chris, I mean, if I look at your previous comments, I mean, in previous earnings call in October 2020, I'm sorry to quote you, but you said that competitors once mentioned 50% to 60% price hike to justify a greenfield.

And you said it's not about figure if I quote, but at the end of the day, we need to see contractual obligation from customers. So how does it feel now I mean in terms…

Today…

Okay. So what about the contractual obligation from customers?

Because in the release, you say that it will be – the plan is to get prepayments from customers, but do you have any contractual obligation at this stage? I mean – or what can you say about that this obligation…

We have significant commitments from customers and we are – let's say, when you compare it to a Formula 1 race, we are in the not last laps to finalize the LTAs, but in the commitments, given by the customers, things like pricing, quantities is already – came already to a conclusion and also including of course the subject of prepayments.

Okay, okay. Thank you very much.

You're welcome.

Hi, there. Good morning.

Thank you very much. I only have a couple of questions.

Number one, can I ask a little bit with regards to the ramp up of the new fab in Singapore. You mentioned that most of the supply will be secured by long-term agreements.

I'm just wondering if you could elaborate on how we should think about the ramp up from 2024 onwards. And how big that fab will be?

I am assuming €2 billion probably ranges something around 400,000 to 600,000 wafers per month. And then the second question is, are you seeing any price increases – spot price increases?

Thank you.

First, the ramp. While we were doing our feasibility study, I gave you and the financial environment of Siltronic quite often some examples.

We said that ramping faster than 150K per year for a fab looks very challenging, not to say impossible, but very challenging. The total capacity is something that we do not disclose because, you know, I would like to share it with you, but I would like to share it with competitors.

And consequently, I unfortunately can't even share it with you. And what was the third question that you had, I'm sorry?

The last question was if – so clearly you're seeing – you're negotiating higher prices in LTAs, but how are spot prices doing? Thank you.

Well, like I said, it is on allocation, 300-millimeter policies sold out. Competitors talk about spot price because they consider quarterly contractors spot, and we don't.

So, consequently, it's like the beginning – like it was in the beginning of the year, there is no spot business for us because basically every quantity that we produce is under contractual obligations. So if you want to get information about spot price development, you need to talk through the Japanese because they typically talk about it.

We do not.

That's fair enough. Thank you very much.

You're welcome.

Hi, everyone. Thank you for taking mine as well.

I have a couple, I'll do them one by one, if that's okay. First, the strategy question related to the capacity expansion that you announced.

How have you thought about the capacity expansion relative to how you think your competitors might act? Is it your expectation that competitors will respond with their own capacity expansion of a similar scale?

Well, first of all, the decision of Siltronic to invest in additional capacities in 300-millimeter in Singapore is independent from what competitors are doing. We have a project.

We got the approval yesterday. And since yesterday afternoon, it's all about execution.

We talked in conference quite often in the past about the need of greenfield and there was always the concern that three greenfields, four greenfields or five greenfields maybe built at the same time and there was a concern of overcapacity. And I gave you quite often calculation examples with the three fabs, three new fabs ramping at the same time This would probably then be completely imbalanced with the additional market demand how we see today.

So the risk of overcapacity is something that is very, very unlikely. We need to see that every greenfield, which will start today or tomorrow or whatever in the short-term future, we deliver the first wafers only in 2024.

The products are already for today. There is no brownfield capacity available.

So the shortage will even become more important in 2022 and in 2023. So, when we talk to customers about their commitments for quantities coming out of Appnext, we came to the conclusion that we cannot ramp this fab at the speed that the customers are requiring.

All right, super. And then just a clarification question again, that's a follow-up on the ramp-up schedule.

So you mentioned 2020, 2024 potential for first wafers. Is this the timeline we should be operating with?

Or is there a chance you might be able to bring some wafers to markets before that?

It's only 2.5 years. I think the construction phase is already on a very tight schedule.

And that construction by many means is somehow challenging that material prices are going up and availability is not given either. So, of course, we are trying to make it faster.

But I think it's fair to assume that first wafers out beginning of 2024. And if we are faster, we will tell you, and of course, we'll also tell customers.

And I guarantee your customers would be very happy about it.

Yes. Super, very clear.

And then final – and apologies for this question, but how should we think about Siltronic's depreciation expense for 2021 and 2021 as a result of the capacity announcement and the timing? Because I think you've kept your depreciation guidance for this year fixed, but you're ramping CapEx quite a lot.

So how should we think about that for 2021 and 2022, please?

Yes. I think those are pretty simple, I mean depreciation of the new plant starts when you produce the first wafer.

So I mean we are adding a bit of equipment here and there that will lead to a bit higher depreciation. But the big new project won't see any depreciation until 2024.

Okay. Very good.

Thank you.

Yes. Hi.

Good morning. Two questions from my side, please.

It's both on the greenfield expansion. First of all, I was wondering if there's, again, some support or some sort of support from the Singapore government, such as tax credits, and we should, therefore, also expect a relatively low tax rate beyond 2024?

And then secondly, can you provide a bit of color on the split of the CapEx over the next three years, if that's quite evenly distributed? And also, is it fair to assume that the customer prepayments will cover around a quarter or so of the total spent?

Thank you.

Well first of all, Singapore support, we will get the so-called pioneer status for 15 years, and this means this translates into a very low tax rate or no taxes for 15 years. About CapEx spending for the next two years, we will talk about that when we have a budget which is approved, which will be probably for the year 2022, be done towards the end of this year.

But like we said, in this project, we will spend between now and the end of 2024 €2 billion. And your last question was?

Sorry, if it's fair to assume the customer prepayments will cover on the quarter or so?

Yes. We – once we really have finalized what translated the commitments that we have from customers into LTAs, we might talk about it.

I would argue that 25% is a relatively high figure, but not that either.

Okay. Cool.

Thank you very much.

Yes. Good morning.

I have a question on the tender offer the German Economic Ministry they still have to approve. How do you see the risk that they might not approve?

Or what are your lawyers saying? Thank you.

Well, since the very beginning, we always informed you when we got the sudden approvals, but we always said we will not comment on speculations which are going on in the market. So we will not add to the comments that I gave earlier.

It's still open. But overall, GlobalWafers and Siltronic, we still believe that we will get the closure of the deal by the end of the year.

Okay. Thank you.

Yes. Hi.

A couple of questions – actually, a few questions. If you could just talk a bit about the level of leverage you're willing to go up to?

Is there a kind of maximum? If you could just remind us on that?

And then on the potential equity raise, I'm assuming this would only happen post the resolution of the GlobalWafers process. But can you remind us what equity you could raise without shareholder approval?

And then thirdly, you – in the past, you've done joint ventures with leading customers. Is that something that you think is not likely this time or it's something that still is a possibility?

Well, I think I will answer the last question that you made, joint ventures. To clarify the capital – the capacity increase in Singapore, it will be part of the existing joint venture with Samsung.

And for the first two questions, I would like Rainer to answer them.

Yes, Rob, I mean, obviously, anything we would do, we would wait until we have 100% clarity of the tender offer. So any questions on leverage or an equity increase, I think it cannot really be answered today, and we should wait until we have the outcome.

And on the leverage, do you have any cap 2 times or something else? I think GlobalWafers is willing to go to three in mind?

Yes. We obviously have policies.

And I mean, the amount of debt that we need is limited, and it's far below the number that you just stated. I mean you know we have cash.

You know we have a very strong operational cash flow. And with the outlook on pricing that Chris gave earlier, it's obviously, that the cash flow will improve.

So plus prepayments and so on. I mean, financing this new fab is not difficult undertaking.

Okay. And you said the joint – under the joint venture to Samsung presumably are committing to their portion or there's no dilution of their ownership because I think in the past, you'd acquired some of their equity, but that sounds like it's unchanged.

Is that right?

When the joint venture was founded in 2006 and the first wafers came out, it was a 50-50 joint venture between Siltronic and Samsung. And in January 2014, we acquired another 28%, so that since then, we are at 78% and Samsung is 22%.

And this will continue to be so even during and after the investment that we announced yesterday.

Got it. And just a clarifying point on this 60% from, I think Sumco had mentioned.

I think that was relative to Q4 2016 pricing, if I remember rightly, that they would consider brownfield. Is that correct?

And that would actually imply pricing not that far from current levels. So I think what I'm asking is, presumably, I mean, your return on capital is not massively above the cost of capital at the moment.

So I'm just wondering whether you expect significant premium pricing from current LTA agreed pricing in order to justify the investment, which would kind of be intuitive or whether you think the 60% is still relevant relative to the Q4 2016 baseline? Thanks.

Like I said before, for competitive reasons, we will not further go into details. But I want to clarify a little bit.

As Sumco mentioned 50% or 60%. As far I remember, they never talked about the basis.

So this was the problem that we never know what was the starting point. Q4 2016 was the basis point that Siltronic mentioned, when we went into the project of brownfield additions.

And we said for brownfield, we need to see 30% based on Q4 2016. So the basis Q4 2016 is Siltronic basis.

And I do not – I'm not aware that Samsung ever have said that the 50% or 60% take a basis whatever period, I'm not aware of that. I'm sorry.

Okay. And then just very last question, sorry, there's one other, which is you – in the past, you've talked about €4 million per 1,000, which would imply obviously a 500,000 line, which is comparable to the existing line.

Is there any reason why that €4 million per 1.000 might not apply anymore? And presumably, you're going to get a significant cost down from a more efficient facility this time around.

Is that right? And that's it for my questions.

Thanks.

But I think €4 million is not a bad figure.

Okay. And you – do you think you can get more cost down than you did in the first facility?

Or is it kind of comparable?

Well now, the big advantage of Singapore activities is the running cost. And we will – Siltronic will invest in additional capacity in a facility, which is in Singapore and have significantly lower running costs than our activities, say, for example, in North America and in Singapore, so the share of low-cost production locations will increase, and this will, of course, have a positive impact on margins.

Great. Thanks a lot Chris, and congrats.

You're welcome.

Okay. Thank you, operator.

This concludes our Q&A session. Thank you very much for joining us today, and we hope you will join us again in our Q3 release in October.

So goodbye to all of you and, stay safe and healthy.