Hello everyone, and welcome to Siltronic's Conference Call on its Q1 2022 Results. 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 Rupert Krautbauer, Corporate Vice President, Investor Relations of Siltronic AG.
Thank you, operator. Welcome everybody to our Q1 2022 results presentation. 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 current market developments. After the introduction, 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, and in our annual report. All documents relating to our Q1 2022 reporting are also available on our website. I now hand the call over to Chris for introductory remarks.
Well, thank you, Rupert. Welcome everyone, and thank you for joining us for our Q1 2022 results call. I hope all of you and your families are healthy and safe. Let's start with a look at our key financials before Rainer leads you through the Q1 development in more detail. Compared to the fourth quarter, 2021, our sales grew by more than 10% to EUR 417 million. Overall, ASP in Q1 was significantly up compared to 2021 due to the higher wafer prices and a favorable exchange rate. The euro continued its weakness in Q1 with an average rate of 1.12 USD/EUR , providing even more tailwind on our sales. EBITDA came in at EUR 186 million. EBIT was up 32% at EUR 143.7 million.
The result is largely influenced by one-off positive effects resulting from the failed tender offer. We received EUR 50 million termination fee from GlobalWafers. On the other hand, we saw even stronger inflationary effects on COGS, mostly due to rising energy and material costs. CapEx of EUR 206 million was significantly up year-on-year. The investments were mostly related to our major expansion projects, the construction of our new 300mm fab in Singapore, and the expansion of our crystal pulling hall and EPI in Freiberg. Our net financial assets were EUR 709 million at the end of the quarter, up from EUR 573 million at the end of last year. Demand for silicon wafers is driven by the growing use of semiconductor and all types of electronic applications.
Growth of the worldwide electronic markets will continue to drive demand for our wafers. The main growth drivers for semiconductor are content growth in smartphones and automotive, as well as continuous investments in digitalization, which reflects in strong rates for server and data center applications. However, we also see some weaker spots in the market. Supply chain hiccups due to the lockdown in China and lower automotive sales are a negative for unit growth. Nevertheless, all major demand trends in end applications continued in Q1. According to SEMI, wafer area sales in Q1 increased by 1% quarter-on-quarter and by 10% year-on-year. In Q1, we made good progress with our expansion projects. Fab Next construction in Singapore is well on track within the original budget. The buildings grow in size every day, and we will start installing the clean room in the second half of the year.
The expansion of our crystal growing operations in Freiberg is also proceeding well. Smooth execution of these two projects is key focus for Siltronic in 2022. Now I would like to hand over to Rainer for more details on the financials of Q1.
Thank you, Chris. Good morning, everybody. Sales increased quarter-on-quarter, mostly driven by higher sales price. The invoiced wafer area sold was slightly higher than in Q4. In addition, we saw a favorable FX development with US dollar further appreciating from 1.14 in Q4 to 1.12 in Q1. COGS went up noticeably in Q1, mainly due to rising costs for electricity, supplies, and raw materials. In particular, we saw the impact of higher prices from annual purchase agreements and even higher electricity prices. FX also had a negative cost impact in Q1, as a significant share of our procurement is in US and Singapore dollars. Despite higher costs, our gross profit rose to EUR 135.6 million in Q1, and gross margin came in at 32.5%. Currency effects were dominated by a stronger US dollar.
The weaker euro had a positive impact on sales and margins, but also led to a negative hedging result in Q1. EBITDA was up to EUR 186 million in Q1, a 29% increase versus Q4. This was driven by higher gross profit and the positive one-off effect due to the receipt of EUR 50 million termination fees from the failed GlobalWafers tender offer. EBITDA margin was 44.6% after 38.2% in Q4. Obviously excluding the effect from the tender offer, EBITDA would have been EUR 136 million with an EBITDA margin of around 33% in Q1. EBIT came in at EUR 143.7 million for Q1, with an EBIT margin of 34.5% compared to 29% in Q4.
The EUR 50 million termination fee was fully taxable in Germany with a statutory rate of 29%, resulting in a higher than average tax rate of 18%. It will go down significantly in the quarters to come. Net profit was EUR 114.8 million in Q1, up from EUR 93.7 million in Q4. Earnings per share came in at EUR 3.47, versus EUR 2.79 in Q4, again, with positive effects from the termination fee. A dividend payout of EUR 3 per share for 2021 was approved by the AGM last week. Working capital in Q1 decreased quarter-on-quarter to EUR 193.7 million, mainly driven by an increase in trade liabilities related to investments. DSO was roughly stable as always.
Looking at our balance sheet, equity grew again to almost EUR 1.6 billion by the end of Q1. Equity ratio increased to almost 56%. The increase is based on the strong profit as well as a decrease in pension obligations due to higher interest rates. The pension provision in Germany was discounted at 1.86% as of March, whereas 1.23% as of December. In the U.S., the interest rate increased from 2.51% to 3.22%. This caused our pension provision to decline significantly to EUR 288 million. On a side note, in April, interest rates were up another 40 basis points. Net financial assets increased to EUR 709 million despite high CapEx.
This was mostly due to the very good cash flow from operating activities and customer prepayments received in the last two quarters. Net financial assets will decrease in Q2 with a dividend payment of EUR 90 million and high CapEx. CapEx in Q1 was EUR 205.7 million. Most of the investment is used for the ongoing expansion projects, namely the expansion of the 300- mm crystal pulling hall and EPI in Freiberg, and of course, Fab Next in Singapore. For the full year 2022, we are planning CapEx of EUR 1.1 billion, with about two-thirds of this going into Fab Next. As commented before, we will take a conservative approach in financing our Fab Next project. The majority of the investments will be financed by existing liquidity, future cash flows, and prepayments from key customers.
We have already received some prepayments related to Fab Next in 2021, and more is coming in 2022 and 2023. We will continue to pay dividends, and there will be no capital increase in 2022. We will also raise some debt, enough to maintain a solid liquidity. This will keep the leverage at less than 1x net debt to EBITDA at its peak in 2024. Again, as a side note, we are starting to market a promissory note loan this week. Interest rates have been secured some four weeks ago. Operating cash flow in Q1 was EUR 273.7 million. Despite high CapEx, the net cash flow in Q1 was slightly positive at just below EUR 37 million. The increase in accounts payables was helpful.
Net prepayments to customer LTAs increased by approximately EUR 100 million in Q1. With that, I would like to hand over to Chris again for the outlook.
Well, thank you, Rainer. Silicon demand will continue to rise with growth focused on 300-mm wafers and advanced applications. Therefore, we target to maintain our strong technology position by driving innovation and continuous improvement. We also continue to work on our cost position, especially in light of the growing inflation effects. Of course, we do everything we can to ensure a smooth execution of our expansion project to support our customers' future demand growth. Our guidance for 2022 remains unchanged despite continuing macroeconomic uncertainties. In our quarterly statement, we updated our risk assessment for supply risk due to this terrible war in Ukraine here. We are currently not impacted directly, but we are closely monitoring all developments together with our suppliers and the authorities. We expect our sales to grow by 15%-22%, mainly driven by price increases.
Our EBITDA margin should increase to between 34% and 37%. EBIT should increase significantly despite the higher depreciation of approximately EUR 185 million. Expected cost increases for the current fiscal year are reflected already in our forecast. Due to the high CapEx, our net cash flow will be significantly negative. Earnings per share will increase significantly. With this, we close our presentation and we are now available for your questions. Operator, please open the QA session.
Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial zero and two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. We have a first question. It's from François-Xavier Bouvignies of UBS. The line is now open for you.
Thank you very much. I have a couple if I may. First one is on your guidance, a clarification. What exchange rate do you use? If I remember correctly, last quarter or in March, you said it, you were using between 1.12 and 1.18. I just wanted to check if you updated that in the guidance. The second question is a bit more, Chris, you know, we are, like you mentioned, seeing some slowdown maybe to some consumer applications, smartphones and PCs. My question to you is like, are you seeing, first of all, any signs of this slowdown on your side?
Which I would be surprised because you're a bit, you know, far from the end sales if you like, and it would take a bit of time. How do you think the customers will react to this slowdown? I mean, are we gonna see an inventory build up because, you know, what we have experienced with the shortage? In other words, how long do you think it's gonna take for you to really see what's going on in the end demand, given the shortage and relatively low inventory and supply chain?
Well, that's a very complex question and not that easy to answer. You know, we depend somehow on the information that we get from our customers. Nobody's talking about a slowdown. We had in the end of Q1 and also for Q2, we had some smaller spot quantities available and, you know, we did sell them at premium prices without any problem. As soon as we offered it to a customer, the customer took it. There is no reason for us to believe that demand will be impacted negatively. To your first question, you know, like always, there are some details that we do not disclose. We have an approach in the guidance. We talked about the revenue increase, we talked about the EBITDA.
First quarter was 1.12, like you rightly mentioned on what I said in the call. On the other hand, we all know that actually it's around 1.06.
Okay. We don't know what currency you use for your guidance for the rest of the year.
Right. Because we also don't know what will happen in the next months.
Okay. Thank you, Chris. If I may have a quick follow-up, since it was a short answer, but good. How should we think about, you know, the inflation costs and related to your pricing increase? I mean, for example, this quarter we saw the gross margin, I mean, slightly down quarter-over-quarter, despite a significant price increase quarter-over-quarter. I don't know if I try to understand maybe related to the pricing, to the product mix, also some currency effect, but how should we think about the gross margin going forward in the context of higher inflation and at the same time you try to increase the prices at the same time. How should we think about that?
Well, you know, we saw significant ASP increases in Q1. The reason for that is that many contracts start at the beginning of a year, but we'll continue to see additional increases in ASP during the year. Of course not to the extent like we saw it in Q1. We will have a continuous increase in ASP going from quarter into the next quarter. On the cost side, you know, we really there are things which are difficult to judge, mainly the energy prices in Germany. We took a relatively cautious approach. We still believe that the amount of euros created through price increases will be higher than the losses that we will have due to cost increases.
Great. Thank you very much, Chris.
You're welcome.
The next question is by Jesper Strömberg of Berenberg. The line is now open for you.
Hi, everyone. Jesper from Berenberg. I have three questions please. First, just on your volume growth in Q1, would you say that the volume shipments that came out of Siltronic fabs in Q1 was broadly in line with the 10% year-on-year growth reported by SEMI for the overall market?
Any color there would be very much appreciated. I have a question on customer inventory levels. Could you please update us on how you see customer inventory levels at the moment? A final question on your own order visibility and revenue visibility. What level of visibility do you currently have on your own business, given the contract structure that you're sitting on at the moment?
Well, thank you for your question. Question number one was related to volume development in Q1. I mentioned the figure which was published by SEMI. You know, we do not talk about quarter-on-quarter volume development, but we had excellent operational performance of Siltronic in Q1, and in line with that, we were successful. But at the end of the day, you remember that. Since the second half of last year, we were always informing people that last year development was driven by additional volume compared to 2020. This year, the major gap in revenue will be created through price increases and not volumes. You also know that SEMI said wafer area should grow this year by 6%.
We in Siltronic doubt that the industry, which means we and our competitors, will be able to ship 6% more compared to prior year. Inventory level at customers, you know, there are a few where we have a relatively detailed look at. There was no significant change during Q1, so it's at a, let's say, healthy level, acceptable level. Your last question was regarding?
Just your own order visibility. I know oftentimes you have some pretty good visibility given the contract structure you have. I was wondering if you could give us an update as to how far ahead in the future you're able to see given your own business.
You know, from today's perspective, we are sold out this year, and we are probably also sold out next year. This is what we started to communicate to the market, even in 2021, is due to the fact that demand on one side is supposed to grow, specifically in 300- mm. On the other hand, you know, most of the brownfield additions are done, and we all know that greenfield will take some time. We will get the first wafers out of our greenfield investments maybe end of 2023. Most likely it will be beginning of 2024. I am pretty convinced that the situation at competitors is not different.
All right. Super. Thanks.
You're welcome.
The next question is by Jürgen Wagner of Stifel Europe. The line is now open for you.
Yeah, good morning. Thank you for taking my question. Actually, I have only one with the yen weakening even against the euro. Do you see the risk that your Japanese competitors might lose pricing discipline, let's say, over the next 12 months if FX stays where it is today? If not from them, where do you see competitive pressure potentially coming from? Thank you.
Well, first of all, you know, we do not see competitive pressure, and we do not see any pricing pressure because demand from customer side overall is larger than the quantities offered. I already said by answering an earlier question that every little spot quantity that we offer to the market was sold at a premium price, so therefore we do not see any pressure. You know, to argue about discipline of competitors is always a challenging task. Please keep in mind, you know, the industry had decades of very difficult financial performance. Since the first opportunity to increase prices late 2016, early 2017, everybody enjoyed discipline in pricing and also discipline in adding capacity. It would be simply crazy to give that up.
Pricing discipline, why should there be price aggressive behavior in the market when everybody's sold out? You know, even if your cost position due to exchange rate improves compared to your competitors, there's no reason to give that to the customer.
Okay. Clear. Thank you.
The next question is by Constantin Hesse of Jefferies. The line is now open for you.
Hi there. Thank you very much for taking my questions this morning. Very quick one, just in terms of the cost headwinds. You mentioned that you're seeing more permanent cost headwinds, you know, stretching beyond 2022. What I'm wondering, just looking into 2023, I know that pricing is expected to continue going up, which means we could see some margin improvement in 2023. Just to really understand that, is that do you expect higher costs versus 2022, or for costs actually to remain at a higher level, which means that the pricing you're gonna have next year is still gonna yield higher margins? My second question is, are there any areas where you could potentially gain some cost savings from this year? Thanks.
Well, you know, we always said it's difficult to predict our market development, and it's also difficult, especially in the actual environment, to predict cost increases. We need to be aware that energy increases, energy cost increases typically come from more demand than availability. This is not the actual case. The actual case for gas price development, fuel price development, crude oil and also electricity is simply driven by panic. You know, predicting panic is something where I would not participate. There are a few things where we have reasons to believe that costs will continue to go up. One case is Singapore electricity, because Singaporean electricity is based on LNG.
You know, everybody runs for LNG so that the LNG cost will go up next year, I think it's not a given, but I think it's very likely to happen. On the other hand, what will happen to the energy cost in Germany? I think it's from today's perspective not predictable, because then you would have to predict what happens in Russia and Ukraine. I think nobody's in a position to do so.
That's perfect. Thanks. Any areas you could potentially get cost savings from this year?
You know, we always continue. You know, we continue to have a target on yield, for example. We continue to have a target on productivity. We are relatively successful in doing so. You know, when energy prices are going up by 60%, then it's yeah, you know, positive contributions from productivity improvements are always welcome, but they will never be able to compensate that increase that we see on the energy side.
That's great. Thank you very much. Very helpful.
You're welcome.
Cheers.
As a reminder, if you want to ask a question, please press zero and one. Our next question is by Robert Sanders of Deutsche Bank. The line is now open for you.
Yeah. Hi, good morning. Thanks for taking my question. I guess my first question is around the Chinese silicon and silicon carbide players. I know you're not in silicon carbide, but one of the European manufacturers seems to be qualifying a Chinese silicon carbide player for six-inch. I was just wondering if you could update us on how Chinese silicon players are progressing on 6-inch and 8-inch at least, and whether they are gaining ground or still not competitive. Thanks.
Well, let me try to answer it for silicon-based wafers, China in general. We need to realize one thing is when the Chinese talk about quantities, they always talk about capacity. Nobody knows whether this capacity only exists or whether it is really used to produce wafers for customers. Difficult to judge. We believe that the capacities in China are completely underutilized, also in 300- mm, because they do not show the right performance in the eyes of the customer. What did we do recently? Recently, we offered spot prime volume and spot test wafer volume at premium prices to one of the Chinese players, and they took it within 24 hours.
This indicates to me that the test wafer, even at premium prices from Siltronic, is still preferred over test wafer coming from Chinese players, and the same is obviously also true for prime wafers.
Just out of interest, in principle, is it more difficult to do, to reach the spec in pure silicon versus silicon carbide at a given diameter or is it, still harder on silicon carbide?
You know, it's difficult just to admit it, but I'm not in a position. I don't know enough regarding silicon carbide to be able to answer that question, but I think the challenge is relatively comparable.
Got it. Just given all the narrative around recession next year, et cetera, can you just contrast 2018 and 2022? In 2018 when there was a downturn in the wafer market, you know, customers just couldn't take delivery of the wafers that they were obliged to take. Ultimately, they just didn't take delivery in the end. You kind of compromised on volume, but you didn't compromise on price. Can you just talk about how the contracts are different now, whether you have, you know, more onerous terms for the customer and how in that scenario of a downturn, things could be different this time around versus the last cycle? Thank you.
Well, you know, by principle in our LTAs, we do not build in a scenario for a downturn. You know, our behavior won't be different from what we did in the past. When the customer absolutely doesn't need the quantity, we will be willing to listen to their needs, but we will not compromise on the overall quantity of the contract and will not compromise on pricing. Nothing changed.
Okay. Even if they can't receive delivery, they don't have the space to take the wafers, that's not an area of compromise.
You know, I think there are plenty of good opportunities in the market nowadays. We are sold out. Spot quantities are easy to sell at premium prices in the market, so we shouldn't talk too long about the risk that maybe sometimes in the future there might be demand which is below offered quantity.
Got it. Just last question. On the 12-inch capacity, in the past you've talked about how much capacity you think there is with brownfield. I just wondered if GlobalWafers', you know, EUR 3 billion+ expansion has changed your view of the amount of brownfield that there is out there to be done, or you think it's still the same sort of numbers that you were looking at before?
I think actually we are at installed capacity of 7.8. This is basically the quantity which is shipped according to SEMI data, and we do not expect this figure to change significantly this year. Maybe plus 100 or plus 150, but I do not believe that we will reach shipments of 8 million wafers this year.
Perfect. Thanks so much, Chris. Cheers.
You're welcome.
There are no further questions, and so I hand back to you.
Well, this concludes our Q&A session. Thank you for joining us today, and we hope that you will join us again for our Q2 release in July. Goodbye, and stay safe and healthy, everybody.
Thank you. Bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.