Good morning, ladies and gentlemen, and welcome to Siltronic's conference call regarding its Q3 2022 results. Please note that this call is being recorded and streamed on the Siltronic's website. The call will be available as a replay 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, Head of Investor Relations and Communications of Siltronic AG. Please go ahead, sir.
Operator, welcome everybody to our Q3 results presentation. We do apologize for the technical issues we just experienced with the audio connection, and we hope that everybody had a chance to dial in by now. If not, I will repeat this at the end of the call. Please contact Siltronic IR for a follow-up. We will do our best to answer all your questions. Now, in today's call, I am joined by 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 development. 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 Q3 reporting are available on our website. I now hand over to Chris for introductory remarks.
Thank you, Rupert. Welcome everyone and thank you for joining us for our Q3 2022 results call. I hope all of you and your families are healthy and safe. I will present some highlights of our Q3 business before Rainer will guide you through our KPI development in more detail. Q3 was another excellent quarter for Siltronic, with sales reaching a new record high. Wafer demand continued to be high and we benefited from a stronger U.S. dollar. Our operations also had an excellent performance with production output slightly above last quarter's. The expansion projects in Singapore and Freiberg continue to proceed very well without any delays or interruptions. We expect high loading for our 200- and 300-mm fabs to continue through Q4, despite some signs of weakness in some end markets, most importantly smartphone and PC unit sales.
As the US dollar exchange rate against the euro is expected to stay strong, we raise our guidance for sales growth for this year to +26% to +30%. EBITDA margin is expected at 36%-38% for the year 2022, at the upper end of our previous guidance. The latest reports from electronics end markets still show a mixed picture with softening in some areas. Smartphone sales continue to decline. This is certainly not good news for anyone, but the impact to total silicon demand is somewhat softened by the continuing trends to more content per device. The situation in the automotive industry has not changed much as it is still recovering from supply chain issues. It is still unclear when supply can catch up with demand. Again, the trend for more electronic functionality per unit continues, along with the growing share of electric vehicles.
Orders for industrial electronics seem to be slowing, but builds and shipments continue to be strong. Computing demand shows a very mixed picture. Server and cloud services continue to grow while PC unit sales are down significantly. Demand for gaming consoles is still high. Many market forecasts emphasize the growing uncertainty due to macroeconomic and geopolitical developments, along with the ongoing correction for memory and some logic devices. Looking at the impact on wafer demand, we see a mixed picture as well. Overall, demand from our customers continued to be high for 200 and 300 mm wafers. However, demand for smaller diameter wafers is somewhat softer. We are very glad that both of our major expansion projects continue to proceed according to plan. This is a great achievement of our two project teams.
The construction of our FabNext factory in Singapore is on track for first shipments to customers in the early part of 2024. This is made possible by an experienced team that works in great collaboration with our general contractor and the equipment makers. Construction work for the crystal pulling hall in Freiberg is coming to a close, and we have started to move the first equipment into the new building. Compared to Q2 2022, our sales grew by 7% to EUR 474 million. Overall ASP in the quarter was significantly up compared to the Q2 2022 due to favorable exchange rate and higher wafer prices. The main driver was the U.S. dollar to euro rate, which declined from 1.07 dollar per euro in Q2 to 1.01 in Q3.
EBITDA came in at EUR 171 million and EBIT increased to EUR 124 million. CapEx of EUR 226 million was mostly related to our major expansion projects, the construction of our new 300 mm fab in Singapore, and the expansion of the crystal pulling hall and EPI in Freiberg. Our net financial assets were EUR 553 million at the end of the Q3 , down from EUR 573 million at the end of last year. Now I would like to hand over to Rainer to provide you with some more insights into our Q3 financials.
Thank you, Chris, and good morning, everybody. Sales increased quarter-over-quarter, driven by the higher sales prices and the strong US dollar. FX development was favorable with the euro further depreciating from 1.07 USD per euro in Q2 to 1.01 in Q3. COGS increased further, largely due to the FX headwind, as a significant share of our cost base is also US and Singapore dollars. Unit costs for electricity, supplies, and raw materials increased significantly year-over-year, but not further quarter-over-quarter. Despite higher costs, our gross profit rose to EUR 164 million in Q3 and gross margin came in at 34.6%. Currency effects were once more dominated by the stronger US dollar. It has a positive impact on sales and margins with a neutral non-operational FX result in Q3.
Please note that top and bottom line sensitivity to exchange rates has increased due to the lower exchange rate. Favorable FX development and higher prices also led to an increase in EBITDA. EBITDA was up to EUR 171 million in Q3, a 16% increase versus Q2. EBITDA margin increased to 36%. EBIT came in at EUR 124 million for Q3, with an EBIT margin of 26% compared to 23% in Q2. EBITDA and EBIT in the first three quarters of this year already exceed the full year results we had achieved last year. Net profit was almost EUR 110 million in Q3, more than 49% higher compared to Q3 last year and up more than 20% quarter on quarter. EPS came in at 3.32 EUR versus 2.66 EUR in Q2.
The dividend of EUR 3 per share for 2021 was paid out in May, and we are planning to propose a dividend of another EUR 3 per share for 2022 at the next AGM in May 2023. Working capital in Q3 increased by about EUR 30 million quarter-over-quarter to EUR 290 million, basically in line with sales growth. Looking at our balance sheet, equity grew further to almost EUR 2 billion at the end of Q3, with an equity ratio of 57%. This increase is based on the strong profit as well as a decrease in pension obligations due to higher interest rates. The HGB interest rate for pension provisions in Germany increased to 3.7% as of September, versus 1.1 to 1.2% as of December 2021.
The US interest rate increased from 2.5% in December to 4.85% now. This resulted in our pension provision stabilizing at a much lower level than in previous years at EUR 160 million. Net financial assets remained high at EUR 553 million. Financial assets grew to EUR 922 million and financial debt to EUR 366 million. Operating cash flow in Q3 was strong at EUR 150 million. Cash flow for CapEx was comparable to Q2 at EUR 226 million. This resulted in a negative cash flow, net cash flow of EUR 64 million in Q3 as expected. So far, we have received about $220 million of fresh prepayment in 2022.
We expect more prepayments in Q4 as well as in 2023 and in 2024. CapEx in Q3 was EUR 226 million. Most of the invest is used for the ongoing expansion projects, namely expansion of the 300 mm crystal pulling hall and Epi in Freiberg and of course FabNext in Singapore. For the full year 2022, we still expect CapEx of about EUR 1.1 billion, with about two-thirds of this going into the FabNext project. In addition, we adjusted our dividend policy to balance the cash flow throughout this investment phase. Capping the dividend at EUR 3 provides additional liquidity for investments. At the same time, our shareholders will continue to participate adequately in the success of the company at an attractive return rate.
As mentioned before, we successfully issued an ESG-linked promissory loan note or in German, Schuldscheindarlehen, over EUR 300 million at favorable conditions with terms of five, seven and 10 years. The interest rate on the promissory loan is linked to the Sustainalytics management score for Siltronic. Secondly, we secured a long-term loan in Singapore dollar with drawdowns in 2022 and 2023. In addition, we just recently secured a bilateral EUR 200 million bank loan from the European Investment Bank, amortizing over 10 years. The loan will finance research and development in Germany, as well as production capability for innovative products in our German factories. The drawdown is planned for the Q4 of this year. With that, I would like to hand back to Chris.
Thank you, Rainer. Silicon wafer demand continues to grow, and SEMI just reported new record shipments for the Q3 . Volume growth of 300 mm wafers has been very steady over more than a decade, with the growth coming mostly from advanced applications. Therefore, we target to maintain our strong technology position by driving innovation and continuous improvements. 300 mm wafer supply has been short, and market growth this year is limited to a few% due to the industry capacity. New capacity will only become available in early 2024 at a noticeable scale. This gives us confidence that the current uncertainty is just temporary and that the timing for our next project is absolutely right. Looking ahead at the remainder of this year and into next year, we still see a very mixed picture.
Global news are dominated by uncertainty, geopolitical tensions, and macroeconomic concerns. Some end markets have softened and there are ongoing inventory corrections for some semiconductor device types like memory, while others are still high in demand, for example, chips for car electronics. Despite all this short-term uncertainty, we are convinced that the long-term drivers for our industry are still intact. There is no doubt that the semiconductor industry will continue to see growth in the mid and long term. Based on our current visibility, we expect demand for our products to stay strong. Our main focus continues to be on a smooth execution in operations, our expansion projects and cost control to counter inflation. A few months ago, there was a lot of uncertainty about gas supply in Germany.
By now, we have made very good progress with our project to become independent of gas at our German sites, and we expect that we can run the Freiberg site with fuel oil instead of gas within the next months. Furthermore, we are confident to have sufficient supply of energy and gas at all our sites for the foreseeable future. Based on the continued strength of the U.S. dollar against the euro, we increase our guidance for sales in 2022 to +26% to +30%. Consequently, the expected EBITDA margin is adjusted to 36%-38%. Everything else in our guidance for 2022 remains unchanged. Our guidance for cost increases in 2022 remains unchanged. We studied the new U.S. export rules and the impact on to our China activities in great detail. However, so far, without any negative implications.
Finally, just a few words on 2023. We expect the environment to be a little bit bumpy going into next year. We do expect further unit cost increases in 2023. However, we expect further tailwind from exchange rate. With this, we close our presentation and we are now available for your questions. Operator, please open the Q&A session.
Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star then followed by two. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star and one at this time. Our first question is from Francois-Xavier Bouvignies of UBS. Please go ahead.
Hi. Good morning. Can you hear me?
Very well.
Thank you. Thank you very much for taking my questions. The first one is on Chris, the memory side of things. I mean, I'm sure you have seen the announcements from a number of players. I mean, the Samsung, SK hynix and Micron and their planned CapEx for next year and actually for some decreasing even the production next year. Now, you know, you polish the wafers. I mean, memory, my understanding it's a high exposure. I'm just trying to, you know, figure out when should we expect any impact or if you see any impact from this kind of change that we have seen in the last 3-5 months? Because when we look at the performance of 300 mm, it doesn't seem that you see anything.
Now if you look at the past, we always experience lag between, you know, what your customers are seeing and what you finally see after, you know, given the complexity of the supply chain, the impact on your business. Should we expect what we see on the memory side, the impact more into 2023? Is it fair assumption or how can you not see anything at this stage would be helpful to know. Thank you.
Well, you know, very good question. You know, we have the same information as you do. We got some negative signals from the one or the other player, mainly in the DRAM area of memory. Up to now, we do not see any impact on our business. In the past, we always talked about inventories that we see for 300 mm wafer set customers, and these inventory levels that we see are still completely fine. We do not see any, let's say, abnormal uptrend in raw wafer inventory. Like in the past, we need to say that we don't see the inventory of finished goods, and we don't see the development of work-in-process inventory.
There are some, let's say, more negative news than positive news coming from the memory industry, but up to now, this does not translate into wafer demand. On the other hand, you know, when you look at the announcements which were made, whether it was out of Japan or North America or Korea, it was about wafer starts, it was about demand, but nobody talked about purchasing less wafers. You need to keep in mind that during the year 2022, up to now, 300 mm was a very, very short product, and there are no announcements for additional capacity before the early part of 2024. Therefore, I think for our customers, it's still very important to have the wafers that they need.
That's very clear, Chris. How can we understand if inventories are not growing that much, as you say, and you know, that you don't see any impact on the memory side. At the same time, the memories are seeing, like, really downward pressure on the sales. I mean, where is it going then? I mean, what's the gap, you know, where there must be all the inventories then if you don't see anything and on the other side, they have a planned output.
It reminds me a little bit the situation in the later part of 2018, you know. Analysts and investors at that time were forcing us, "Why don't you see anything? The only thing that we said at that time, "We don't see anything, but we read the same news as you do, and whether this will translate sooner or later into something negative for wafers needs to be seen." This is relatively. That is relatively comparable to today. The difference is that we have good reasons to believe, based on the development that we had in the earlier part of 2022, that the inventory for raw wafers are more on the low side than on the high side. Therefore, I wouldn't be surprised that even if a company reuses wafer starts, they continue to buy what, the LTA obligations show.
I see. Okay. Thank you, Chris. How should we think about the pricing into next year? I mean, you have the new LTAs kicking in in the Q1 , if I remember correctly, which is usually your seasonality. So probably some help in there. You know, what's the outlook for pricing? Should we expect a significant increase like you experienced this year or more moderate? You should have, I guess, a good visibility given your LTAs. Just was wondering how we should model or the trend of the pricing side for next year.
You need to keep in mind, you know, when we talk about ASP, we typically talk about ASP in euro, and ASP in euro was driven on one side by exchange rate development and pricing. This is both contributing quite a bit. I do not expect to have a comparable tailwind from currency. We will see some. We tend to believe that the euro will close at an average value for the year 2022, around 1.05. If it stays where it is today, then we would see a EUR 5 tailwind. The tailwind in this year was much more bigger.
Mm.
Yes, we will see some price increases. If you say this year was significant, will it be more moderate? I think more moderate is the right assumption.
Great. Thank you very much.
You're welcome.
Thank you. The next question is from Amit Harchandani of Citi. Please go ahead.
Thank you. Good morning, all. Amit Harchandani from Citi. Two questions, if I may. My first question, again, to continue on the previous questions, is on the top-line growth as we look into 2023 and beyond. By all accounts, we are entering a downward phase within the semiconductor cycle. You have talked about some factors which give you confidence, including the lower levels of raw wafer inventory. But can you comment a bit further on your earlier statement on current visibility about demand staying strong? Is it your conversations with customers? Is it the confidence that the LTAs won't be breached? Is it something else that gives you... I guess I'm trying to figure out how should we think about the resilience of your top line this time versus what we have seen in previous cycles.
You commented on late 2018, but there have been a few more before that. Your thoughts on the topic would be much appreciated. I have a second question.
Thank you for your question. It's not one question. It's basically plenty of questions around the outlook for the years to come. Today is certainly not the year to give a detailed outlook about the future. Let me try to give you some insights. Typically, revenue development is always driven by two things, the quantity that you sell and the prices that you get. On prices are already answered in the first question that we got today, that a more moderate approach compared to the current year is probably the right one to do for the year 2023. On the other hand, for this year, we said we only expect for the industry low- to mid-single-digit growth because there is no more capacity in the industry.
Like I said in my speech, there won't be any significant additional 300 mm capacity next year to the market. Whatever demand will develop into, I do not believe that we and our competitors will have significant more quantity available. This is basically information number one, that quantity wise, we will not see a strong tailwind, and price-wise will be moderate. I think this is the best approach that we can take today. If we look into mid to long term, you know, it's same old story. You know, we tend to believe that the demand and the development for semiconductors is still intact. In many areas, not so much driven anymore by pieces produced or pieces sold. This is true for automotive and for sure also for smartphones.
It's much more driven by content changes and also by shift from, let's say, combustion engines to electrical engines or hybrid cars. There are many, many developments which are in our favor. Our assumption that we used for the decision-making process for the investment into FabNext, where we said in the average we do foresee a 6% area growth for 300mm, this is still true. It will not happen every quarter. Sometimes it might be below, sometimes it will be up. We do not have any reason to believe that this approach is not the right one for the future. Please keep in mind, you know, we said that we secured roughly 80% of the most likely output during the ramp phase of FabNext with LTAs.
Siltronic had the possibility to secure much more, but we didn't want to run the risk to cover 100%. Even demand from customers was well beyond 100%. All these indicators together, I'd say, is justify that we have quite a bit of confidence into the mid to long term future.
Thank you, Chris. Maybe I'll limit my second question to a clarification on the LTA point I said earlier, which is, can you help us understand what's the wiggle room in the LTA for your customers? Can they delay volumes? Is there a minimum committed volume? Are there pricing corridors? I guess I'm trying to understand what's the level of resilience that a greater share of LTAs can provide in this cycle versus previous cycles, assuming we end up in a situation where your customers do need to reduce the number of wafers they need to take from you.
Well, like always, predicting the future is always challenging and also whether customers will fulfill the LTAs, yes or no. We do not have any indication that this will change compared to prior period. Maybe the one or the other customer will show up and try to talk about quantities, you know, to move quantities from an earlier part of the LTA into a later part. This is something where probably Siltronic will liken the parts, listen to the challenges of the customer. As soon as we talk about overall reduction of quantity or price adjustment, our willingness to listen is there. Our willingness to react is completely underdeveloped.
Understood. Thank you.
You're welcome.
Thank you. The next question is in from Robert Sanders of Deutsche Bank. Please go ahead.
Hi, I just had a question about chiplets. It seems like Apple's quite keen to move to that architecture for its smartphones in a couple of years, and I think the assumption is all the mobile processor guys will follow. I was just wondering if you've done any work in terms of what that would mean for the square area per device if you started to see, you know, more fragmentation of system on chips into multiple dies, some of which would use sort of lagging edge technology. I have a follow-up. Thanks.
Yeah. Rob, thank you for your question. This change is basically built in our forecast.
Do you see it as a material event for the wafer industry or is it too minor to really move the needle?
Thank you, Robert. You know, I think it's simply part of the densification that we see. We saw it in the past, we see it today, and it will happen in the future, but it's part of our forecast.
Got it. Just looking into next year, I mean, in terms of utility prices and all of that Do you feel better about the situation into next year versus three months ago? I mean, the forward price seems to be dropping for utilities, et cetera. I was just wondering if you felt that, you know, that means you're in a better position to negotiate, et cetera. Are you looking to lock in prices or are you still relatively exposed to the spot prices? Thank you.
Yeah, Rob, the voice quality is not very good, but I think you were asking for utility pricing. I mean, it is coming down slowly. If you look at spot pricing, it's already down significantly. If you buy forwards for next year, it would still be very expensive. If you compare this year, next year, and over next year, you can obviously see how prices drop also in the forward. Kind of if you were to buy forwards today for over next year, you would already see a significant reduction. We are obviously careful on buying forwards into next year because we don't wanna lock in the high pricing we see today. Comparing it to spot prices, we see that there is enough room for additional decrease in the forward.
I mean, we will definitely see more increases next year and then very likely also a significant reduction in over next year.
Thank you.
Thank you very much. The next question is from Adam Andrejew of Bank of America. Please go ahead.
Hi. Thanks. Just had one question on prepayments. You know, they declined in the quarter and you said earlier that you expect them to grow again in 2023, 2024. Just curious, you know, if you can help us on the trajectory there. I think in the past you said you're expecting most to come in in 2022 and then a little bit in 2023. Has anything changed on that? Secondly, on the CapEx, you know, you've capped the EUR 1.1 billion guide and that would imply quite a step up in Q4. You know, I understand you said everything is on track, but just wondering, you know, is that right? We should expect a significant step up in Q4, and maybe if you can help us to understand why there would be such a difference between the quarters? Thanks.
Yeah. I mean, prepayments there is basically no change, except maybe one or two additional contracts. We said the majority is coming this year. There's more coming next year. What I said is, I mean, we didn't get one in Q3, but there will be one in Q4, more in 2023, and also a little more in 2024. That's basically no change. Yeah, CapEx, I mean, there's a lot of reasons why CapEx is always highest in Q4. That's kind of a trend you've seen also in prior years. It's quite a bit that is still coming in this year. A lot of that coming really very close to year-end and which will not necessarily then lead to a cash outflow, but it will be counted as CapEx in Q4.
Okay. Thank you.
Thank you very much. The next question is from Juergen Wagner of Stifel. Please go ahead.
Yeah, good morning. Thank you for letting me on. A follow-up on electricity prices. Is the message then a bit that we should expect an increase, let's say, over the next 12 months and then model it down again later on? Second question, looking at the share price being so low, we discussed that in the past. At what level would you consider share buybacks instead of dividends? You mentioned you still wanna pay the EUR 3. Thank you.
Yeah. Looking at utility prices, I mean, just looking at the forward pricing, you know, I'm sure you do the proper modeling. I mean, we have some bought already for next year. But most of what we bought for next year, we bought already about a year ago, so at much lower prices. Now if you look today at the forward to next year in Central Europe, they're a little below EUR 400, so still very high. If you buy today for over next year, you are somewhere between EUR 250 and EUR 300, so significantly lower.
If you were just locking in today, which we are not planning to do, but then you would see another significant increase next year and also a significant reduction over next year, basically down to the levels of this year. You know, on the share buyback, I'm sure we discussed that many times. There's currently no intent, and if we were ever to have an intent, we will let you know.
Okay. Thank you.
Thank you very much. The next question is a follow-up question from Amit Harchandani of Citi. Please go ahead.
Thank you for allowing me on, and if I could have two follow-ups. My first question goes to the topic of geopolitics and what's happening between U.S. and China. Could you kindly clarify from your perspective today, what do you see as potential direct or indirect implications for your business? Then I have a second question.
Well, like I said, you know, for the business, any implications today. On the other side, you know, we are fully aware that there were decisions taken by the U.S. government in order to, let's say, take an influence on possible developments in China. We can only judge of the status of today. This might change tomorrow, might become more severe, and then it might have an impact. Up to now, everything was related to leading edge in China. Leading edge in China does not exist so much. Let's put it that way. I think the actions taken by the U.S. government are much more against equipment supplier than against wafer supplier. We watch it carefully and, you know, we will follow whatever is requested to do.
Noted, Chris. As a second question, if I may, probably a bit more strategic. There seems to be growing momentum around silicon carbide at this point of time. In the past, we have talked about your views on silicon versus silicon carbide, and you've talked about your emphasis on gallium nitride. I was just wondering if you're revisiting that from a strategic standpoint. Whether you see the opportunities compelling enough to accelerate your efforts. Appreciate the chemistries work differently, but it does seem like a long-term opportunity, and Siltronic does seem to be a company that could potentially be interested. Your thoughts on next generation power semis, and how are you thinking about that besides, of course, your core silicon business. Thank you.
Very good question, Amit. You know, people are talking very much about the development and with very positive comments on the silicon carbide business. The very positive impression is typically coming from growth rates and not from absolute figures. We looked at it twice, and we came twice to the same conclusion. When we looked at it for the second time, you know, you remember probably that we stopped it because at that time, Siltronic was buying the [default activities], a business which had $14 million revenue, and they paid $480 million for it. Consequently, there was a price tag in the market, and this is a price tag that Siltronic does not wanna follow. In the actual environment, you know, we spend a lot of money in our FabNext.
We concentrate on what we are good at, and this is what we are going to continue to do. By the way, in the meantime, there are also applications where silicon carbide is used, and there is a risk or even a very good chance, maybe even a guarantee that it will be replaced with gallium nitride on silicon. For example, the onboard charger of the electric cars and hybrid cars. Today, they are based on silicon carbide, and the industry is convinced that in relatively short timeframe it will move away from silicon carbide because it's simply too expensive.
Okay. Noted. Thank you, Chris.
You're welcome.
Thank you very much. We have no further questions in the queue at this time, and I would like to hand back to Rupert Krautbauer for closing remarks.
Thank you. This concludes our Q&A session. Thank you for joining us today. We hope you will join us again for our full year results release in early March. Again, I would like to repeat our apologies for the technical issues we had at the beginning. If anyone joined the call later and did not have a chance to ask a question, please contact Siltronic IR, and we're happy to follow up. Goodbye. Stay safe and healthy.
Thank you very much, sir. Ladies and gentlemen, the conference is now concluded, and you may disconnect your lines. Thank you for joining and have a pleasant day. Goodbye.