Earnings Call: Q2 2021

Jul 28, 2021

Hello, everyone, and welcome to Citronics' conference call on its Q2 twenty twenty one results. Please note that this call is being recorded and streamed on Citronics' 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 Britt van Mueller, Head of Investor Relations, Communications of Sittronik AG. Thank you, operator, and welcome everybody to our Q2 twenty twenty one results presentation. This call is also being broadcast live over the Internet at citronic.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, Doctor. Christoph von Blotto and our CFO, Rainer Eller. 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 comments during this call will include forward looking statements, which will involve risks and uncertainties. For a discussion of the risk factors, I encourage you to review the 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. Thank you, Petra. Welcome, everyone, and thank you for joining us for our Q2 twenty twenty one result 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 Global Wafers. All requests for approval with the individual authorities are stipulated in the offer document has been filed. And by now all the 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 Affairs Energy. We still expect the transaction to close in the second half of this year. As we published yesterday, the other 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 tight 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 through long term agreements with customers, including prepayments. The plans are currently being negotiated with customers, and we see good progress. The construction is planned to start this year. Our central R and D hub in Wolkhausen will provide technology support and proposed 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 EPIC capacity in Freitag, which will allow additional EPIC 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 will now around €400,000,000 Based on current planning, CapEx for the new fab will be around EUR 2,000,000,000 until the end of twenty twenty four. This project is the most important one for Siltronik in the last ten years. It is a landmark project, which will enable Seltronic 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 effects, some seasonality and also ship shortages. But higher content driven by 5G migration is still intact. Cellular business showed good growth and PC, including combos, are still growing. The auto industry continues its recovering path but is limited by supply shortages. The share of hybrid and electrical cars is 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 EUR $341,000,000. 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 EUR108 million with the EBITDA margin of nearly 32%. EBIT was up to almost EUR70 million. Our net financial assets increased to €528,000,000 as of 06/30/2021. Now let me hand over to Rainer for a detailed walk through of our financials. Yes. Thank you, Chris, and welcome, everybody. As Chris pointed out, Q2 sales were strong. Vapor 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 million, up 8% on previous quarter. Year over year, the euro appreciated quite a bit, resulting 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 million. However, compared to the higher wafer area sold, COGS increase was under proportionate. Cost by 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 EUR 105,000,000 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 Waverhill. Costs were roughly EUR 2,000,000 in Q1 and EUR 2,700,000.0 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 million, basically a result of a positive hedging. The positive contribution from the increased vapor area sold and the reduced cost per vapor area, along with flattish prices and a minor FX impact led to strong results in Q2. EBITDA was up to million in Q2, a nearly 18% increase versus Q1 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 EUR1 million quarter on quarter. And therefore, in line with EBITDA, EBIT in Q2 went up to EUR 70,000,000 with an EBIT margin of 20.4% compared to 17.2% in Q1. Financial result improved too and the tax rate continued to be low. Net profit was million in Q2 compared to million in Q1. Earnings per share came in at The dividend of per share was accepted by the Annual General Meeting and we paid a EUR 60,000,000 dividend in May. Working capital went slightly down in Q2 to EUR $232,000,000. 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 EUR1.1 billion with an equity ratio of 54% at the June. Equity increased nicely compared to December 2020 with high profits minus the dividend and lower pension provisions. It was roughly stable quarter on quarter. The pension provision in Germany was 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 million, though we paid 60,000,000 dividends. As of June 2021, pension provision came in flattish with a slight decrease of EUR 12,000,000 versus March. If we use 3% to calculate DBO, we would see it at around EUR $830,000,000, and we would have just a pension provision of EUR 84,000,000. CapEx in Q2 was significantly up quarter on quarter at nearly million. Other than MOB, we continue to invest in capability, epi capacitors and we started the expansion of a crystal pulling hole to replace older equipment in Freiburg. Our operating cash flow in Q2 increased to EUR105 million. The net cash flow in Q2 was positive at million. Up to now, we received additional 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 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 IP 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 and the study from home pushed DC 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 of different. With the outdoor 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 the trend 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 2020 for 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 EUR 400,000,000, up EUR 150,000,000 from the outlook that we gave in April. In April, we expect that net cash flow to significantly improve. Due to the higher CapEx, the net cash flow will obviously come in lower. We expect that 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 are now available for your questions. Operator, please open the Q and A session. Thank you. We will now begin our question and answer session. The first question is by Francois Bauvenard of UBS. Hi, Yves Guin, and good morning. So 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 such big project for Ciltronik? And have a follow-up after for 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 announcement. We 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 Seltronic, but we believe also at competitors is already completely filled with equipment. And by the way, theoretically, there are two outcomes possible on the offer from Global Wafers. 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 is therefore somehow independent on the closing outcome. Okay. That's very clear. And maybe just a 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 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 are, of course, independent from the output out 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 comment, I mean, in previous earning calls in October 2020, and I'm sorry to quote you, but you said that our competitors once mentioned 50% to 60% price hike to justify a greenfield. And you said it's not a bad figure, if I quote, but at the end of the day, we need to see contractual obligation from customers. So how does it fit now? I have to think too. I mean in terms Today. Okay. So what about the contractual obligation from customers? Because in the release you said that it will be the plan is to get prepayments from customers. But do you have any contractual obligation at this stage? I mean, what can you say about this obligation? We have significant commitments from customers. And we are, let's say, when you compare it to a Formula one race, we are in the last lap 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. The next question is by Konstantin Haase of Jefferies. 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 FET will be? I am assuming $2,000,000,000 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, Duran, while we were doing our feasibility study, I gave you and the financial environment of Seltonic, quite often some examples. We said that ramping faster than $150,000 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 I would like to share it with you, but I wouldn't 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, Epi is on our location. 300 millimeter polish is sold out. Competitors talk about spot price because they consider quarterly contracts as 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 to the Japanese because they typically talk about it. We do not. The next question is by Auguste Pohlberg of Berenberg. 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, a 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 expansions of a similar scale? Well, first of all, the decision of Sertronix 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 may be built at the same time. And while the concern of overcapacity, and I gave you quite often calculation examples with three fabs three new fabs ramping at the same time, this would probably then be completely in balance 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 will deliver the first wave of only 24. 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 FabNext, 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 as a follow-up on the ramp up schedule. So you mentioned 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 market before that? It's only two point five years. I think the construction phase is already on a very tight schedule. And you know 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 wave is out beginning of twenty twenty four. 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, apologies for this question, but how should we think about Citronic's depreciation expense for 2021 and 2022 as a result of the capacity announcement and the timing? Because I see you 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? Yes. I think those have been 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 till 2024. Okay, very clear. Thank you. The next question is by Martin Lundgrenslais of Kepler Cheuvreux. 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 spend? Thank you. Well, first of all, Singapore Support, we will get the so called pioneer status for fifteen years, and this means this translates into a very low tax rate or no taxes for fifteen 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 EUR 24,000,000,000, EUR 2 billion. And your last question was? Sorry, if it's fair to assume that the customer prepayments will cover around the quarter or so? Yes. Once we really have finalized what translated the commitments that we have from customers into ATAs, we might talk about it. I would argue that 25% is relatively high figure, but not that either. Okay, cool. Thank you very much. The next question is by Jurgen Wagner of Stifel. 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? Well, since the very beginning, we always informed you when we got certain 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 comment that I gave earlier. It's still open, but overall, Global Waste Management Funding, we still believe that we will get the closure of the deal by the end of the year. Okay. Thank you. Next question is by Rob Sanders of Deutsche Bank. Yes, hi. A couple of questions, I'm sure 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 Global Wafers process, but can you remind us what equity you could raise without shareholder approval? And then thirdly, 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, John 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 for Werner 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. We should wait to it till we have the outcome. And on the leverage, do you have any cap two times or something else? I think global assets 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, obviously that the cash flow will improve. So plus prepayments and so on, I mean financing this new fab is not a difficult undertaking. Okay. And you said the joint venture under the joint venture system presumably are committing to the 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 02/2006 and the first wave that came out, it was a fiftyfifty joint venture between Seltronic and Samsung. And in January 2014, we acquired another 28%. So that since then, we are at 78% and Samsung is at 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 the 60% from I think Simcoe had mentioned, I think that was relative to Q4 twenty sixteen pricing, if I remember rightly, that they would consider greenfield. Is that correct? And that would actually imply pricing not that far from current levels. So I guess 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 investment, which would kind of be intuitive or whether you think the 60% is still relevant relative to the Q4 'sixteen baseline? Like I said before, for competitive reasons, we will not further go into details. But I want to clarify a little bit. As Zumco mentioned, 50% or 60%. As far as I remember, they never talked about the basis. So this was the problem that we never know what was the starting point. Q4 twenty sixteen was the basis point that Seltonic mentioned when we went into the project of brownfield additions. And we said for brownfield, we need to see 30% based on Q4 'sixteen. So the basis Q4 twenty sixteen is zerotonic basis. And I do not I'm not aware that Samsung ever said that the 50% or 60% take its basis whatever period. I'm not aware of that. I'm sorry. Okay. And this is very last question. Sorry to add. There's one other, which is in the past, you talked about $4,000,000 per k, which would imply obviously a $500,000 line, which is comparable to the existing line. Is there any reason why that $4,000,000 per k 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? That's it for my question. Thanks. Well, I think $4,000,000 is not a bad figure. Okay. And do you think you can get more cost downs than you did in the first facility? Or is it kind of comparable? Well, the big advantage of Singapore activities is the running cost. And we will Sidoniek will invest in additional capacity in a facility which is in Singapore and has significantly lower running costs than our activities here, 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. Welcome. There are no further questions at this time, so hand back to the Sipronics team. Okay. Thank you, operator. This concludes our Q and 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. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.