Earnings Call: Q1 2021

May 7, 2021

Hello, everyone, and welcome to Citronics' conference call on its Q1 twenty twenty one. 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. At this time, I would like to turn the conference over to Petra Muller, Head of Investor Relations and Communications of Seltronic LGE. Thank you, operator, and welcome everybody to our Q1 twenty twenty one results presentation. This call is also being broadcast live over the Internet at sysbonic.com. A replay of the call will be available on our website shortly. Joining me on today's call are our CEO, Doctor. Christopher von Blotto and our CFO, Rainer Edel. 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 reporting documents. All documents relating to our Q1 reporting are available on the website. And with this, I turn the call over to Chris. Thank you, Petra. Welcome, everyone, and thank you for joining us for our Q1 twenty twenty one result call. I hope all of you and your families are healthy and safe. Before we dive into our Q1 figures, I would like to give you a short update on the tender offer of Global Wafers. All requests for approval with the individual authorities as stipulated in the offer document has been filed. And by now, Germany, Austria, South Korea, Taiwan and Sapios have already cleared the transaction. Approvals are currently pending from the merger control authorities in Japan, The U. S, China, Singapore as well as from the German Federal Ministry of Economic Affairs and Energy. We still expect business update for Q1 twenty twenty one. The quarter was stronger than originally expected, and we achieved sales of EUR $316,000,000, 11 percent up compared to the last quarter of prior year. ASP was flattish. And while wafer area in Q1 twenty twenty one was significantly up, cost per wafer area went down. Exchange rates did not have a major impact quarter on quarter. Our EBITDA came in at EUR 92,000,000. EBIT was up to EUR 54,000,000. Our net financial assets were EUR $538,000,000 as of 03/31/2021. As pointed out, we saw strong wafer demand in the first quarter. Looking at the end markets, we see smartphone business recovering. Five gs migration is accelerating. And as always, new smartphone generations come with more content, more memory and again additional cameras. The server business showed only moderate growth while PC including Chromebooks developed nicely. As we can all read in the news in the past weeks, the auto industry is recovering strongly and we see an increasing share of hybrid and electrical cars. On the industrial side, there is somewhat a mixed picture as a lot of different applications are subsumed under this heading. Overall, the situation is improving. When we look at the development by wafer diameter, 300 Fe is on our location, 300 millimeter polished and 200 are strong and small diameters loading improved. ASP was flat quarter over quarter. With this first overview, I hand now over to Rainer for more details on the financials of our Q1. Thank you, Chris, and good morning, everybody. Q1 sales were really strong. Vapor airway sold increased year over year and quarter on quarter. Prices were stable quarter on quarter, but of course, ASP was down year over year. Overall, sales reached EUR $360,000,000, up 11% to last quarter. Year over year, the euro appreciated quite a bit, resulting in headwind from exchange rates. Quarter on quarter, though, we saw relatively stable FX rates. Due to higher wafer areas sold, COGS went up by 7.5% quarter on quarter to EUR $228,000,000. However, compared to the higher area sold, COX increased under proportionally. Cost per vapor came down due to fixed cost dilution. Our gross profit rose to EUR 88,600,000.0 in Q1. Gross margin was up to 28%. Our admin expenses were influenced by advisory service in relation to the tender offer of Global Wafers, EUR twelve million accrued in Q4 and EUR 2,000,000 in Q1. We booked the cost, but most of the payment is only due after closing. In Q1, non operational currency effects were positive at EUR 4,000,000, and that includes the hedging results, which was positive too. EBITDA was up to EUR 91,700,000.0 in Q1, a 37% increase versus Q4. This was triggered by the higher wafer area sold. EBITDA margin was 29% after nearly 24% in Q4. Lower advisory costs in connection with the tender offer also contributed to that increase. Depreciation increased by EUR 1,000,000 quarter on quarter. And in line with EBITDA, EBIT in Q1 went up to EUR 54,000,000 with an EBIT margin of 17% compared to 10% in Q4. The positive contribution from the increased wafer area sold and the reduced cost per wafer area, along with flattish prices and a minor FX impact, led to strong results in Q1. In Q1, we recorded a tax income. Effective tax expense was low, as always given that most profits are generated in countries with low tax rates. In addition, we recorded a deferred tax income. We apply, in principle, a careful approach to the measurement of DTAs. However, given the improved outlook, we now believe that the value of certain future tax benefits such as NOLs has improved, resulting in an increase in DTAs that were booked in Q1. Net profit was EUR 58,400,000.0 in Q1 compared to EUR 40,900,000.0 in Q4. EPS came in at EUR 1.67 versus EUR 1.17 in Q4. The dividend of EUR 2 per share was accepted by the Annual General Meeting last week and we paid dividends of EUR 60,000,000. Working capital went up in Q1 to EUR $235,000,000. Trade receivables and inventories increased simply due to higher sales. Trade liabilities went down due to lower capital. Trade liabilities also include EUR 2,000,000 advisory fees for the tender offer table after closing. Looking at our balance sheet, equity was nearly EUR 1,100,000,000.0 with an equity ratio of almost 54% at the March. The increase is based on the profit and also on lower pension obligations. It appears that long term interest rates saw that rough and improving interest rates resulted in a reduced benefit obligation. The pension provision in Germany was discounted at 1.11 as of March compared to 0.69% as of December. In The U. S, the interest rate was also up. Net financial assets went up by EUR 39,000,000 to EUR $538,000,000. As of March 2021, pension provision decreased by EUR 180,000,000 versus December due to higher interest rates in Germany and The U. S. And stood at EUR $449,000,000. If we used 3% interest rate to calculate DBO, it would be EUR $850,000,000 minus the assets leading to a pension provision of only EUR 120,000,000, more than EUR 3,000,000 less. CapEx in Q1 was EUR 37,000,000. In 2021, CapEx of around EUR $250,000,000 are planned. We will invest mainly in capability projects, epi reactors and the expansion of Crystal Pulling Hall to replace older equipment. Our operating cash flow in Q1 increased to EUR 77,000,000 following EUR 31,000,000 in Q4. The net cash flow in Q1 was positive at EUR 28,000,000. While we refunded customer prepayments during 2020, we recently received small amounts for new LTA signed. And with that, I would like to hand over to Chris. Well, thank you, Rainer. We are highly optimistic about the mid- and long term growth of our industry backed by megatrends like digitalization, modern mobility or connectivity. Of course, there are short periods of moderate corrections, for example, due to inventory and macro effects, but long term CAGR will remain high. This year, we are also optimistic about the short term business development and believe that there are more opportunities ahead of us than headwind. Of course, the pandemic with its mutants is still a risk, even though we might really see a life at the end of the tunnel in summer. And of course, the ongoing U. S. China tensions are not favorable for nobody. But end markets are developing nicely. Smartphones are recovering and the higher share of ID smartphones proves again that every new phone generation comes with more content. PCs are booming and especially high end computing and consoles are practically sold out for the rest of the year. We see some uncertainty on the memory demand of service. Could well be that customers have to digest some more inventories first. And also Intel CPU release might have an impact on the demand. Industrial shows a mixed picture as always. And in the outer space, players are bullish despite the ship shortage talk. This could lead to some inventory buildup in the value chain. The trend to more automated driver assistance systems and electric cars is still intact. Looking on silicon area development. On the device level, we also see a positive impact. NAND and power devices should develop nicely and contribute to wafer area development, while DRAM and logic won't contribute that strongly due to the density effect. After a strong Q1, we raised our forecast two weeks ago in our talk release. We estimate that our Silicon area will grow by at least 15% and that ASP will stay flattish. The strong euro will, however, slow down our growth path this year. Therefore, we expect sales to increase by at least 10% above the year 2020. Our EBITDA margin should be between 3032%. Also, our net cash flow and earnings per share should significantly increase. The forecast for EBIT, depreciation, tax rate and CapEx remains unchanged. With this, we close our 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. Our first question is from Francois Bouvignier, UBS. The line is now open for you. Hi, good morning. Thank you very much for taking the questions. I have a couple. The first one is on your long term agreements. So when we look at your peers like Shinetsu lately mentioned that they were signing new LTS with significantly higher price than previously. So I know I mean, what you said end of last year that you would have some contract to renew. I think it was end of the year and beginning of this year. So I just wanted to have your perspective on how long term agreements are trending at the moment and the price. The second question is at the beginning of the year, end of the year, last year, you mentioned about the oversupply of around like 10% in 300 millimeters, if I remember correctly, something around that. And now you see more than 15% into area sold. So I just wanted to check with you how you see the supply and demand outlook in the next six to twelve months given your updated guidance? And the third question is on silicon carbide. I mean, it's a bit different, but you mentioned your power, silicon area share and power is a big part of it among others. But it seems that silicon carbide is not slowing down in terms of interest and share in the next few years. And you had a review recently. You didn't decide to make any significant investment, but I wanted to check with you if anything is changing given the trend that the market is going towards to? Thank you very much. Well, Francois, thank you for your questions. I will reverse the order by answering. I will start with number three. So we will not rethink our strategy regarding silicon carbide. Yes, you're right. It's impressing growth figures, but still from a very, very low level. And it's like other products like, for example, SOI, it's a niche and it will stay in it. And then you need to keep in mind that global wafers has activities in the field of silicon carbide. And we still believe that we will close the deal in the second half of the year. So consequently, it does not make sense if one of the two combining partners already has activities that the other one start fall over. The situation, the second question, I'm not quite sure whether I got it right. You refer to 10% underutilization, which was mentioned by me, which I clearly do not remember. We said in the later part of last year that utilization is north of 90%. In some cases, we said 95% was different whether we talk about three eighty or other product categories. One thing is for sure, the basis is simply different. You know that we invested we continue to invest in brownfield 300 millimeter. And our total available capacity in the average of the year 2021 in Singapore on 300 millimeter porridge is simply significantly larger than it was prior year. Therefore, this is one of the reasons why we can justify an outlook with at least 15% area growth. You also mentioned 200 millimeter. And I mentioned in my speech that 200 millimeter loading is very high. In some categories, even it's basically close to our location like 300 is two. And as far as I remember, the calls given by some of our Asian competitors, They see a similar situation that loading is very high to full in 200 millimeter. And as far as I remember, some of our competitors also mentioned that they won't spend money to increase capacity in 200 millimeter. I expect 200 millimeter to stay tight for the current year and most likely also for the years to come. Your first question was related to LGAs. Yes, I know that some of our Asian competitors were talking about significant price increase, which are necessary. In the past, we in Sultonic, we did put more focus on implementing cost increases and talking about it. What was mentioned by the Asian competitors, we didn't see anything of that in the market up to now. So and for the rest, you need to refer to mainly the Japanese competitors. Yes, it's true. We have to differentiate when we talk about LTAs about two issues. One issue is running LTAs, which will expire during this year or beginning next year, and we are looking for a renewal. There are a few ones. We work on that. We have good discussions with customers. In one case, we even closed the discussions. We have a new LTA with higher prices for the years to come. And then secondly, we talk about the so called new LTAs, which are related to additional capacities, which might come on stream available to the market, most of them most likely linked to a greenfield, which is not yet decided. And there we are in an open discussion with customers. I think in the meantime, it's fair to say that customers somehow accepted that these contracts will come at higher prices. And the same story like always. It's about pricing. It's about quantity. It's about obligation. And it's about a new investment. And for a new investment, we are not looking for a two year LTA. It must be significantly longer than two years. So I think this should answer your three questions. Thank you very much. Appreciate it. Our next question is by Konstantin Hesse, Jefferies. The line is now open for you. Mr. Hesse, the line is now open for you. Sorry, I was on mute. Can you hear me now? Morning. Yes. Sorry. Good morning. A couple of questions. Good morning, Morning, sorry. A couple of questions on my side. So on 200 millimeter with full loading there over the next few years, has there been any movement at all in spot prices there? Because that surprised me a little bit that pricing wouldn't move at all with 200 millimeter full loading. So just some question there. And then second question, just in terms of timing. What I'm trying to figure out is, have you are you having are you already having discussions about greenfield? I guess you answered that question when you were answering the LTA question. But the last time you gave us some numbers regarding the demand and the total shelf capacity, which I remind which I remember being 6.8 for demand and 7.2 I think for shell capacity. And with the current volume outlook, it seems like that is going to be hit literally. I mean, it's going to be at the biggest in mid towards the end of this year. So I'm just wondering in terms of timing here, how will this work or has this potentially shifted the shell capacity? Two questions. Good. Well, thank you. So now let's first answer spot 200 millimeter. So first of all, I want to remind you that in our industry, unfortunately, there is no common definition for spot. When we talk about spot, it's without any contractual obligations. When the Japanese talk about spot, they include also quarterly contracts. And yes, 200 millimeter is short. Everything which is renegotiated will get price increases. This is true for quarterly contracts. This is true for six months contracts. And if there might come an opportunity around the corner to sign an LTA for 200 millimeter, it will also be at higher prices. Now let's come to Greenfield. So what did we say in the past? We said that in Q4, towards the end of last year, total shipment was 6,900,000 wafers, same as in Q1. This year, I do not remember. Maybe I didn't even know up to now the figure from April, but my best guess is it's comparable around 7,000,000. And our best guess, excluding Mainland China, is a shell capacity of 7.2. And I also said that we assume that this shell capacity will be fully equipped latest by the end of the year. So available capacity was the end of the year 7.2%. This is something like 4% more than the shipments of the first quarter and does not reflect really demand growth. Of course, there is a difference between loading in AP and in polished. AP is on allocation. Polished, there is a little room to move, but not a lot. So if you further assume that also next year the market will grow, I can tell you from the five layers and 300 millimeter, we do not know of any additional capacity which will come on stream. So if we define the year 2021 as a shortest year for 300 millimeter, then 2022 will be shorter. And this is nothing new. This is something we are saying since 2018 when there was a slowdown in the second half of the year of demand due to inventory correction. And we told customers even then, the next shortage will come maybe a little bit later than we thought early twenty eighteen, and the next shortage will be more painful for customers. So up to now, we were not successful in really signing deals with customers reflecting the need to invest in Greenfield. We continue to work on that, but there is nothing new to announce. And if you talk about timing, I can give you the answer. From today's perspective, the greenfield fab will come too late. And this is not a cyclonic statement. This is a statement for the wafer market. That's great. Thanks. And just on top of that, I mean, back in 2017, what was the industry already in full shortage or but that was brownfield, right? So that was a bit different. I mean, fair enough. Okay. Thank you very much, Chris. Yes. You're perfectly right. We got into shortage in late Q3, Q4 '20 '16. That was the moment when we announced price increases. But there, a quick reaction, relatively quick reaction at the beginning of the shortage around twelve months is to bring additional equipment in brownfield. And as then during that phase in 2017, everybody did brownfield. In the later phase of that shortage took a little bit longer than it was around fifteen to eighteen months to bring a national capacity on spring. Now we talk about Greenfield. And Greenfield, if we decide today, if we decide to do and we start construction, then probably first wait us out in 2024, not before. So for Siltronic, there is no we don't have any possibility to increase overall output beyond what we already decided for the year 2021, '20 '20 '2 and 2023. And we have good reasons to believe that most of the competitors are in a similar situation. That's great. Thank you very much. We have the next question by Gustav Vohberg, Berenberg. The line is now open for you. Hi, everyone. Thank you for taking my questions as well. My questions are relatively similar to what others have asked on the call as well, but I'll try and ask it in another way. Given what you just said, Chris, about timing of capacity, etcetera, and CapEx and so on, how are you looking to secure further growth beyond 2021 when it seems like you will be hitting full capacity? Do you have any other sort of outputs or ways of adding incremental growth to the business? Or does this now effectively mean that you cannot grow any further given the timing it takes to ramp up capacity, etcetera? Well, I think it's difficult to you should never say no. There's one thing we know. In the cells that we have in Singapore and in Germany for 300 millimeter, there is no open space in the clean room to add equipment, full stop. Of course, we can never exclude that our technology guys or technology ladies also have brilliant ideas, which might contribute to a higher output. That's something you can never exclude. But CapEx wise, there is nothing we can do about it. And I think your question goes into the direction, but then Sultronic will lose market share. My answer to that is only under the assumption that the others can create more output. I do believe the scenario for the later part of this year in 2022 is different. There will be more demand than capacity, which basically means the sum of demand will not be delivered by the wafer producers. Yes. Thanks. And then just a question on your actual CapEx that you've guided for this year, the two fifty million dollars You talk about some replacement demand for machinery. Could you give us an idea of how much potential output that could increase for you? Or is it more a replacement in terms of gaining efficiency and that it will be better for your margin? Well, I think out of the EUR $250,000,000, basically no euro will contribute to additional output. The additional output euros were spent in prior periods. And today, we get the higher output. So there is a big portion of, let's call it, maintenance of business. Then we have capability enhancement, which is leading edge mainly for 300 millimeter AP. And also there, we have the same challenges as obviously also competitors have because they are singing the same song. It's not only about additional equipment for production, it's also additional production equipment for measurement. And on top of that, the leading edge AP is becoming so demanding that out of the same number of equipments, you simply get less wafers. So a certain portion of investment is only to maintain the output of epi. And then we continue to add epi reactors, but this is not additional volume sold. This is additional epi volume sold. And as we need substrates for that, the Polish number will be influenced negatively. And that's also true for competitors who are adding APE reactors. And then last but not least, Rainer mentioned the crystal growing haul in Singapore. This is a story which started sometimes twenty years ago because at the very beginning of 300 millimeter, rightly so, Setonix decided not to invest in the first step into dedicated 300 millimeter crystal pullers. We converted 200 millimeter pullers very successfully, and we used them for many, many years. But with the development of design rules, specifications becoming more demanding, some of this additional specification demand did translate into different crystal requests, which could not be fulfilled with older modified equipment. So our 300 millimeter activity in Singapore already has only dedicated 300 millimeter cooler equipment. And we continue to add a dedicated 300 millimeter puller in Germany because the specifications, the number of specific variations where we can use all the equipment is becoming lower, lower and lower. And one day, most likely, it will even disappear. So this is also a lot of money that we spend, but it's not additional output. All right, excellent. Very clear. Thank you so much. Our next question is by Florian Preich from Maerskbank. The line is now open for you. Hi, gentlemen. Thanks for taking my question. I have two for unexpected around LTA in first place. So the question is that you talk about this kind of renewing LTAs and new LTA for greenfield. So my impression was that obviously prices in the new LTA discussions are not yet high enough to trigger a greenfield. For me, the question would be, when is the timing you can go for an opportunistic investment, I. E. Without strong commitment, I. E. You also certainly have a responsibility for the industry to act at some point in time? And the second question is around, yes, basically, if you are still in the driver's seat here, you said when it comes to silicon carbide, you have the second partner inside of the company, which is basically making the decisions, I would say, they are simply one layer higher in the hierarchy. So clearly, why are you still talking about greenfield with clients? Why is that not something which needs to be done only by global wafers and Taiwan will basically decide who will invest? Thank you. Well, when I resume your first question, you basically speak about the responsibility that Sutanik has for the market, and I tend to not disagree with you. But I want to remind you that our customers have a responsibility also for the market. And if they don't participate in creating conditions which are favorable for greenfield investment, it's easy to say it's our responsibility. I think it's a shared responsibility. And I'm pretty convinced, no, I even know that customers share that view that it's a combined obligation to the market. It's not only the supplier, it's also the customer. So that's to your question number one. To your question number two, I fear that I didn't get it. Could you please repeat it? I heard something like global wafers. I heard silicon carbide, but I missed the context. No problem. So you said at the beginning of the Q and A, the question around silicon carbide, you said that you are basically two companies and one are e, citronic plus global wafer. So you will basically come up with a kind of combined silicon carbide strategy. So the question for me is, if that is also you can transfer this question to a greenfield investment, so why are you basically still in discussion with the client? If you assume the deal will be closed in H2 two thousand and thirty one, is that the point where you can say the responsibility is only in Taiwan? So to get a better impression, how are you working with the pipeline? I'm sorry, these are completely different issues. One is was the question whether we enter a market where we're not present today. We always said in the past that we twice looked into it and we came to the conclusion not to participate. And we don't see a reason to look into it again. And in the call earlier this morning, I added, and by the way, we still believe that in the second half, the closing will be done and then the combined company has silicon With regard to greenfield, it's a completely different animal. Here, the closing is not signed. We are competitors. There is no possibility to have in this phase common acting. Okay. Yes, I would agree. So for now, but whatever going forward, like one, two quarters from now, then you can act in concert. Then the question is who will make the decision? Then you ask the question in two or three quarters. Okay. What is your view on it? Will you go for a standalone greenfield and Global Wafers will go for a standalone greenfield? I cannot talk for Global Refers. I speak today I speak for Seltronic, which I consider today to be a competitor to Global Refers and also to the other players in the market. Okay, perfect. Thank you. You're welcome. The next question is by Jurgen Wagner of Stifel. The line is now open for you. Oh, he already left. The next question is by Holger Schmidt. The line is now open for you. Mr. Schmidt? Yes, I was muted. I have one question and it's with regard to greenfield investment. Could you just remind us with around the necessary total amount of CapEx for such a greenfield investment? And I think you already mentioned it, how long it would take. So it will take until the beginning of twenty twenty four. But what is what would be interesting is to see the total amount of necessary CapEx for this. Well, we always talked about a figure which is around EUR 2,000,000,000. Of course, it depends EUR 2,000,000,000. Of course, it depends what the share split between EP and polished will be. And it depends on which technology you will install over there. So I think it will be for sure seven. It will must be five. And we need to reserve space for three and two nanometer. And then we have to keep in mind, when you listen to competitors, everybody is at least thinking about greenfield. So I do believe that we will see price increases on equipment. We already see in many places in the world that construction is becoming much more expensive. The steel for construction went in parts of Europe up between 5070%. So I think the figure of around $2,000,000,000 is probably too conservative. Yes, and the day we make a decision, then we have a more precise figure and then we will talk to you about it. Okay? Okay. Understood, Jens. Thanks. We have no further questions. So I hand back to Petra Muller. Thank you, operator. Ladies and gentlemen, this concludes our Q and A session for today. Thank you for joining us, and we will hope we hope that you will join us again on our Q2 release in July. Goodbye. Stay healthy.