Transcripts
Siltronic AG (SSLLF) Q1 2023 Earnings Call Transcript
Operator
Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] And the first question comes from Robert Sanders from Deutsche Bank. Please go ahead.
Robert Sanders
Yeah, good morning. And Rainer, best of luck with your new role, which I’m sure will be a huge challenge. But we’re looking forward to seeing where you can do that. So my first question would be on utilization. So it looks like your utilization, your loading is about 60% at 150 and about 80% at 200 and 100. So, you know what I’m interested in is, how you think the pricing situation is going to play out? Are you seeing customers wanting to drive concessions on pricing, particularly those with short-term contracts? And I have a follow-up. Thanks.
Rainer Irle
Yeah. Thank you, Rob for the wishes. I’ll try to do my best. Under utilization, I mean, if waivers stock are down 10% and then, utilization is down 10%. So, utilization is down. Luckily actually we do not see pricing pressure. And that’s a kind of a bit different from the prior slowdown in 2019, where we saw pricing pressure. But so far, it is more about customers just pushing out and I guess, all customers we talked to know that that wafers were probably still remain to be very tight next year, so they try to be friendly to us, they ask for push outs, but they have not been talking about prices so far.
Robert Sanders
Got it. Okay. And then on the CapEx. It looks like it’s a little bit lower than your previous statements. So, is the situation you’re going to ramp up full speed to Phase 1 and then perhaps revisit depending on demand as we move through this year, the speed of Phase 2? Or is there anything I should read into to what you’re saying about CapEx? Can you just remind us on first wafer out and what capacity Phase 1 will give you? Thanks.
Rainer Irle
Yeah, Rob. I was trying not to change the language that we have been using. So absolutely no change, we go full speed. We just had the first wave actually last week, but it will be a longer process to qualify everything and then kind of I mean, we still expect the first wafer to ship basically on January 1st or on January 2nd.
And so, no change there. We never disclose the exact output, the capacity of Phase 1, so we want to continue not to disclose that. But there’s no change in strategy. And then, maybe later this year, there needs to be a decision on the ramp speed for Phase 2. But I think this is something to be done in fall of this year.
Robert Sanders
Just one quick follow-up on that. On depreciation, how do you think depreciation and amortization will start kicking in from that FabNext year and the year after? Because I think depreciation is roughly EUR 200 and something million this year? How will it trend in the next two years? Does that mean, I understand doesn’t affect your EBITDA, but does it affect your gross margin as and what sort of step up in depreciation should we see? And that’s it for me. Thanks.
Rainer Irle
Yeah. Okay, Rob. So, depreciation will basically double next year, I mean, if you look at our balance sheet we’re of half of the long-term assets or assets in construction, so that will all hit next year to come operational, and then depreciation will stop. I think the new factory will have the positive impact on EBITDA margin from day one, because even at a slow production output, will be already very effective.
Though, obviously, it will put a burden on EBIT with the higher depreciation, and that will take a little to come back, because depreciation really comes from day one for all of the factory, for all of the cleanroom and for all of the equipment that is already there. And then, kind of with the loading increasing over the first years with the ramp, then more and more EBITDA will be generated. And then EBIT will kind of come back to all levels and in the end, probably at higher levels than we see today.
Robert Sanders
Thanks a lot.
Operator
And the next question comes from Adam Angelov from Bank of America. Please go ahead.
Adam Angelov
Yeah, hi. Thanks. And just echoing the well wishes and all the best for the next role runner. So firstly, just wanted to get, you know, I know visibility is low today, but your initial views and maybe you’re having any of these conversations with customers on 2024, given and I guess, a limited or no expectation for the market to recover in H2 2023. And we have all this new capacity coming online in 2024. Just what you’re hearing from customers there?
And then secondly, just on the pricing developments, I was curious just maybe if you could go into in a bit more detail on your answer to the last question. I would have thought maybe spot was slightly weaker than where we were a few months ago. And LTA pricing maybe a bit more resilient and if you could just go into that in more detail? That’d be great. Thanks.
Rainer Irle
Yeah, sure. That’s the aim, Adam. Thank you. So kind of, I mean, if you’ve read through customers’ presentations and also from our conversation with customers, everybody is expecting a significant uptick in ‘24. I mean, if you look through the earnings calls, I mean, for example, large logic manufacturer, they see already the truck now, though, typically, we see it six months later, because you know, the inventory need to be digested. But there’s clearly a lot of positive signals into next year.
And again, I mean, if this year is down 10% for inventory adjustments, you would expect next year to pick up just from that by 10%. New capacity, as you said, I think the amount of capacity coming online from customers next year might even be a bit higher than capacity coming online from beta manufacturers. We believe we are somewhat ahead of competition when it comes to this tension.
As you remember, we are the first ones to site on Greenfield. And the project is actually executed very, very well. So, we will be able to shift from the new line really already on January 1st. And we think we already have and we do not expect that there’s, you know, more capacity EBIT on our site that our customer site it’s rather the other way around.
Now, we said that pricing for this year would be up a little. And we stick to that comment, particularly from new LTAs coming online. But there is no weakness in quarterly contracts. It is really less, I mean, the volume is down, but we have not had customers asking for price reductions, we’re kind of you know, I give you more volumes, if you lower the price. We really don’t see that, because the customers are expecting this to be a very temporary weakness and the market to come back next year, and then, they need a significant amount of wafers.
Adam Angelov
Okay, got it. That makes sense. And just a quick follow-up. Is the plan roughly still to around FabNext over four years?
Rainer Irle
Yeah, Adam, this is nothing that we need to decide today. So we have kind of Phase 1, we will continue to go as planned. And then, what we do kind of in ‘26, ‘27, ‘28 is something that can be decided later. We can continue as planned, meaning, that we will ramp to ‘28 that kind of depending on the market assessment in the second half of the year, we could also slow them down by a year or two.
Adam Angelov
Got it, very helpful. Thanks.
Operator
The next question comes from Gustav Froberg from Berenberg. Please go ahead.
Gustav Froberg
Hi, everyone. Thank you for taking mine as well. Also to just reiterate from previous comments, Rainer, best of luck in your new role. And so on to questions. I just really have one. And I think you’ve alluded a little bit to it earlier, and it’s on cycle dynamics, I’m just trying to compare the current cycle as you see it with the one we saw in 2019, when we basically saw EBITDA decline year-on-year in ‘19, we saw further decline in 2020.
And given what you see today and what you know, today, how do you think the timings of the cycle will work this time around? Do you think that the inventory digestion is greater than or less than what you’ve seen previously? Yeah, just basically any color around cycle dynamics compared with the past would be very helpful. Thank you.
Rainer Irle
Yeah, sure, Gustav. And thank you for the kind words. It’s kind of feels a little like 2019. Those kind of there, I mean, the market is down even a little further. The big difference is really that we do not see pricing pressure. And so, kind of, but the starting point is the same right, 2018, end of 2018 was particularly strong, customers were still taking spot volumes. And that’s kind of the same that we saw end of last year.
So I mean, customers took spot orders or spot volume and they also said they would take more spot only in Q1 this year, and then suddenly kind of inventory went up and inventory always comes late and kind of you know, we realize very light that there is the issue. And then customers reduce wafer stock.
And then kind of we are behind their, I mean, our cycle is like six months behind the semi cycle, because kind of that takes a long time. So we are told to reduce wafer stocks actually result in lower wafer sold. And so also the uptick takes six months later on our site.
But really, I mean, it feels like the last cycle. But the big difference is that there is no pricing pressure. And I truly believe that the reason is that, I mean, first of all, we have a lot of great LTAs, but also on the shorter-term, we do not see pricing pressure and customers really expect that wafer supply might actually be pretty tight next year.
Gustav Froberg
That’s great. Thank you. Just a follow-up on the LTAs. Could you remind us of the percentage share covered by LTAs currently?
Rainer Irle
Two-thirds, roughly. No change.
Gustav Froberg
Okay, great. So, same as before.
Operator
So the next question comes from Jurgen Wagner from Stifel. Please go ahead.
Jurgen Wagner
Yeah, good morning. Thank you for taking my question. I have yeah on solar wafers, given the current initiative of our green government to subsidize electricity by significantly. At what point would you consider the production of solar wafers being an economic alternative? I know that you previously said an option, but now, things seem to change in terms of the production costs? Thank you, and all the best.
Rainer Irle
Yeah, Jurgen, thank you. I think we will see each other soon. So yeah, I mean, solar wafer, I think the last solar wafer we sold in 2008, and this is really another business for us. I mean, that this is kind of a, I mean, I saw solar wafer manufacturing in China, I saw these huge holes where they have thousands of products to produce a very, very cheap product in you know the manufacturing costs of a solar wafer of maybe 10% over electronic grade wafer or maybe even less, this is really nothing we are interested in. And, I mean, personally, obviously, follow that that discussion with a lot of interest, but that is definitely nothing we would ever engage in.
Jurgen Wagner
Okay, thank you.
Operator
[Operator Instructions] And we have a follow-up question from Robert Sanders from Deutsche Bank. Please go ahead.
Robert Sanders
Yeah, I’m just picking up on the pricing commentary you made. I mean, if pricing is stable, and the industry is worried about tightness next year, why don’t either customers continue to build up inventory or you run your factories flat out in order to take market share next year, because you’ll have the volume and no one else will? I mean, that’s a bit I don’t quite follow.
Rainer Irle
Yeah, Rob, I think customers already built inventory, and they know real life that their warehouses are full and they have to reduce. You know, and then also on our side, I mean, you’re always, I mean, you’re thinking about, yeah, that’s pre-produced. I mean, kind of the capacity that we don’t use today, it’s been gone. But, I mean, history clearly tells that good leadership means to cut immediately. And don’t transfer the problem, right. I mean, it’s kind of, if you let it go in Q1, and then you might have a problem in the second half of the year.
So, it’s clearly good leadership is having flexibility in the company, being able to cut quick, but also to restart quickly. So, we are ready to ramp up production quickly as soon as the demand comes back. But you know, as it’s always difficult to predict the exact timing, we actually reduced our manufacturing output in line with market demand. And I’m 100% certain that it’s the right thing to do, because otherwise, you would just push out the problem.
Robert Sanders
Got it. And the only other thing I wanted to just ask was around prepayments. So Simco makes a big deal that none of their expansion is contingent on prepayments. What they argue is that companies like you and GlobalWafers are kind of obligated to ramp at full speed, because of prepayments. So, can you just sort of contrast and compare what you’re doing with prepayments with a company that is just building to demand as they see it? Is there an obligation for you to kind of buildup regardless of the demand picture?
Rainer Irle
I mean, I’m surprised to hear that comment. I’m not sure if that makes a lot of sense. I mean, our LTAs sell wafers, not a specific factory, right. So, I mean, if we would realize that the overall demand is growing less than we had expected, and we have sufficient existing capacity, we would not be obliged to expand the factory.
That’s why I said before, kind of you know, if we later realize this year, that the demand picture for the next five years probably lower than we thought before we could very well slow down the expansion, though, I mean, Rob I actually do not see that. So, I would, as of today, I think that we would continue to ramp, but you know, the LTAs just obliges to sell wafers, but it does not tell from which factory necessarily.
Robert Sanders
Got it, thank you.
Operator
And the next question comes from Martin Jungfleisch from BNP Paribas Exane [sic – Exane BNP Paribas]. Please go ahead.
Martin Jungfleisch
Yeah. Hi, good morning. Just a quick question on the margin guidance. I mean, do you expect sales basically flat “on Q2”, but margins down at the midpoint? And if it’s not the pricing, what is the primary driver for this? Is it ForEx and personnel cost? And then maybe, generally on costs. I mean, obviously the market is not something you can control. But what are you doing in order to keep profits at a certain level? Is there any levers that you have set stronger influence on? Thank you.
Rainer Irle
Sure, Martin. Yeah so the margin in Q2 is down very little. And the biggest driver for that is exchange rate, you’re right. And I mean, then there’s a small minor things, for example, kind of, you know, to be a first in, first out, in January, we still use a lot of materials that we actually bought last year. And you know, in Q2 then you only consume material that you bought this year. But that is small effect, but that is reason for the guidance.
Now, profitability is sluggish, and we do a lot of things like I said, we don’t pre-produce, we rather try to reduce the workflow for us temporarily to also see the reduction in labor cost, and what’s probably most important during this time is keeping the productivity up. So you know, reducing temporary people or reducing our accounts and so on.
And then also and there, you know, we saw a significant inflation in our material costs, last year, also in electricity, we’re trying to take the right decisions now to make sure that electricity costs come down next year, we see some reduction already in spot prices now. And you know, we try everything we can you know, to change the course of the supply costs. So rather to see I mean the first step no further increases, but then maybe going into next year, some first reductions.
Martin Jungfleisch
Okay, great. Thank you, and all the best, of course, for the future.
Rainer Irle
Yeah. Thank you, Martin.
Operator
And we have one more follow-up question from Adam Angelov from Bank of America. Please go ahead.
Adam Angelov
Yeah, thanks. Just a quick one. I was wondering if you could go a little bit deeper into logic foundry versus memory, both on the inventory side? And then I guess, as a result on the demand side as well? Would be great. Thanks.
Rainer Irle
Yeah, I can I mean, we cannot make any specific comments on the individual customers. But obviously, there if you look at the logic companies, they, in their own communication seem to be through the worst, and they see improvement starting in the second quarter already. Foundry obviously is kind of, you know, always sees a bit more of a reduction. But if I read the transcripts of some of the foundry customers, correctly, they also seem to be a bit more positive about the second half of the year.
And then, in memory, I guess, we would all say that they were slow to accept that they have to reduce wafer stocks and that they kept producing and memory is probably the area where we see the highest inventory levels. So, that will be the area where it takes up most time to actually get back into growth.
Adam Angelov
Makes sense. Thanks.
Operator
[Operator Instructions] So, it seems there are no further questions at this time. And I hand back to Verena Stutze for closing comments.
Verena Stutze
Thank you. This concludes our Q&A session. Thank you for joining us today. We hope you will join us again in our H1 ‘23 release on July 27. Have a good day. Goodbye.