Siltronic AG (WAFGn.DE), a leading semiconductor wafer manufacturer, reported a challenging Q1 2024 with weakened demand and high inventory levels affecting sales. Despite the current downturn, the company expects a dynamic upward trend in wafer demand beyond 2024 and remains committed to its ambitious growth targets for 2028. Siltronic's Q1 sales dipped slightly from the previous quarter, but EBITDA margin saw an increase to 26.4%.
The company has revised its 2024 guidance, anticipating sales to fall around 10% below the previous year and EBITDA margin to range between 21% and 25%. Capital expenditures are projected to be slightly below EUR 550 million, mainly due to the development of its next-generation fabrication plant, FabNext, in Singapore.
Key Takeaways
- Weak Q1 demand for Siltronic's wafers due to high customer inventory levels.
- Q1 EBITDA margin increased to 26.4%, despite sales being slightly lower than the previous quarter.
- Siltronic adjusts 2024 guidance: sales expected to be ~10% lower than 2023, EBITDA margin between 21% and 25%.
- CapEx for 2024 is projected slightly below EUR 550 million, primarily for the ramp of FabNext.
- The company plans to discontinue small-diameter wafer production by 2025.
- Long-term goals include substantial sales growth and EBITDA margin in the high 30s by 2028.
- No major revenue impact from smaller diameter size phase-out in 2024, but mid-single digit decrease expected in 2025.
- Company remains confident in its 2028 targets and does not plan a capital increase in 2024.
Company Outlook
- Company revises 2024 guidance: Sales expected to dip ~10%, EBITDA margin 21%-25%, CapEx below EUR 550M.
- Siltronic aims for sales over EUR 2.2 billion and high 30s EBITDA margin by 2028.
- The company anticipates dynamic growth in wafer demand after 2024.
- Plans to phase out production of small-diameter wafers by 2025 to focus on high-value and leading-edge products.
Bearish Highlights
- Challenging demand conditions expected to persist through 2024.
- Sales for 2024 projected to drop approximately 10% compared to 2023.
- Uncertainty in long-term pricing after inventory correction and new wafer fabs ramp-up.
Bullish Highlights
- Increased EBITDA margin in Q1 2024 to 26.4%.
- Long-term outlook remains positive with substantial growth and margin improvement by 2028.
- Balanced market segment exposure with a slight overexposure in memory.
Misses
- Slight revenue impact from phasing out smaller diameter wafers expected in 2024, increasing to mid-single digits in 2025.
- The impact of currency fluctuations, particularly the weakening yen, is not expected to be significant.
Q&A Highlights
- No structural change in market share indicated.
- Pricing discussions in long-term agreements ongoing.
- The company is comfortable with its equity share and is exploring refinancing options.
- Specific dates for cost parity or margin contributions from FabNext cannot be provided due to market conditions.
Siltronic's next investor relations event is the Annual General Meeting (AGM) scheduled for May 13th, with Q2 figures to be released on July 25th. The company's focus on growth drivers, especially the development of FabNext, is a pivotal part of their strategy to achieve long-term targets despite current market adversities.
InvestingPro Insights
As Siltronic AG navigates a challenging semiconductor environment, its financial health and future outlook become critical for investors to monitor. According to real-time data from InvestingPro, Siltronic's market capitalization stands at $2.46 billion, reflecting its positioning in the market. The company's P/E ratio is currently 15.77, which may be considered by investors when evaluating the company's earnings relative to its share price.
InvestingPro data also reveals a dip in revenue, with the last twelve months as of Q1 2024 showing a decline of 16.38% to $1.57 billion. This contraction aligns with the company's reported weakened demand and sales reduction. Despite this, Siltronic has maintained a gross profit margin of 22.44%, a figure that, while indicative of the company's ability to control costs, aligns with one of the InvestingPro Tips highlighting the company's weak gross profit margins.
InvestingPro Tips suggest that Siltronic is quickly burning through cash and may suffer from valuation concerns due to a poor free cash flow yield. With analysts not anticipating profitability for the current year and expectations of net income dropping, these insights may be crucial for investors considering the company's prospects. It's worth noting, however, that Siltronic has been profitable over the last twelve months, which could be a sign of its underlying resilience.
For those looking to delve deeper into Siltronic's financials and projections, InvestingPro offers additional insights. By utilizing the coupon code PRONEWS24, readers can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription, which includes a total of six InvestingPro Tips for Siltronic AG, providing a more comprehensive analysis of the company's financial health and future outlook.
Full transcript - None (SSLLF) Q1 2024:
Operator: Hello, everyone and welcome to the presentation of Siltronic Q1 Results for the Financial Year 2024. Please note that this call is being recorded and streamed on the Siltronic's website. The call is also be available as an on-demand version later today. Your participation in this call implies on your consent with this. At this time, it would like to turn the conference over to Verena Stutze, Head of Investor Relations and Communications of Siltronic. Please go ahead.
Verena Stutze: Thank you, Sandra. Welcome everybody to our Q1 2024 results presentation. This call will also be webcast live on siltronic.com. A replay of the call will be available on our website shortly after the end of the call. Our CEO, Michael Heckmeier; and our CFO, Claudia Schmitt, will give you an overview of our financials, the current market development, and our guidance. After the presentation, we will be happy to take your questions. Please note that management comments during this call will include forward-looking statements that 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. All documents relating to our Q1 2024 reporting are available on our website. I now turn the call over to Michael for his remarks.
Michael Heckmeier: Thank you, Verena and a warm welcome also from my side. As usual, let me start with the key messages of today's call. The first quarter of 2024 was without any major surprises and continued to be characterized by weak demand for wafers due to the high inventory levels at our customers. As you probably saw in our ad hoc announcement last week, this negative sentiment will remain with us for most of 2024. Accordingly, I would call it a year of transition. Our industry and the future growth will be driven by megatrends such as generative AI, digitalization, and electromobility, and therefore we confirm our ambition to increase our group sales to more than EUR2.2 billion and our EBITDA margin to a figure in the high 30s by 2028. Let me give you a quick glance on our Q1 figures, which will be presented in detail by Claudia in a minute. As already indicated, the first three months did not bring major surprises. Sales were slightly below the previous quarter, but the EBITDA margin increased from 25.5% to what I consider a respectable 26.4%, thanks to positive tailwind from the non-operating FX result. We achieved this with stable market shares and prices. Although, we have passed the peak of our investments in 2023, the CapEx primarily required for the ramp of FabNext led, as expected, to a continued negative net cash flow. Claudia will now give you a deep dive into our financial performance before I report back with updates on the market development and the outlook. Claudia, please.
Claudia Schmitt: Thank you, Michael. A warm welcome also from my side. Let's jump directly into the analysis of our results. As Michael highlighted, the first quarter progressed largely as expected with no big surprises, and we have been managing the weak demand with resilience. Our sales totaled EUR344 million, a decrease of 3.7% quarter-on-quarter. The small decline is due to some shifts in product mix and a slight negative FX impact. It's important to note that product mix shifts are typical quarterly fluctuations. Both the wafer area sold and the prices remained largely stable sequentially. In the first quarter, our EBITDA was robust with EUR91 million with an EBITDA margin of 26.4%, marking a slight increase quarter-on-quarter. The small decline in sales was counterbalanced by a favorable FX result of EUR5 million in Q1, which arose partly due to hedging and partly due to valuations in the light of a strengthening U.S. dollar. Looking into the next quarters, please do not expect a similar positive hedging result. As we have already stated for this year compared to 2023, while we do forecast a positive impact from reduced energy and material costs, we expect this to be offset by a lower hedging result and increasing labor tariffs. The EBIT came in at EUR36 million and was in line with Q4. Our financial result saw a modest decline to minus EUR3 million. The tax rate for Q1 stood at 16%, an increase from the 7% rate in Q4. The lower tax rate in Q4 was mainly related to deferred taxes. Taking all these factors into account, we concluded Q1 with a net income of EUR28 million. Now, let's look at our balance sheet. Total assets summed up to roughly EUR4.6 billion by the end of March. The changes compared to Q4 are mainly driven by two factors. On the one hand, our investments increased the fixed assets by EUR153 million. Consequently, our cash and securities have decreased to less than EUR400 million by the end of March. On the other hand, you may recall that our working capital ratio at the end of 2023 was at an all-time low. We've recorded very favorable DSO and a CapEx related surge in trade payables. However, as already announced in the last call, we now saw a reversal of this. The DSO increased in general, and we've received customer payments just after the reporting date. Furthermore, the spillover from the trade payables from Q4 was significantly reduced in Q1. The equity ratio remains resilient and is at a very healthy level of 46%. Financial liabilities in Q1 increased quarter-on-quarter as we have drawn the first EUR50 million of our syndicated loan. Therefore, loans amounted to a total of roughly EUR850 million at the end of March. Customer prepayments were slightly above EUR600 million with EUR27 million received and EUR6 million refunded. In Q1, our CapEx totaled EUR173 million, which is roughly EUR200 million below Q4. Reflecting our increased focus on CapEx management, we have revised our full year CapEx guidance downward from less than EUR600 million to slightly below EUR550 million as compared to our March publication. Most of this CapEx is allocated to our new Fab. Let's dive deeper into our debt situation as illustrated in the bridge. End of '23, Siltronic was carrying net financial debt of EUR356 million. Our operating cash flow in Q1 was impacted by an increase in trade receivables, and therefore, came in at EUR62 million. As previously mentioned, our DSO were, in general, higher and we've received payments from customers just after the reporting date. Consequently, our operating cash flow was noticeably lower than the high CapEx payments we saw in Q1, also due to the CapEx liabilities overhang from the previous year. In Q1, we've recorded an investment grant of EUR32 million, which had a positive effect on our cash flow. In total, our net financial debt amounted to EUR501 million. You already know this financing picture. Therefore, only a brief update from my side. The first portion of the syn loan, EUR50 million, was drawn in Q1. As already announced, we will undertake refinancing this year and are currently evaluating our options. In this context, we currently have no plans for a capital increase. With this, I hand back to Michael.
Michael Heckmeier: Thank you, Claudia. Ladies and gentlemen, when looking at this slide, let's begin with the good news. The end markets are anticipated to grow. Our March projections for end market growth were slightly lowered from 7% to 8% to approximately 5% due to some new data points, especially for the Industrial & Automotive segment. Servers driven by AI, especially generative AI, will see the largest growth this year. From the end markets, the growth would perfectly fit to our 4% to 5% CAGR assumption. However, the still elevated inventories of our customers are being reduced slower than expected. As a result, we anticipate a higher negative inventory impact. This inventory situation overshadows the positive trend from the end markets and results in an overall negative wafer demand in the mid to high single digit percentage range. Therefore, we expect the inventories to last for several more quarters, further delaying the turnaround in our industry. Let's take a closer look at our market assessment for the three wafer segments and our most important market channels. Whilst memory inventory is decreasing slowly, we already see the first positive impacts from one of the big megatrends driving our industry. Artificial intelligence. The strongest growth we see in servers used for AI applications is driven by high-end DRAM chips used for high bandwidth memory. The inventories for HBM appear improving compared to other DRAM and NAND, which are still pretty elevated and only decreasing slowly. When it comes to logic, the inventory levels show a mixed picture at different customers. Regrettably, we observe similar trends when the inventory levels are only improving slowly. And unfortunately, power inventories further increased based on the latest data points. Please be aware that this is a combination of our own models and market data based on several data points and that segment dynamics are influenced by individual customer patterns. The overall picture can deviate significantly due to different inventory types and also our customer mix. When looking at the more positive news flow from certain chip manufacturers, these announcements appear to be more price than volume driven. And you know, for us, volume is the decisive factor. As you may have noted from our ad hoc announcement last week, we've observed further significant volume postponements from customers, particularly for the second half of 2024. Overall, the demand situation has not improved in the past few weeks. And as already mentioned, we anticipate 2024 to be a transition year. Looking beyond 2024, we expect a dynamic upward trend for overall wafer demand, in particular for 300 and 200 millimeter wafers. I'm sure you are familiar with this chart. As you know, for 300 millimeter, we anticipate a strong CAGR of 6%. For 200 millimeter, we expect a small growth and for diameters up to 150 millimeters, a continued decline. Today will be the last time we report on the small diameters market. Since a few weeks ago, we announced that we will phase out the SD wafer production during 2025. As communicated for us, SD wafers are approaching the end of their life cycle. The significant decline in volumes we saw in 2023 and early '24 triggered our decision to discontinue the production of polished and epitaxial small diameter wafers. The process is set to be completed in the course of 2025 and will not have a substantial negative effect on our results this year. Going forward, we will further increase our focus on the growth drivers power and leading edge also fueled by 300 millimeter wafers. And this is supported by FabNext in Singapore. So, we are very pleased with the development of FabNext. The transition of the project to the local team is completed and the capacity ramp is on schedule. Let's now turn to the guidance for the financial year 2024, which had to be adjusted due to the still challenging demand situation driven by high customer inventories. Due to the ongoing weakness in demand reaching into the second half of the year, we now expect 2024 sales to be roughly 10% below 2023. This is mostly volume driven, but we also see both a small FX and price effect. We expect our EBITDA margin to be in the range of 21% to 25%. Depreciation is projected to be below EUR300 million, a significant increase from the previous year's EUR203 million. However, this new guidance is considerably lower due to the later start of FabNext's depreciation in Q4. As indicated, CapEx will be significantly reduced compared to the record high of more than EUR1.3 billion in 2023. We expect it to reach an amount of slightly below EUR550 million, which is roughly EUR50 million lower than our guidance in March. This reduction is driven by our high focus on CapEx management. Due to the steep decline in CapEx, we will see a pronounced improvement in net cash flow, although it will still remain significantly negative. I would like to conclude this presentation confirming our midterm ambitions for 2028. We expect a substantial sales growth to more than EUR2.2 billion and an improvement of the EBITDA margin to the high 30s by 2028. Thank you very much for your attention. With this, we close our presentation, and Claudia and I will be happy to take your questions. Sandra, please open the Q&A.
Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Daniel Schafei from Citi. Please go ahead.
Daniel Schafei: Hi, good morning. Yes, so I have a couple of questions. The first one being, so now that given we have seen the pushouts in the second half, can we still expect that the first half in terms of sales will be still the low points, especially in 2Q or might it be even 3Q and 4Q now? And also, now that you've seen those pushouts and adjusted the guidance accordingly, is this guidance now already conservative enough, or is there potential for more pushouts to come? Thank you.
Michael Heckmeier: Thank you, Daniel. I will take these two questions. With regards to more details about quarterly phasing, we would refrain now to give a great amount of more of this. As you know, we gave a full year guidance, our Q1 results, and then you can do some math. And we don't expect any significant pickup during the year. So, I think that's maybe enough for your further quarterly modeling. With regards to your second question, do we expect more pushouts? Currently, we built all what we know into the guidance. We have some downside potential and margin there in the guidance. But I also have to say the environment is a very dynamic one. But we know -- what we know is included and we don't have a clear view on what to come. But what we know by today is embedded in this guidance.
Daniel Schafei: Okay. Thank you. I understand. And just maybe a follow-up, a quick one on pricing. What price reductions do you guys see for 200 millimeters and 300 millimeters, respectively currently in the spot and LTA markets?
Michael Heckmeier: Yeah. We said clearly for the time being pricing is stable. That was the Q1 numbers. Going forward, we will see and we do see some price effects. And as we indicated earlier, it's a kind of mixed bag. Let me start with the lowest one, the small diameters experiencing significant price pressure, which at the end was one of the reasons for us to discontinue that business. In the second corner, 200 millimeters, we would say it's a mixed bag. So, some more high-tech areas are pretty stable and unchanged. And some others are also experienced pricing pressure. 300 millimeter is mainly covered by LTAs. Of course, no change in that statement. And we see a good adherence to LTA contracts. But also on the spot side there, we do see increasing price discussions. Overall, it's not significant, but that's maybe the overall situation we can explain.
Daniel Schafei: Perfect. Thank you.
Operator: The next question comes from Harry Blaiklock from UBS. Please go ahead.
Harry Blaiklock: Good morning. Thanks for taking my question. I've got a follow up to that pricing question. I just wondered what gives you confidence that pricing will stay at that slightly negative effects that you're guiding for and you won't see any further pressure beyond that?
Michael Heckmeier: Yeah. So, I think the good news is the LTA coverage and it's holding. But we early on already said the longer this, let's say, demand weakness is hanging on, the more we will also see pricing effects kicking in. So, for the time being, we're quite comfortable. As I said, Q1, we can confidently report a stable price situation. We see this discussion is increasing, but we also don't have any hint for total gear change in this space of discussions.
Harry Blaiklock: Got it. And then, I mean, based on your comments around LTAs, I guess, you haven't had any customers coming to you kind of asking for flexibility on pricing.
Michael Heckmeier: Sorry, I didn't get this acoustically in the LTAs. We had what?
Harry Blaiklock: Have you had any customers coming to you and asking for any flexibility kind of around pricing?
Michael Heckmeier: So, the LTAs are including some price margins, right, as we discussed. This goes to single digit ups and downs, and there are discussions in this framework currently.
Harry Blaiklock: Got it. Very useful. And then, I think in the past you said that for this year you don't have any major LTAs expiring. Is that the same going into 2025 as well?
Michael Heckmeier: So, no major LTAs expiring, and particularly, let's say, important ones covering our FabNext, as we said, run times until 2028 or 2030. So, nothing major changing there.
Harry Blaiklock: Great. Thank you, Michael.
Operator: The next question comes from Constantin Hesse from Jefferies. Please go ahead.
Constantin Hesse: Good morning. Thank you very much for taking my questions as well. The first one is, Michael, I know that you guys typically don't comment on competition, but given the dynamics, I'm very surprised about the different outlook that you guys are giving relative to Shin-Etsu. Shin-Etsu clearly stated last week that they saw the bottom in Q1 and that every quarter from now on they're seeing a recovery. So, I'm trying to understand, because typically, you, Shin-Etsu, Sumco (OTC:SUOPY), there might be some timing differences, but typically you do move in tandem. So, is there something fundamentally happening here? Are you losing market share for some reason? Or is it simply a timing situation as to maybe you were supplying more wafers compared to Shin-Etsu and as a result, they're basically catching up a bit? What's the dynamic here? Why are they saying something completely different to you in that sense? That's my first question.
Michael Heckmeier: Thank you, Constantin. I mean, we don't comment, resize on individual competitor statements. But what I can say is the following, and I repeat what I said already. Q1 data very clearly indicates no change in market share. So that means for the time being, and particularly through all those shifts happening last week. And of course, there's some phasing effects, et cetera. But we don't have any indication that our market share changes for the time being. Now, going forward, I mean, we need to check quarter-by-quarter as we do anyway. And that could well be that different wafer suppliers have different customer mix, different product mix. And then it depends, of course, for example, in the memory space, some of the customers did pull the brake earlier, others later. And then, some wafer suppliers have different exposure to different customers and depend on individual pickup times of the business. This could lead to such a mix effect. We don't have any indication for a structural or fundamental change happening at all. So, what we see is a stable situation and then some phasing and potential mix effects here and there. But that's what I can comment on. And when we read the very details of different announcements, it's not so different when you study them word by word than what we are saying.
Constantin Hesse: Yeah. I was just a bit surprised that they're seeing an improvement following Q1 and you are. So, just some food for thought. Then, on the price, I understand that the change of the guidance, I assume that's now primarily driven by continued weakness in spot. And you just said something interesting there. My understanding was that there was no compromise on price in the LTAs, zero compromise across you, across Sumco, across Shin-Etsu. Now you're saying that the LTAs actually do have price ranges which can be negotiated in the single digits. And you're basically having these discussions now. So, concerning the LTAs, do you compromise on price here? So, are there discussions ongoing to potentially see price declines in LTAs?
Michael Heckmeier: Thank you, Constantin. What I said about LTA pricing and the margins in the contract is nothing new. We said that already last year and it's part of the contract. And those discussions are happening, let's say, on a six-month and on a yearly basis. I don't see -- just to be clear, I don't see a significant change there. There's nothing new. The more price discussions starting in the spot part of it. But the LTA pricing is happening as committed in the contracts and there is no change.
Constantin Hesse: Okay. So, no compromise on price on the LTA side.
Michael Heckmeier: So, as contracted, as I said, some contracts have margins. Those are discussions, but no change compared to contracted pricing.
Constantin Hesse: Okay. Understood. And then lastly, is on the production exit of the smaller diameter size in '25. You mentioned that there will not be a big impact in '24. Could I please understand what the impact is in '25? What is the current exposure you still have? I believe in previous conversations, I think it was something around 10% to 15% of volumes, market level anyways. And you always said that you were relatively similar to the market. So, what kind of a vote [ph] could we actually see up to a 10% volume impact next year, driven by the fact that you're exiting the SD market?
Michael Heckmeier: Yeah. Thank you, Constantin. So, the reason why we don't see any -- or foresee no major impact for this year is that customer reactions were fairly relaxed. So, we never got customers that were cutting orders immediately. On the outside, we didn't also see an indication to harvest some very early upside. Because, of course, we were hoping some customers start a kind of last order race. So both did not happen. And that's the basis for the statement that '24 will not widely be impacted. In '25, we will continuously ramp down the revenue. It's a single digit, mid-single digit in our overall sales pattern. And from a margin side, we also said it will be slightly supportive in EBITDA margin, as the SD margin, of course, was and is below average of our group margin. So, these are the two effects. Revenue is slightly down, single digit in the overall portfolio and margins slightly up.
Constantin Hesse: Okay. So, the revenue for SD is only mid-single digit. Brilliant.
Michael Heckmeier: Yeah.
Constantin Hesse: Okay. interesting. Okay. Thank you.
Operator: The next question comes from Gustav Froberg from Berenberg. Please go ahead.
Gustav Froberg: Good morning, everyone. Thank you for taking my question as well. I just have one just on balance sheet and funding. Could you run me through how you look at your balance sheet as of today, given the recent cut to guidance? Do you see any need to top up with equity, or are you happy to fund with debt? And what are some of the assumptions and thoughts that underlie the thinking around your funding and your balance sheet, please? Thank you.
Claudia Schmitt: Good morning, Gustav. I will take your question regarding balance sheet. As we mentioned, the equity share of 46% is pretty comfortable with this. And we expect it to stay roughly in that range going further. Of course, we have drawn now the first part of our Syn loan and as such, our loan amount will go up during the year until end of this year. And those are the major changes that we see in our balance sheet for this year.
Gustav Froberg: Okay. Do you have any comments on covenants or anything of the like with the debt that you have and maybe the debt that you will take on? Whether or not you see any need for equity at all in the business?
Claudia Schmitt: As we stated, we do not plan a capital increase this year. So, you see that we still feel very comfortable regarding our financial covenants.
Gustav Froberg: And final question on the same topic. Is the scope for you to take out more debt beyond what you have already talked about in terms of the syndicated loan, et cetera?
Claudia Schmitt: Yeah. We announced that we will start refinancing around this year and this will take -- during this year we are evaluating our options and depending on the instrument that we choose and the general conditions, we will decide on how much we will take there, how much additional refinancing.
Gustav Froberg: Thanks, Claudia. Very clear.
Operator: The next question comes from Florian Treisch from Kepler Cheuvreux. Please go ahead.
Florian Treisch: Yeah. Thank you very much. Two questions. The one is around the inventory correction you are now facing. So, the first question is a bit in Q1, was the impact still rising relative to Q4? Or do you expect it to really come down now quarter-by-quarter? And more in general on inventory correction, what is really your visibility? I think we have two major shifts in more pronounced inventory advance in the last five months, so clearly is it just hoping to have the right number or do you really get decent information from your key clients? The second part is around your reiteration of the ambition for '28. As they have now heard, SD will go out, which will be an impact. The whole recovery is delayed by excess inventory. So, is it implicitly meaning you're more confident than ever or is it just offering enough room for error to still get to this ambition? Thank you.
Michael Heckmeier: Yeah. Thank you, Florian. With regards to inventories, I mean, you're right. There is a more general discussion picture and data point when we talk about memory, logic and power and the trend here. We kind of analyze with the same or similar data than you do. Yeah, this is pretty much from MI side and institutes what is published. And then, of course, in addition, we have the insight into our customers. So, here we can say if we take memory as an example, yes, inventories are going down, but much slower than we anticipated. So, this is, let's say, a very persistent topic. And some of our customers are still very elevated. That's a fact and has to do with their business situation. Some of them start reporting, let's say, growth and then, let's say, very positive dynamics. But then when you look into more details, it's more on the high value HBM and other side, which for them is more price than volume driven. So, means they can drive their P&L, but it's not by volume happening, but it's more on the price side. So that's not helping us a lot, but it's still good for our customers for the overall industry dynamics. So, we have a very clear picture of some of those inventories still elevated, going down. But it's hanging on for a longer time than everybody did foresee. Coming to your second question around our 2028 ambition. I mean, we have no doubt that the drivers of this industry are unchanged. And even I would say with Gen AI, there's even more midterm potential for the industry in total. So, a bad year or two bad years do not change our overall belief and ambition. And of course, we do the math and we are still confident that we can do the '28 numbers.
Florian Treisch: Great. Thank you very much.
Operator: The next question comes from Martin Jungfleisch from BNP Paribas (OTC:BNPQY). Please go ahead.
Martin Jungfleisch: Hi, good morning. I have two questions, please. On FabNext, first of all, on the ramp speed. I understood initially it was like 100,000 wafers per month, final annualized output by year-end. Has this changed? And also, what you hear or see from competitors that are also expanding? Do you see a somewhat rational behavior? Or so, do you also adjust output speed according to market demand? Or is there any signs of them trying to gain market share? And the second question is really on the ramp cost. In your previous release, you were expecting a 300 basis point margin hit from ramp cost. Now with the Fab ramp delayed, what would be the impact this year? And also, would this mean that the majority of this 300 basis point impact would be now pushed to next year? Thank you.
Michael Heckmeier: So let me start maybe with more outside perspective on FabNext. Then Claudia will give you some details about ramp cost and depreciation. And then, I come back with your second question about competitors behavior. So, FabNext, overall, our ramp plan is in place and there's no change. And this is, I think, very good news. The project has been handed over from the internal project organization to the local organization, which is always a very important milestone for such a, let's say, massive construction project. And things are happening on plan and on schedule there. With regards to customer qualifications, we see some of them sliding into Q4. And that is also, of course, related to the overall market environment, but not a change for overall ramp situation and ramp capacity. Now that's more the high-level statement. And maybe Claudia can then discuss a bit more the ramp cost situation and this depreciation impact.
Claudia Schmitt: Yeah. I will take over for this part. To be very clear, the ramp costs are still there cash wise. So, there are ramp costs. But until we start to the depreciation of FabNext, they are capitalized. So, they show up in the assets and starting Q4, they will show up in the P&L. So, they are still there, but in our result only from Q4.
Operator: The next question comes from Robert Sanders from Deutsche Bank. Please go ahead.
Michael Heckmeier: So, there was one from Martin around competitors, whether there's a change in competitors ramping their capacity. And Martin, I would also stay to my old statements. We see some of them also delaying ramping slower for some of them, which are, let's say, more in the shell phase. Still, we don't have very detailed insights. But overall, this high-level statement of rational behavior when it comes to capacity add and extensions is unchangeably true.
Martin Jungfleisch: Good to hear. Thank you.
Operator: Mr. Sanders your line is now open. Please go ahead.
Robert Sanders: Yeah. Hi. Good morning. I guess, given that you're delaying FabNext, the ramp of it, I was just wondering when you now thought that line would reach kind of cost parity with the existing Singapore line. Second question would just be around the SD impact. Did you say mid-single digit percentage of sales in 2024? Is that right, as opposed to mid-single digit millions? Just to double check. And then the last question, which is, can you comment around the impact of currency? Because obviously the yen has been very weak, which could give your Japanese competitors an advantage and perhaps a desire to be more aggressive on price. Thank you.
Michael Heckmeier: So, let me take the first one, FabNext. When it's low, that's been ramping to a certain extent. We have no doubt that it will be very attractive and will contribute with EBITDA margins above 50%. So, now your question is, of course, when will that happen? And our honest answer is we don't know that, because it really will completely depend on market pickup and further ramp opportunities with our customers. So, it's now would be really misleading to give you any date in the current situation. Once market is picking up and we see volume developments coming in, then we would be again in a position to be more precise on that, what do you call cost parity or accretive margin contributions from FabNext. And to be honest, I didn't get the second one, but I think it was around SD. Is it mid-single digit overall sales? And I can reconfirm the answer, yes. It's mid-single…
Claudia Schmitt: Mid-single digit percentage
Michael Heckmeier: Correct. Yes.
Robert Sanders: Yeah. That's what I thought. It was a 1 million wafer per month line in Berghausen, right? But I assume you've scaled that down already. I was just actually interested. Is that -- when is that going to be zero? Basically, when are you going to be completely shut down? Is it the end of '25?
Michael Heckmeier: It will depend on final customer dependence and let's say all the patterns coming in. But in the course of '25, we will be discontinued that business.
Robert Sanders: Got it. I actually just have one other last question just on the debt side. So, how much of your $900 million odd of debt is actually being refinanced this year? And what is your cost of debt now that your leverage is heading above two times? Is it above 6% or below? Thanks.
Claudia Schmitt: As already mentioned just a second ago, we have not fixed the amount that we will refinance this year. We will see. It will heavily depend on the instrument that we will choose in the end. But we will let you know as soon as we know.
Robert Sanders: Got it. Thanks a lot.
Claudia Schmitt: And your question regarding FX, I think it's still open regarding the Japanese yen. Yes, of course, our Japanese customers may have benefits of the development. But of course, we won't comment on that. Our Japanese yen share in sales is pretty low, so it's not nice to see that development, but it's okay for us.
Robert Sanders: Thanks a lot.
Operator: The next question comes from Jurgen Wagner from Stifel. Please go ahead.
Jurgen Wagner: Yeah. Good morning. Looking at page 11 on your handout, which market segments would you regard yourself as being significantly overexposed? And then, you talked about rational behavior on a high-level. What would be your view on longer term pricing once this inventory correction is over and all the new wafer fabs have ramped up in volumes in, let's say, '26 or so? Thank you.
Michael Heckmeier: Thank you, Jurgen. In terms of our market exposure, there is basically no change. I mean, we are almost equally represented in the three segments, memory, logic and power. And of course, we have a slight overexposure in memory. But the recent developments or shifts did not change our overall, let's say, market situation and exposure to those segments. What is surprising once inventories are melt down? The honest answer, we don't know. I mean, we eagerly wait for that time to happen. We would still be then in the position where around two-thirds of our 300 millimeter businesses in LTAs with the margins and price corridors I described there. And then we would assume, of course, if demand is picking up very quickly, that there will be upside spot opportunities again. But it's a bit speculative when you're still, let's say, in the middle of this rally and wait for the uptick. That would be my more high-level statement to your question.
Jurgen Wagner: And your long-term targets, they are basically based on the assumption that you will have two-thirds in LTAs, right?
Michael Heckmeier: The long-term target is, of course, unchanged. And the assumption is, of course, kicking in of the FebNext benefits here, where the fully automated, let's say, very low-cost base, which then would provide this above average and eventually above 50% EBITDA margin contribution to the group. That's the main value driver together with our strategy, focusing on high value, leading edge and power.
Jurgen Wagner: Okay. Thank you.
Operator: [Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Dr. Michael Heckmeier for closing remarks.
End of Q&A:
Michael Heckmeier: Thank you very much. But I hand only back to Verena.
Verena Stutze: Thank you, Michael. This concludes our Q&A session. Thank you for joining us today. Our next Investor Relations highlight will be the AGM on May 13th. And the speeches of this AGM will also be streamed on our IR webpage. For our Q2 figures, this will be released on July 25th. Stay healthy and let's talk again soon. Bye.
Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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