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Edited Transcript of WAF.DE earnings conference call or presentation 24-Oct-19 8:00am GMT

Q3 2019 Siltronic AG Earnings Call

Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Siltronic AG earnings conference call or presentation Thursday, October 24, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christoph von Plotho

Siltronic AG - Chairman of Executive Board & CEO

* Petra Müller

Siltronic AG - Head of IR & Communications

* Rainer Irle

Siltronic AG - CFO, Labor Relations Director & Member of Executive Board

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Conference Call Participants

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* Amit B. Harchandani

Citigroup Inc, Research Division - VP and Analyst

* Florian Treisch

Commerzbank AG, Research Division - Research Analyst

* Francois-Xavier Bouvignies

UBS Investment Bank, Research Division - Technology Analyst

* Gustav Froberg

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Jürgen Wagner

MainFirst Bank AG, Research Division - Director

* Martin Jungfleisch

Kepler Cheuvreux, Research Division - Junior Equity Research Analyst

* Quang Tung Le

Crédit Suisse AG, Research Division - Research Analyst

* Veysel Taze

Bankhaus Lampe KG, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, everyone, and welcome to Siltronic's conference call. Please note that this call is being recorded and also streamed on Siltronic's website. The call will be available as an on-demand version later today. Your participation in this call implies your consent with this.

At this time, I would like to turn the conference over to Petra Müller, Head of Investor Relations and Communications of Siltronic AG.

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Petra Müller, Siltronic AG - Head of IR & Communications [2]

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Thank you, operator. Welcome, everybody, to our Q3 2019 results presentation. With me are Chris Von Plotho, our CEO; and Rainer Irle, our CFO. Both will comment on the market development and our financial performance and will be available for Q&A afterwards. Please note that the presentation contains the usual safe harbor statement and applies throughout this call and the presentation.

Today, we have published all documents relating to our Q3 2019 reporting. They are available on our website.

And with this, I hand over to Chris for opening remarks.

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [3]

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Good morning, ladies and gentlemen. 2019 is a turning year for us and for the industry. With the ongoing general global economic slowdown, geopolitical uncertainties and high inventories in the value chain of our customers, wafer demand is down compared to the exceptional strong year 2018. In Q3, sales came down by 3.8% compared to the prior quarter. Sales came in at EUR 299.8 million.

Our EBITDA went down by 8.5% to EUR 91.5 million. The decline in the EBITDA margin quarter-on-quarter was mitigated by lower cost of sales. EBIT came down to EUR 63.6 million. In addition to the weak start in 2019 and the rise of energy costs, higher depreciation weighted on profits. CapEx in the third quarter was EUR 88.6 million after EUR 105.1 million in the second quarter. It's related to investments in improving our capabilities, different automation projects as well as our new crystal-pulling hall in Singapore.

Due to the high CapEx, net cash flow in Q3 2019 was minus EUR 8.8 million compared to a plus of EUR 0.4 million in the second quarter. Despite the high payments of investments, the dividend payment and the refund of customer prepayments, our net financial assets still stood at EUR 579 million as the end -- as of the end of September.

Having shown you some key financial figures, let's have a look at some details of the market development. The market environment in Q3 continued to show a high level of uncertainty and weakness. The macroeconomic slowdown and geopolitical uncertainties continued. The overall economic sentiment softened.

Inventories in the supply chain of our customers, including raw wafers, remain at the high level. In Q3 2019, the silicon wafer market was down 1.7% to 6.3 billion square centimeters per month quarter-on-quarter and down 10% year-over-year.

Looking at wafer demand, the downward trend that we already observed in Q1 and Q2 continued, especially the demand for smaller diameters declined strongly. In 200 millimeter, the picture is unchanged compared to the second quarter with special products still doing okay.

With regard to 300 millimeter, wafer demand was slightly down as customer inventories remained high and customers shifted volumes under signed LTAs. But the decline was more moderate than we thought in 200 millimeter and smaller diameters. Logic and foundry and therefore, 300 millimeter EPI are doing okay, while 300 millimeter polished is under some more pressure.

We usually look into 5 end markets. Our overall visibility for 2020 is currently very low, and we expect end markets to start rather flattish into next year. From our point of view, unit growth in smartphones and computing might be flattish, while industrial applications in cars should be down.

Content shows a mixed picture. While the trend that content is growing from one smartphone generation to the next is still intact, the overall content in the smartphone industry will depend on the mix effect. Currently, high-end smartphones, which have more content, see lower volumes compared to mid-sized and low-end smartphones. We expect die size to have a slightly negative impact on NAND and DRAM, while the impact on logic should be okay. We expect NAND inventories and somewhat -- to somewhat stabilize versus the DRAM applications.

Overall, the high inventory levels of semi devices should lead to somewhat muted demand going into the year 2020. Given the rather flattish end market development and the high inventories, especially at memory players and the auto and industrial device makers, we do not see yet any signal for wafer shipments improving near term.

With this first overview, I would like to hand over to Rainer for a detailed presentation of our financials.

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Rainer Irle, Siltronic AG - CFO, Labor Relations Director & Member of Executive Board [4]

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Thank you, Chris, and welcome, everybody, from my side. Business in Q3 2019 continued to see weak demand. Due to less wafer area sold, sales in Q3 reached EUR 299.8 million and was thus down by nearly 4% Q-on-Q. The first 9 months sales came in at EUR 966 million, representing an almost 10% decline compared to previous year.

Prices in the first half of the year were quite a bit higher than prior year. But in Q3, we started seeing some price reductions on quarterly contracts. The cost of sales decreased by 1.7% Q-on-Q, thereby, lower cost for raw materials and supplies as well as labor was partially offset by higher depreciation.

The first 9 months 2019, cost of sales were EUR 605 million compared to EUR 617 million in 2018. Our gross profit in Q3 declined to EUR 104 million. Gross margin came down from 36% to 35%. Gross margin for the first 5 -- for the first 9 months came in at 37% compared to 42% in the year ago.

Lower cost for materials and supplies were largely offset by higher energy cost and higher depreciation.

Negative implications from currency effects, like hedging, added up to EUR 23 million year-to-date.

In Q3 alone, we saw a negative EUR 7.7 million. We purchased [forwards] a year ago at a spot rate of $1.16 plus $0.03 interest, i.e., roughly $1.19, USD 1.19 per euro. Now in Q3 this year, spot rates were around $1.11, i.e., 8% -- $0.08 lower. This explains the negative result.

Looking at the next slide, you can see that only 10% of our sales are generated in euro, while 65% of our costs originate in euro. The rule of thumb for this year is $0.01 change would be EUR 8 million more or less in revenue and roughly EUR 6.5 million more or less in EBITDA unhedged. The change of the Japanese yen, either direction, would be EUR 2.5 million revenue and roughly EUR 2 million in profit.

The lower wafer area sold and the higher electricity cost weighed on our profit. Our EBITDA in Q3 came in at EUR 91.5 million. EBITDA margin went down quarter-on-quarter from 32% to 30.5%. Lower cost of goods sold in Q3, however, softened the decline.

In the first 9 months 2019, EBITDA was EUR 319 million with an EBITDA margin of 33% compared to an EBITDA margin of 40% last year. In addition to slow business, EBIT was also burdened by higher depreciation and the mentioned higher energy cost. Thus, EBIT came -- EBIT in Q3 came in at EUR 64 million. EBIT margin went down from 24% to 21%.

In first 9 months, EBIT came in at EUR 242 million, with a margin of 25% compared to 34% last year. Net profit reached EUR 59.5 million in Q3, and earnings per share came in at EUR 1.65 per share.

Looking at the 9 months results, we generated net profit of EUR 215.6 million and earnings per share of EUR 6.31. The tax rate in Q3 was 8%, 9% in the last quarter. The reason for the low tax rate is that we kept our low-cost sites in Singapore at a very high loading while reducing the load of our sites in Germany and the U.S.

Thus, the improved tax rate is due simply to the fact that the profitability declined over-proportionally at those group units located in countries with above-average tax rate. Working capital has come up slightly in Q3. Inventories were slightly up simply due to quarter end effects. Trade receivables were up by EUR 15 million. Trade liabilities were down by roughly EUR 5 million.

Looking at our balance sheet, equity was EUR 809 million at the end of September. This equals an equity ratio of 42%. The drop compared to end of 2018 is attributable to the 9 months profit minus the dividend payment of EUR 150 million and the interest-related change in pension obligations of EUR 202 million.

The impact of interest rates on the valuation of pension provisions was truly material. Hard to believe, but the European Central Bank and its loan purchase program managed to renegotiate long-term interest on rates to come down further. And so the pension provisions in Germany were discounted at 0.97% in September 2019 versus almost 2% at the end of last year.

In the U.S., also the interest rates went down more from 4% to 3%. Despite the dividend payment of EUR 150 million, the payments for CapEx of EUR 261 million and the refund of customer prepayments of EUR 48 million. Net financial assets decreased by only EUR 112.5 million, and we're still at EUR 579 million.

Pension provisions were up by EUR 202 million, as I said in the first 9 months, which is basically due to the lower interest rates, meaning pension liability is up, equity down.

As said before, we had to use 0.97% discount rate to calculate the pension in Germany. Together with U.S. portion, this adds up to DBO of EUR 1.23 billion, against which we have assets of EUR 662 million. The delta of DBO and assets is a pension provision at EUR 566 million.

Now in the second column, we use a 3% rate, which would bring DBO down to EUR 850 million and consequently, pension provision down to EUR 188 million. That is EUR 380 million less pension and more equity. And in that case, our equity ratio would be at 62% compared to the 42% we are showing in the balance sheet.

Now why 3%? The German government requests pension funds to do an asset liability study. And this study says that there's a probability that we will achieve at least 3% return with a probability of 80%. And that is because the pension fund has actually quite good assets, which are many times accounted for at -- not at value, but at cost. It means that real estate bought years ago in Munich and other places is accounted for at cost. And it also means that in many cases, bonds with long durations are accounted for at cost.

Of other hidden reserves in there, like high-quality assets, this is why we are confident that 3% is a good number, whereas the asset liability study is at 80% probability.

Our operating cash flow in Q3 came in at EUR 74 million following a EUR 79 million in the quarter before. We refunded customer prepayments of EUR 15 million. Year-to-date, we refunded EUR 48 million. We have not received any additional customer prepayment until Q3 2019. Net cash flow in Q3 was slightly negative at EUR 9 million. For the total year, net cash flow totaled EUR 72 million.

And with that, I would like to hand over to Chris.

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [5]

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Thank you, Rainer. In view of the economic and geopolitical uncertainties and the given -- and given the usual seasonality, we expect sales in Q4 to further decrease. We confirm our outlook for the year 2019. However, expect sales and EBITDA margin to be in the lower half of the forecast range and thus, in line with market expectations. While ASP in euro for the first 9 months 2019 was up compared to 2018, we see a slight quarter-on-quarter ASP decline also going forward.

Please bear in mind that the year-end ASP will set the base for next year. While we saw an ASP tailwind for 2019 based on the exit ASP in 2018, we will see headwind from the same figure for the year 2020. We expect a slow start into 2020 and visibility into next year is currently very low.

Please be reminded that the wafer industry is usually seeing any upturns as well as downturns with a time lag of several months compared to other players in the semiconductor industry. However, despite the ongoing market weakness, we are convinced that the underlying growth drivers for the wafer industry are intact and will lead to a stronger demand for wafers again in the future, but most probably, not in the very short term.

With this, we close our presentation and are now available for your questions. Operator, please open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Francois Bouvignies, UBS.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [2]

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My first question was on the pricing and maybe to clarify one of your comments. So if we look at the environment and into next year, your last comment was suggesting that maybe you have more headwind of the ASP next year, if I understood correctly. So I just wanted to clarify this. And when you say headwinds, so should we expect some pricing decline next year? That's the first question I have.

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [3]

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Well, I think the guidance that I gave just a few minutes ago was relatively clear. We saw price declines during this year referring to quarterly contracts in the second half of the year. And the endpoint in ASP of the year 2019 will be the base for 2020. And therefore, we will start from a lower point compared to the start in 2019. And consequently, we accept the ASP level in 2020 being below the one of 2019.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [4]

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Okay. That's very clear. In the Q4 guidance, what you gave, do you expect the same kind of minimal price decline in terms of magnitude? Or do you expect a bit more impact?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [5]

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Well, typically, we always give -- try to give some guidance because you depend on our guidance, but guidance for pricing by quarter is something that -- we typically avoid it. But in general, the LTA prices are still firm. That's what we always confirm. And on the other hand, we said on our call that for quarterly contracts, we see pressure on pricing.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [6]

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Okay. That's very clear. And maybe one last question for me. It's on your LTAs into next year. So it's difficult to predict, I guess, but can you give us an idea of how many LTAs are running out of date by the end of the year? How should we expect, for next year, in terms of percentage of LTAs as a percentage of your deliveries?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [7]

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We are always willing to share some transparency with you, but there is a limit in detail. So I do believe what we always said about LTA still holds true also for the year 2020 for existing LTAs where prices and quantities were already negotiated quite some time ago. We do not see any negotiation level or renegotiation level from customers.

And the new ones, it's a different environment. So the -- I think it's fair to expect that everything that you negotiate at a new level will be under price pressure, whether it's an LTA or a quarterly contract. And on top of that, we need to keep in mind the timing on LTA, you always need 2 partners willing to do so. And I think the willingness from our customers in '17 and '18 to sign additional LTAs was very, very high.

And today, with a different market environment, it's maybe a little bit less.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [8]

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That makes sense, but do you have any like -- because when you started the LTAs, really, I guess [the wave] is 2017 or so. So we are 2 to 3 years from that date. And if we look at the average years, maybe it's 2 to 3 years for an LTAs, and correct me if I'm wrong, but should we expect like -- in this regard, like the end of life of the big wave, the first big wave of LTAs are signed and therefore, maybe a good and important release in 2020?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [9]

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Well, you might put it that way. You might also argue that the next shortage is ahead of us. We do not know by when. But sooner or later, we'll run into a shortage because nobody is investing in additional capacities. And you mentioned average year. Typically, our industry does not have an average year. You can calculate an average, but every single year is always different. It's either better or not as good as the average. We basically are always moving from upturn to downturn or downturn to upturn.

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Operator [10]

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The next question is from Amit Harchandani of Citigroup.

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Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [11]

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Amit Harchandani from Citi. First question from my side, if I may. Chris, could you maybe share your thoughts on how do you see the wider situation in the industry as it relates to supply and capacity? Obviously, I realize visibility is poor in terms of demand, but pricing is a function of demand and supply. To what extent do you think there exists discipline in the industry today? And just wanted to get your latest perspective on that, please.

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [12]

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Well, I think we still see discipline when we look at the wafer players. On the other hand, you are perfectly right that there is a certain influence on demand. But I think demand is not the major driver for the short-term period like 2020. 2020 will be completely overruled by inventory effects, and these inventory effects are somehow difficult to draft for you and also for us because we only have a few customers where we have a view on raw wafer inventory. But we still believe that one of the big challenges is work-in-process inventory and finished good inventory, specifically, in the memory industry.

And I do not believe that the picture -- let's say, the balance or imbalance between demand and capacity will not change significantly due to capacity increases because companies are concluding the investments that they initiated and nobody, at least to our knowledge, is starting additional ones.

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Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [13]

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Okay. That's helpful. And secondly, if I may, in terms of demand, you made some comments earlier. I think you've talked a bit about the die sizes as well in the context of memory. Could you maybe help us get a better sense for some of these, say, structural or more sort of technological shifts, which are happening in memory and in logic? I mean on logic, there's this move towards EUV, for example. Cyclicality is, I guess tough to forecast. But in terms of some of these technological shifts, how do you think of that versus the need for wafers?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [14]

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Well, let me first try for the answer regarding EUV. In prior calls and meetings with investors and analysts we had, from time to time the question, "What is the EUV wafer?" And there is no EUV-specific wafer. EUV is a process step at our customers. And this process step only makes sense for certain design rules.

You probably know that TSMC is working relatively successful on 7 nanometer and that's -- and for 7 nanometer in certain process steps they use EUV, which doesn't make sense for, let's say, a 16-nanometer production. So there is no direct link between EUV on one side and us on the other side. There is more a link between the specification of our wafers and 7 nanometer.

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Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [15]

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And maybe on the memory side?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [16]

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Yes. On the memory side, we always have this headwind, which is die size, which means more content per square unit. Long-term average probably is somewhere between 15% and 20% for DRAM, and maybe for NAND, a little bit higher. And this is typically overcome -- or was overcompensated for quite some time by additional bit demand.

But what we shouldn't neglect that when customers go to the next level, bit density is against us. But at the same time, typically, the yields at the customers are going down. So it's -- to calculate the result in between loss of yield, increased bit density and increased bit demand is somehow difficult. But we believe that in the -- when you don't look at it quarter-by-quarter, but you look mix on to long term, there is always the overweight coming from bit demand.

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Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [17]

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And just a final one from my side. You've commented about usual seasonality being down Q4 versus Q3. By my reckoning in the last 4 out of the 5 years, it's actually been up quarter-on-quarter. I appreciate there's no usual or average year, so I was a bit puzzled why you used the word usual seasonality.

And if there is something like a usual seasonality, could you tell us what we should think about in terms of usual seasonality for 2020, if you're modeling across quarters?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [18]

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That's a very good question, Amit. Usual seasonality is the seasonality that you can explain. And typically, the seasonality for us is that Q1 and Q4 are the weaker quarters and Q2 and Q3 are the stronger ones. When you look at the last years, and you try to find a typical quarterly behavior, you won't find it. All the quarters were untypical either to the positive way or to the negative way.

And I want to remind you, the first quarter of 2016, going from '15 into '16, everybody was convinced that Q1 '16 will be significantly weaker than Q4 in 2015 was. And in reality, then Q1 was the beginning of the significant upturn.

And at the end of the day, it drills down to -- still true. The so-called Christmas business; and Christmas business, if it has an impact on us, it has a positive impact in Q2 and maybe Q3, but for sure, not in Q4.

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Operator [19]

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The next question is from Gustav Froberg of Berenberg.

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Gustav Froberg, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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I have a couple. Just to start off, how should we think about your market position now within all of this? I mean, I'm aware that the relationship between your sales growth and overall market sales volume is not 1 to 1, but it seems as though your sales are falling a little bit faster than what the overall volumes are in the market. And I'm wondering: a, well, how we should think about it now going forward? But then also what you are maybe doing to mitigate what appears to be a continued loss in market share?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [21]

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Well, it's true when you look at the period of the last 3 years as we lost a little bit of market share. In the beginning of the shortage, one of the reasons was that we were probably the first ones to be full. And on the other hand, we are, today, under the impression that some of the competitors invested earlier than we did. We stick to the promises that we gave. And I think this was well done and well executed by Siltronic.

And during the shortage, we had some players where we simply -- or we had some customers, potential customers who we simply couldn't supply. And we went for, let's say, adjusting prices to a level to be competitive. We tried to avoid to buy market share because we know by experience that is not sustainable.

During this year, we saw the beginning of a slight upturn in market share. And we continue to do compelling offers to customers, but buying market share is not part of our strategy.

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Gustav Froberg, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

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All right. And then just on capacity, I know it was sort of asked earlier as well, what your views are on overall industry capacity in the market. Do you think that other players are all done with their capacity expansions for this year? And also, are you seeing any capacity or competition coming from new market entrants?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [23]

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Well, on 300 millimeter, we don't see anything from new market entrants, specifically when we refer to China. I mean in the meantime, Zing Semiconductor is producing something like 30,000 to 40,000 wafers per month, but they obviously do not have prime quality to just -- the precise level of performance that they deliver is a little bit difficult, but I would argue somewhere between test and monitor wafers.

We always said that total available sale capacity is around 7 million. So from today's point of view, maybe 7 million is more on the conservative than on the optimistic side, maybe it's 7.2 million. But we do not see the build-out of the 7.2 million wafers per month in the year 2019.

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Gustav Froberg, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

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Okay. So you don't expect the industry to make it 7.2 million by this year, maybe next year or...

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [25]

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I think from today's point of view, all the players are somehow underutilized. So basically, if you add capacity next year, this is the capacity most likely you won't need.

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Operator [26]

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The next question is from Florian Treisch of Commerzbank.

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Florian Treisch, Commerzbank AG, Research Division - Research Analyst [27]

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I have 2 questions. The first is on the cost base. So I believe higher electricity bill plus higher D&A have slightly overshadowed your internal cost containment initiative in 2019. Can you add some color what is possible here for 2020? Can you -- we see some tailwinds from lowered overall cost levels here on your side?

And the second is on LTA, you said that clients are not renegotiating the contracts. I believe the simple reason is that they are not taking the volume they have promised, there is not really a need on their side to renegotiate. The question is more if there is a need on your side, to say, "Clients, you have to take the volumes you have promised us," as I believe it is probably unrealistic to assume that they will pick up the lost volumes in the years to come.

May -- I'm interested here in what your view here is, clearly, the question's is on my side, what will you do with the LTAs? Can you pressure your clients to prolong the LTAs, arguing that they're not taking the volumes as in the end, you are paying for the volumes with the underutilization? So it's basically only a lost situation for you, while the clients are still happy to take the volumes they needed? Or am I wrong here?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [28]

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A very good question, and I'm in the industry for more than 30 years and pressure customers is not a good idea. Because typically, you meet more than twice in life. And when you pressure customers, they have a very good memory for that. We always took the position, since the challenging environment started beginning of this year, that we will not force customers to take quantities that they don't need because it doesn't make sense.

But we also said, we are not willing to renegotiate the total volume of a contract. And we also said, we are not willing to negotiate prices, which at the end of the day, leads to the fact we are willing to accept that a certain quantity is not taking -- is not shipped to the customer in 2019, but will be shipped to the customer later. That's what we -- that was our approach. And up to now, this worked out very good.

To the cost position, we still -- we have this year, successful cost reduction programs. We -- I assume we will also have it for next year, although budgeting is not really done. But I want to be a little bit more detailed on the energy effect. We have 2 effects on energy. One is this distribution grid story in Germany, which cost us roughly EUR 22 million, and then you need to keep in mind that roughly half of our energy cost, electricity is fixed cost and half is variable.

Reason for that is, when you run a clean room, you have to run the clean room and you -- and this brings a certain consumption of electricity regardless whether your utilization is 50% or 100%. So when you are not loaded in 100%, the portion that you spend for running a clean room does not decrease. So basically, the cost per wafer then, for that portion, goes even up.

And this was always the case in our industry. And from today's perspective, this will also be -- hold true in the future.

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Operator [29]

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The next question is from Quand Tung Le of Crédit Suisse.

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Quang Tung Le, Crédit Suisse AG, Research Division - Research Analyst [30]

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If I can come back to ASP. You said that it will be decreasing quarter-on-quarter going -- as you look into 2020. May I ask specifically for 300 millimeters, 200 millimeters and 150 millimeters and lower, do you see all of these wafers' ASP to decrease?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [31]

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No.

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Quang Tung Le, Crédit Suisse AG, Research Division - Research Analyst [32]

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And could you be more specific, which wafer you...

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [33]

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But -- I could, but you gave me the possibility to answer with no, and I took it.

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Quang Tung Le, Crédit Suisse AG, Research Division - Research Analyst [34]

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I see. Well, if I can have a follow-up then?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [35]

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No, of course, you can have a follow-up. There are still segments where loading is very high. And this is, for example, 200-millimeter float zone. This is everything which is related to the power business, which means [highly organic stuff, highly wafer stuff], whatever the diameter is.

And also in 300 millimeter, like I mentioned in my speech, there is a difference. I would say that the industry in 300 millimeter, it is relatively close to full loading and the quantity pressure, and consequently, for new contracts, pricing pressure, is much more on the polished side, which means in memory side than anything else. A part of that, we always gave you some details regarding ASP, but we never disclosed ASP by product category like 200, 300 or 150 millimeter, and we tend to continue like that.

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Operator [36]

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The next question is from Veysel Taze of Bankhaus Lampe.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [37]

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The first question is regarding your LTA. At the Capital Markets Day, you said the LTA level was 65%. Can you confirm that number for the current moment as well? And what would be towards the year-end?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [38]

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Well, first of all, I can confirm the 65%. And secondly, it will not change by year-end.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [39]

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Okay. And then on the LTA structure, I mean my understanding is it is 2 to 5 years, right? So mostly around 3 years. So if we now go back and look at the LTA structure, then in 2020, you should have still volumes coming from the 2018 and late 2017, right?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [40]

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Yes.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [41]

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So -- but you will -- you are not willing to share which part would that be from this 65% LTA in terms of shipments?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [42]

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You are perfectly right.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [43]

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Okay. And then on the ASP development throughout the year. So peak of the ASP was Q4 last year, there was a decline throughout the year. My understanding was, if I look at your wording in Q3 then the slow -- the price decline has slowed down. And it will be still slowing into Q4. But can you give a little bit color around the price development, in general, for wafers throughout the year 2019?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [44]

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I will give you more color than you want. Well, first of all, you said in your statement that peak pricing was Q4 2018. This is what you said. This is not true because we said, late '18 and also early '19, that prices will continue to go up because there were -- there was a space effect from quarterly contracts out of 2018, leading into 2019. So the peak was not in the prior year, the peak was somewhere in this year.

And then mostly towards the second half of the year, pricing for quarterly contracts was coming under pressure.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [45]

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So -- but now compared, let's say, to Q2, is the -- at least that's my understanding from your wording, et cetera, that this pace of spot price decline has rather slowed down?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [46]

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No, we did not comment. Not slow down and not increase. We didn't comment at all on this.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [47]

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Okay. And then on the end market part. On -- I know logic is doing good. On memory side, there are indications in the market that wafer start, at least for NAND, start to improve. For DRAM, people are expecting that to come slowly through in Q4. So I was wondering by your rather conservative statements regarding the volume expectation, so to say. And I was wondering what exactly I'm missing there.

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [48]

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Well, I read some positive news regarding the memory industry. What I obviously missed, I didn't see anything regarding increased wafer starts. We still believe that this slight turnaround in the memory industry up to now can easily be handled by reducing the inventory either on work-in-process or on finished good. And then please keep in mind that most of the memory players have still a relatively high level of inventory on raw wafer. So if the industry really picks up, it will be a significant time difference between the industry picking up and us really shipping and invoicing more wafers.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [49]

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Okay. And on the raw wafer side at the customers. What is the average base you are assuming? And what -- where are we now?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [50]

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From what we know, December last year, in the memory field, we were somewhere between 3 and 5 days. And today, when you look at the reports that we can read, I think the assumption of -- I would even argue more than 2 months is probably realistic.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [51]

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Okay. And on your presentation on Slide #6. If I look at the different end markets and then you have the line with the impact in smartphone sections, it is rather still showing to the downside, it's red. I was wondering, correct me if I'm wrong, but with the 5G phones, the area -- the wafer area is expected to grow, right? And there are now from TSMC, et cetera, statements that 5G penetration will go from mid-single digit to rather mid-teens. And I was wondering is that red arrow there, it's mainly coming from the units? Or why the red...

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [52]

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I think the picture that we gave on Slide #6 is relatively clear. We expect the units to be flatter somewhere, 1.5 billion. And the content will be probably flattish too. On the high-end, it will grow. But on the low end, it will simply stay where it is. And then we come to the point that I mentioned in my speech, it will depend on the mix of products sold to the market. And we saw what the latest -- I think when you look at the period between, let's say, 2005 and including 2015, this period of 10 years, as soon as the new smartphone came out, everyone wanted to have the new one and was willing to pay a price for that.

Today, the latest developments of smartphones are slightly different because most of the, let's say, last generation smartphones have now a cost which is over EUR 1,000. And obviously, this is somehow a barrier to the average consumer. They are not willing to spend 4-digit figures for a smartphone.

And at the same time, the mid-sized or low-end smartphones improved in performance significantly. So at the end of the day, the total smartphone impact will depend on mix sold.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [53]

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Okay. May I...

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [54]

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And this is something you can influence.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [55]

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Okay. May I ask 2 really a very, very quick ones. On -- from the end market perspective, smartphone, PC, server -- but it's more related now. So this area for the 300 millimeter, it's okay. But on the 200 millimeter, would you say that from [antimarket] perspective, there was another leg of slowdown from the industry and auto part if you look at Q3 versus Q2 from your customer discussions?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [56]

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No, I would not.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [57]

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It's the same level. Okay. And then final one, let's assume you see another leg of slowdown in the top line and things in H2 don't really improve, in H1 next year do not improve. Have you still, on the cost side, opportunities to maneuver?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [58]

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On the cost side, you are never done. There are always opportunities. But of course, there's always some tailwind -- some headwind. What is really challenging for us is energy cost in Germany, and there is not so much that we can do about the unit price. And I explained before, the share that we spend for running a clean room is always the same whether that's fully loaded or not.

But let's say, on process, raw material, yield and so forth and connectivity, we still have ideas in mind to react a little bit against it. How much can we compensate? Difficult to say today. We are, today, not in a position to give guidance for 2020, we might do that sometimes earlier next year. By the way, you know that our budgeting process is not even completed for 2020.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [59]

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Okay. And then final one, one of -- few of your bigger or main competitors, like GlobalWafers and SK Siltron, has moved recently into the silicon carbide business; at least, they changed their strategy. So what's your view on silicon carbide at this stage? It looks market is getting from niche to maybe a broader adoption. So an update on your silicon carbide strategy would be really very helpful.

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [60]

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Yes. Our view does not change. There will be always applications where you need a silicon carbide. A silicon carbide will stay a niche application like we have other niches like, let's say, SOI, in our industry. But the niche from our perspective will be significantly smaller.

We know, for example, that in the Tesla, you have quite a bit of silicon carbide-based semiconductors. On the other hand, we know that in the Chevrolet Bolt you do not have any. So obviously, there is also a possibility to go around it. On the other hand, it's difficult to compare a Tesla with the Chevrolet Bolt, specifically when you're a semiconductor player.

We were questioning what to do, but when I look at the price that Siltron paid for the activities, which were in very [troubled] time with the [calling] and then afterwards or chemicals and before, this is simply a price tag, which is completely unrealistic.

As far as I remember, they pay EUR 450 billion for a small business player, which is around 10% and EUR 20 million. This is, from my perspective, significantly overpaid.

And the picture changed. Two years ago, everybody convinced that the shortage will increase in silicon carbide supply. Today, people are more discussing by when we will have oversupply and consequently, price pressure. So yes, it is a niche. Yes, this niche is growing faster than other applications, but it will stay a niche.

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Operator [61]

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The next question is from Martin Jungfleisch of Kepler Cheuvreux.

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Martin Jungfleisch, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [62]

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I have 3. Many follow-ups. First of all, you speak about Q4 sales being lightly lower than the third quarter. Would you say this is more driven by further weakness in 200 millimeter and smaller diameters? Or is it also due to incrementally weaker 300 millimeter sales? That's the first one.

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [63]

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I think it's a general approach, and we do not mention whether it's more influenced by one or the other diameter. It's true for all the diameters basically.

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Martin Jungfleisch, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [64]

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Okay. Okay. The second one is on the cost side. I think you mentioned that you've laid off a number of temp workers and also employees in the U.S. Can you comment on any tangible implications on the cost line for the fourth quarter and also for 2020? So, i.e., how much your cost line will improve?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [65]

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Well, for sure not for 2020 because, like I said, the budgeting is not yet done. But it's very simple. When you are fully loaded, you need a certain number of people. And as soon as your loading decreases, for example, by 20% then you reduce your headcount by 20%, you can't produce anymore. So the -- as soon as you reduce headcount, you always produce a little bit less than the loading is. So your specific labor costs have the tendency to slightly go up even. Maybe not in the first 5% to 10% loading, but afterwards, for sure.

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Martin Jungfleisch, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [66]

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Okay. Okay. And then the last questions follow on capital allocation. I mean, you have a -- quite significant net cash level. So are there any considerations for special dividends or maybe a share buyback in the near term?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [67]

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Very good question. The answer is, no, there is not.

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Operator [68]

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The next question is from Jürgen Wagner of MainFirst Bank.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Director [69]

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I have a follow-up on the capital allocation, I would ask it the other way around. Looking at your high dividend payout and very weak cash flows, what does it take to lower the payout ratio? And you just said no, but why are share buybacks not an alternative for you?

Second question. You said in beginning that you don't worry about supply, but the recent press reports have suggested that given the Korea-Japan trade conflict that there are some 300-millimeter wafer capacity additions happening in Korea because of that. And how do you see that?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [70]

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Well, I think the 300 millimeter additions in Korea is not something new. You talk about GlobalWafers and probably also about [Siltronic]. This was stuff which was cited in 2017 and execution started in '18, so that's not new about it.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Director [71]

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Okay. So that does not worry you?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [72]

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No. And then the dividend. I want to make a comment on the dividend. We defined a dividend policy and the dividend policy was defined at 40%. We executed that dividend for the first time for the year '17 in '18 and for the second time for the year '18 in the year '19. And I think it would have been a very, very bad message that in the second year or when you are questioning whether you will execute your strategy for -- or your guidance for the second time, you adjust it. It will be simply unfair to the market.

And of course, there are possibilities. We once decided it's 40%, but this is not casted in concrete forever.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Director [73]

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Okay. Understood. And share buybacks, you just don't use them. Okay.

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [74]

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I don't think it's a good idea in current environment.

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Operator [75]

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The next question is a follow-up from Veysel Taza of Bankhaus Lampe.

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Veysel Taze, Bankhaus Lampe KG, Research Division - Analyst [76]

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One follow-up. Please allow me to ask you this question. If I look at last year, so end of 2018, that your core end market memory was down, but most of the wafer suppliers were still saying, yes, well, full utilizations, no big change. So -- like November, December commentary. And so -- but your end markets were already down like DRAM, NAND, et cetera. And then you supplied the wafers to the memory players. And then suddenly, end of Q1, there was the profit volume declines and the profit warning in April.

I was wondering, right now, the situation in memory market seems to change. Volumes seems to come back. And at the same time, you are quite conservative still in your expectations. I mean is there a scenario maybe that your customers are just taking advantage of the low spot prices and let you deliver into this or ship the volumes?

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Christoph von Plotho, Siltronic AG - Chairman of Executive Board & CEO [77]

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Well, I -- in my view, it's slightly different. The first information that we get about markets of our customers and the end markets is information coming from our customers. And I want to remind you that we had an outstanding production performance in the Q4 2018, which allowed us to offer noncontractual quantities to the memory players, and they were willing to take it at premium prices. To pay, what -- I don't know, what, between 15% and 25% more than the contractual price. So how do you want a company like Siltronic then to say, wait a second, there is a disaster ahead of us.

And at the same time, till, I will say, 20th of November, the inventory level at our customers didn't move. So how do you want Siltronic to judge whether the customer is really producing semiconductors, and yes, all the orders on his hand or whether he's building inventory? This is something we don't see. This is information which is not accessible for us.

So this is the situation in the past. Now we come to the present. In the present, yes, we see that customers are saying it's slightly getting better. And we know that one day, this will have an impact on us. But we also see the inventory level, at least at the raw wafer, and we estimate that inventory level at finished goods and work-in-process is still relatively high. So there are huge opportunities for the memory player to increase shipments to their customers without buying more wafers. And I think the analysts are underestimating that effect.

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Operator [78]

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(Operator Instructions) There are no further questions. I hand back to the speakers.

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Petra Müller, Siltronic AG - Head of IR & Communications [79]

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Okay. Dear all, thank you for joining today's call. We will report our preliminary full year 2019 figures on January 29 of next year, and we wish you all a pleasant day. Thank you, and goodbye.