Hello all and welcome to Wolfspeed's Third Quarter Fiscal 2024 Conference Call. My name is Lydia and I'll be your operator today. [Operator Instructions] I'll now hand you over to Tyler Gronbach, Vice President of External Affairs to begin. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's third quarter fiscal 2024 conference call. Today Wolfspeed's CEO, Gregg Lowe; and Wolfspeed's, CFO, Neill Reynolds, will report on the results for the third quarter of fiscal year 2024. Please note that we will be presenting non-GAAP financial results during today's call, which we believe provides useful information to our investors. Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website, along with a historical summary of other key metrics. Today's discussion includes forward-looking statements about our business outlook and we may make other forward-looking statements during the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mentioned important factors that could cause actual results to differ materially. Last note that all discussions today will be on a continuing operation basis. During the Q&A session, we would ask that you limit yourself to one question so that we can accommodate as many questions as possible during today's call. If you have any additional questions, please feel free to contact us after the call. And now I'd like to turn the call over to Gregg.

Thanks, Tyler, and good afternoon, everyone. Wolfspeed is the world's only pure play vertically integrated silicon carbide company. 100% of our team's focus is to capitalize on the industry transition from traditional silicon to next-generation silicon carbide, helping customers deliver energy efficient products to market and pursuing outsized returns for our investors. We have an unmatched manufacturing ecosystem, with first of a kind tools and automation that will allow us to scale our efforts as the electrification of key industry segments gains velocity. With that as a backdrop, I'd like to spend a few minutes covering four points. First, we believe the market is not fairly valuing the company consistent with the technology and the business we have built or the strategic potential of the business. The management team and the Board of Directors are focused on this disconnect and routinely consider alternatives to enhance value for shareholders. Second, driving better financial performance and value for shareholders by delivering on our near-term operational commitments for fiscal 2024 and 2025 is at the core of every decision we make. We are laser focused on increasing the utilization at Mohawk Valley, and as I'll talk about in a few minutes, we are making solid progress there. We are also focused on bringing The JP online where we are likewise making solid progress on that project. Third, our operational roadmap provides sufficient time to focus all of our efforts on making sure Mohawk Valley and The JP are on track before we move on to new project, which is not only good for investors, but for our customers who are also counting on us to meet our commitments. At this time, there are not any additional greenfield projects scheduled to launch until we demonstrate further progress on our existing project and we expect…

Thanks, Gregg. Before I go into the detailed financials and following up on Gregg's comments, I would like to frame up our current performance and how it aligns with our longer-term outlook. First, the company's long-term demand remains strong. We achieved another $2.8 billion of design-ins, our second highest quarter ever. Customers who have visited our new state-of-the-art manufacturing facilities and tested and used our products and compared them to rival products continue to choose Wolfspeed as their key supplier across both EV and industrial and energy device applications. In recent months, in materials, key customers such as Infineon in Rome have come back to Wolfspeed for expansion of multi-year, 150 millimeter wafer supply agreements. In addition, last year, after surveying the materials landscape, Renesas selected Wolfspeed for a 10-year supply agreement, including 200 millimeter substrates that included a $2 billion capacity reservation deposit, what we believe is the largest CRD in the history of semiconductors. Secondly, our operating execution has significantly improved during the last 12 months. One year ago, we delivered a revised ramp schedule for 200 millimeter wafer production out of our Durham campus and Mohawk Valley. Since then, we have achieved every one of those announced milestones, which will culminate in 20% utilization in June 2024. We have also had best-in-class performance from our materials operation, generating revenue at or above our guidance in that timeframe, including $99 million this past quarter, our second highest quarter ever. Let me walk through a few facts related to our 200 millimeter ramp. Die cost from our 200 millimeter substrates at Mohawk Valley, even including the full burden of Mohawk Valley fab underutilization, which was $30.4 million in Q3 is now lower than that of the same product produced out of our Durham fab at 150 millimeter. We expect…

Thanks, Neill. As we continue to pioneer 200 millimeter silicon carbide and embark on our capacity expansion plan, we maintain conviction in our strategy. Progress is never a straight line and we've said that there will be peaks and valleys, sometimes at the same time in different areas of our business exactly like we are seeing today. That said, the numbers demonstrate progress on execution, but of course there is more work to be done. I'm proud that our team has continued to execute well in an environment where many of our analog peers are seeing substantial, sequential and year-over-year declines in revenue. Forward looking indicators point to continued outperformance as corroborated by our strong design-ins, which reaffirms our market leading position and the strong demand for Wolfspeed's silicon carbide products. Mohawk Valley will be the flywheel of growth for Wolfspeed and that ramp is underway. The continued progress of the Mohawk Valley and JP ramps will position us ahead of our competition by further enhancing our lead as the world's only pure play, fully vertically integrated 200 millimeter silicon carbide company at scale. From a macro standpoint, our view of long-term demand is unwavering, despite short-term noise. The transition from the internal combustion engine to EVs is the most disruptive change in the history of the automobile and it will be a bumpy and turbulent transition for the traditional OEMs as well as the new EV entrants. But the transition from internal combustion to EV will continue. Nowhere is this more apparent than in China. I recently visited some of our customers in China as well as many new car showrooms and it is very clear to me that the Chinese OEMs are using this transition to try to become the dominant player in the EV market. Based on…

Thank you. [Operator Instructions] Our first question comes from George Gianarikas of Canaccord Genuity. Your line is open. Please go ahead.

Hi, good afternoon, and thank you for taking my question. Just sort of a higher level one. There's significant concern in the marketplace about the Chinese, both from a materials and device perspective, particularly as they appear to be aggressively ramping capacity. Can you help put -- help us put that into context? How concerned are you about their material and about their devices? Have you seen any impact yet? And how can we get comfortable that there won't be a significant P&L impact over the next few years? Thank you.

Yeah, thanks, George. A couple of things. I'll start off on the substrate side of things. I would say the news on this is kind of all over the place. You hear that they're far behind in terms of high quality, high automotive grade substrates. They're definitely investing. And I would say from a 150 perspective, probably making or the word is that they're making some progress, and then on 200 millimeter, it seems to be much further off. It's hard for us to totally judge because it's a lot of speculation out there. I did visit China, as I mentioned, a couple of weeks ago, and I would say the conviction that there's going to be a pretty good supply of high quality, high volume substrates was not strong. And I guess the best fact that I can say is we just renewed two supply -- or extended two supply agreements with two of our long-term customers for wafers and substrates at 150 millimeter. Those were half a decade extension. So I guess that points to the fact that maybe there's not some conviction along that lines as well. I'm not trying to say we're not worried about that. We obviously understand that there's a lot of investment going on there, but it seems like from a fact perspective, there's still some ways to go for the Chinese to catch up with both the quality and the quantity of automotive grade substrates. From a device perspective, I think they're further off than that as well.

Thank you. Our next question comes from Brian Lee of Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking the questions. I guess, maybe as a bit of a follow up to George's question, more focused on the device side. Gregg, can you give us a sense of what you're seeing on market share trends? It seems like there has been some movement and commentary amongst some of your peers in the device market. Are you seeing any market share impact as you're unable to meet shorter term supply needs? Maybe if you could address that, just what you're seeing and hearing from customers. And then on the -- separately on the outlook for Durham device revenue, I mean, this has been a little bit of a thorn in your side for the past several quarters. How much of your outlook here for Durham is still levered to I&E and do you believe that's now fully troughing here? Or could we continue to see headwinds from that end market? And then if so kind of what's sort of the timeframe for seeing some of that picked back up? Thanks, guys.

Thanks. Thanks for the question, Brian. I'll take the first one, maybe Neill can tackle the second one. You know, we just posted our second highest design-in in our history of $2.8 billion, 80% of which is for EVs. So I think that's obviously a pretty good sign of continued progress. At the midpoint of our guidance for our automotive or EV business, we're going to be up, I think, on the order of 48% year-on-year. And also at the midpoint of the guidance for EVs, our EV business will have doubled since the beginning of this year. So it's grown 100%. So I think if I'm unaware of anybody that's growing 100% through the year, so I don't see how there's a commentary about losing share. And then you put that on top of having the second highest design-in in our history, it doesn't quite square the circle.

Yeah. Then -- and Brian, secondly, from an I&E perspective and Durham fab perspective, I think that's exactly right. We have seen some further weakness there. I think we talked about going down to, call it, $60 million to $65 million of revenue from Durham, which is primarily I&E. You should see that for the next couple of quarters down at that level. It does feel like a bottom I would say. There's another thing to consider here. This isn't just really just kind of a normal margin mix type of trade off. If you think about what we're doing when we shift from I&E to auto, you're also talking about more complex die, bigger die in the factory, and that go through more steps from an automotive perspective. So that trade off really is not kind of one-to-one from that perspective. So we're going to manage through this and supply customers where we have demand -- end market demand continues to be on EVs. We'll swap out and push more of our volume and leverage our capacity for EV applications. But that will be the Durham fab. I think the $60 million to $65 million range for the next couple of quarters after that December quarter. And then as I&E starts to come back if you look you know March June next year, we anticipate that coming back, most likely in that timeframe, we'll start to -- we'll look to -- ready to respond.

Our next question comes from Samik Chatterjee of JPMorgan. Your line is open.

Hi. Good afternoon. Thank you for the question. This is Joe Cardoso on for Samik. Maybe just a quick follow up in terms of the response there around the design-in and wins. Can you just -- and maybe this is for Gregg. Can you just spend some time talking about the conversion rate you're seeing from design-in to win, particularly with the step down in design-wins this quarter despite design-ins tracking relatively in line with your recent trends? Like how should do investors be interpreting the moderation here relative to the trends over the past two quarters, particularly as it relates to design-wins? Thank you.

We feel very good about the conversion. And the one thing that I would tell you is design-ins and design-wins aren't necessarily synchronized. Let me explain that a little bit more clearly. Depending on -- let's say, it's an EV application, depending on the company, some companies design-in four years before they go into production. And then we then convert that into a win when we get 20% purchase orders for 20% of the first year's volume. So it could take -- excuse me, four years to go from design-in to design-win. Other more nimble EV manufacturers, some of startups, for instance, they would go in production two years after giving you a design-in. So it isn't necessarily synchronized between the two. So I wouldn't read into it. We're very pleased with both our design-in number for the quarter and our design-win number for the quarter as well.

Our next question comes from Jed Dorsheimer of William Blair. Please go ahead. Your line is open.

Hi. Thanks. I guess -- so couple of questions here. I guess, first one is just, if you can help me with squaring a circle on the unit economics. If I look at the materials business of $90 million to $95 million, I'm going to use 40% margin on that business. I'm getting to -- and I look at the 12% on the 200, your midpoint, which will be $24 million plus the $29 million underutilization, I get $53 million, which would then imply that even if Durham is zero, Mohawk Valley would only be $13 million, which would be a 29% gross margin. Can you help me where my math might be wrong? Is Durham a negative contributor to gross profit dollars or what am I doing wrong here?

Yeah, Jed, I think you're kind of breaking this down in a way that I think it's a little more nuanced than that. As I talked about before, when you move to the bigger die and transition things over to automotive, it becomes a bit more challenging from a manufacturing standpoint. So we're kind of going through a manufacturing transition right now to go from I&E products to automotive products. It will smooth itself out, I think, as we work through the next couple of quarters. But clearly we are seeing that with the same product running out of Mohawk Valley, we are seeing better cost performance and clearly the average transition to same part, same customer that translates into better profitability obviously, if you think about that transition over to Mohawk Valley.

Okay, so it's non-optimized then I guess would be the -- big margin.

Not yet. I think in Durham -- I think over the longer term, I think we'll -- it doesn't really change our view on what -- how things look over the longer term. This is really just -- I think a couple of -- a couple of quarters type of issue. Over time you have strong conviction and ability to try and drive the business up over 50% gross margin. Think about this kind of 70-30 mix, EV to I&E products can be heavy, I&E in this period that will be suboptimizing the factory for a while to serve customers. And then when we're ready to shift back, we'll be able to respond to that very quickly I think. So, there is I think the circle lining from that perspective is we have the ability to transition the business and move product around to where we see the end market demand. But I think over the longer term, as you look at where the markets are growing and we've got a lot of design-ins across a lot of customers for I&E applications that will clearly come back over time, not just in the short-term, but very significantly as you think about it over the long run. And we'll be able to ready to respond and leverage the Durham footprint, I think, for that as well. But I think again, the unit cost economics in Mohawk Valley are just very, very positive for us right now even at early stages. We just expect that to accelerate over time.

Our next question comes from Joshua Buchalter of TD Cowen. Your line is open.

Hi, guys, thank you for taking my question. I was hoping you could maybe expand a little bit more on the change in tone around expansion in the Saarland facility? Is this primarily into a reaction to what you think is better for the stock right now or was there a change in the sort of the long-term outlook? It doesn't seem like the latter given you mentioned sort of perpetual supply constraints and confidence in EV demand. But it would be helpful to hear some more input on what's driving the change in CapEx. Thank you.

Yeah, I'll let Neill cover a little bit of this after I give an introduction here. I think what we're trying to do today is be very, very clear and add clarification to what we're focused on right now. For the last couple of quarters, you've heard me say we are laser focused on the ramp of Mohawk Valley. That included getting Building 10 up and running, that included getting JP constructed. So those three projects are laser focused what we're on right now. Mohawk Valley has hit all of the milestones we've talked about, will hit 20% utilization this quarter. Building 10 has been a great success. We're very confident in our ability to be able to service 25% utilization in Mohawk Valley out of that Building 10 and our Durham campus infrastructure as well. And The JP is on schedule. And the furnaces are being installed. As we mentioned, the campus is being energized and connected to the grid. We'll start qualifying those furnaces later this year. And we have super high confidence in that because The JP site is about 40 minutes to 45 minutes away from where we're at right now. And the same team that brought up Building 10, which I'll remind you was a basketball court, racquetball courts and things like that. It was not a manufacturing facility and is now humming on 200 millimeter silicon carbide. That same team will be bringing up The JP. So we're very confident in that. What we're trying to give clarification on is that that's what our focus is. And we're not taking our focus off of that until we can get -- until we demonstrate the success that we know that we can get out of those facilities.

And then from a CapEx perspective, I think there's really no change to what we've been saying I think for quite some time. We always kind of thought 2024 would be a peak CapEx period. We're going to see CapEx come down in 2025 pretty substantially. We talked about bringing that down to $600 million to $800 million. And that's before including any potential government incentives that could come in at that time frame. And the reason for that is The JP will be largely complete from a facility's perspective as you finish this calendar year. That's been the majority of our CapEx spend in 2024. As you get out of this calendar year and start looking into calendar '25, like very much a tools based spend. So installing tools in both JP and Mohawk Valley and we'll just continue to modulate our CapEx to match that with that market demand. So that's really where we're focused right now. As it relates to another facility after that, I said it very clearly on the prepared remarks. We'll wait until we see that performance Gregg talked about in addition to having good cash flow and operating performance that can support and what we would do next. That's really the plan that we've laid out and that's what we're going to continue to focus on.

Our next question comes from Colin Rusch of Oppenheimer. Your line is open. Please go ahead.

Thanks so much. Given the design activity and a lot of the cost reduction activity that we're seeing with the EV makers, can you talk about what you're seeing from a voltage perspective on power train designs? Are you seeing a steady migration towards 800 volts? Are you seeing kind of a retrace back to 400 volts or some sort of middle ground or any activity around even higher voltages than 800?

No, there's certainly not a retrenching back to 400. I think folks have realized that you get much better efficiency, better charging and so forth at the 800 and even higher voltage bus on the EVs that requires an even higher voltage, call it 1,200 volts MOSFET. So no retrenching back to that. I'm not the expert on what's next beyond 800 volts, but I would say they're really switching from 400 to 800, is not going backwards.

Okay. That's super helpful. And then on the supply chain side, obviously, there's been a lot of rebalancing around inputs into various processes. Can you talk a little bit about the opportunity for kind of fundamental cost reduction on the manufacturing side from a supply chain perspective?

Yeah, I would -- let me hit that and maybe Neill can give a little bit more color. We're at the early phase of ramping a new wafer diameter and a new wafer fab and so forth. And I think we're seeing already excellent progress on the quality of 200 millimeter pools in terms of the percentage of the wafers that we get out that are automotive grade. Substantially, all of them are in that kind of category. And so we're really pleased with that. We're, obviously, we'll continue working on getting more wafer cuts per boule. We'll look at getting better yield in the fab and so forth. So I think there's a lot of despite the fact that we're already below the die cost in Mohawk Valley compared to Durham. I think we're in the early innings of cost reductions on 200 millimeter.

Yeah and let me just add on to that. Well, I think -- and I fully agree, I think we're at the very early stages of the opportunity we have to drive cost down. And I think the early returns on yield and cycle times that we're seeing in the fab really only reinforce that even further. I think there's also a structural component to the business that we're building here. If you look at the cash margins or you look at that EBITDA target of about 40% over the time. If you look at our business today, we'll do about $185 million of depreciation this year. That represents about 20% to 25% of our revenue. Once we bring The JP online next year, that will push upwards towards 30%, even in these early stages of building, building the business. So that is from a -- that means like a very substantial part 20% to 25% of our cost today is not cash. So we see a very, very nice cash opportunity from a margin perspective and a fall-through perspective over time as you build up the business. So as we improve yields and cycle times and build the scale for these facilities, this business is going to generate a lot of cash flow. I think it's just continuing to execute on the basis of yield and cycle times, supply our customers, but I think structurally that will translate into a business that just generates a lot of cash flow.

Our next question today comes from Jack Egan of Charter Equity Research. Please go ahead.

Hey, guys, thanks for taking my question. So, Gregg, I just had a quick clarification for you on one of your earlier comments. So I think you mentioned that Chinese devices are probably further off than materials, but as we generally understand it from a, I guess, a science and an R&D point of view, materials are generally a lot harder to develop and ramp than devices. So, I mean, why would China be further behind in devices even if they're relatively easier to ramp than the material side?

Yeah. So thanks for the question, Jack. This is just the input that I got from the customers out of China. I know there's a lot of effort going into trying to develop a silicon carbide crystal growth capability. As I mentioned, it's hard to get through all the noise on this thing, but likely they're making progress on 150. And what we hear is they're pretty far behind that 200. So and then from a device perspective, a silicon carbide MOSFET is also not a super easy thing to do as well. And I think there is – to be honest, it feels like there's less focus on that at this point.

The next question is a follow-up from Jed Dorsheimer of William Blair. Your line is open.

Hi, thanks. I just want to dig into, Gregg, your comments on demand, which seem strong for you in EV. Just in the materials business, with that business coming down so much, so if I kind of take your guide on a quarterly basis, it's come down about $40 million per quarter. Why aren't materials ramping consummate to that? Because I would assume that opens up the 150 millimeter wafers to sell to other customers.

Sorry, Jed. So in terms of the -- how we think about that. Right now, the end market demand for automotive in terms of EV customers, there's a lot of changes that Gregg talked about in terms of the OEM landscape. The amount of demand still outstrips our supply. So it's really important for us to continue to take as much capacity as we can serve those customers. In the meantime, we'll continue to drive our materials business. As you know, we've got a lot of long-term agreements there that underpin our revenue for a long time. And I think that the $90 million to $95 million per quarter will continue to service that market, I think, in terms of how it's kind of laid out today. I think it's very important that we continue to service our automotive customers this time and we're going to continue to operate.

Well, I understand that. Neill, maybe I didn't ask the question is clearly, but if $40 million coming out of Durham on the devices side where you're supplying the 150 millimeter wafers internally, why wouldn't you be able to see a $12 million increase in the materials business?

Yeah. So maybe I'll take a crack at that. I don't think I understood that to be your question. So a couple of things. Obviously, we have automotive demand that is higher than our current supply. So transitioning that capability from I&E to automotive is a very important customer satisfaction item that we're focused on. The automotive devices are larger than the industrial products and substantially most of the industrial products are sold in packaged or module form and the exact opposite for automotive. For automotive, substantially most of the product that we sell is in die form. So we're not adding value. We're adding incremental revenue potential for the same amount of, I'll call it, silicon carbide millimeters squared. So it's not a one-to-one trade off when you move from an industrial part to an automotive part in the fab itself. Is that clear, Jed?

Thank you. We have no further questions in the queue, so I'll turn the call back over to Gregg Lowe for any closing comments.

Well, thanks, everybody, for participating in the call with us and we look forward to catching up at the end of next quarter. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your line.