AT & S Austria Technologie & Systemtechnik Aktiengesellschaft (ATS.VI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Yelena, your operator today. Welcome, and thank you for joining the AT&S conference call on the results for the first quarter 2020-2021. [Operator Instructions] I would now like to turn the conference over to Ms. Gerda Königstorfer.

Thank you and welcome to the conference call for the first quarter 2020-21. We will give you today an update of the actual situation and also the financials of the first quarter. Today, the conference call will be led by Andreas Gerstenmayer. And with that, I want to hand over to Andreas Gerstenmayer. Thank you.

Thank you, Ms. Königstorfer. And also, welcome from my side for today's call. Some remarks also from my side to today's setting. As you know, we are still missing our CFO. Some information on that. The process has got started. We're in the middle of the search process, and we expect to have a solution within the next coming months. Together with me, I have Mr. Leitner, our Director of Finance and Accounting, with me. So if there are some very detailed questions, he is also able to answer them. And now I will guide you a little bit through the market -- latest market development, the highlights of AT&S in the first quarter, the numbers and some strategic topics. Let's get started with the market development. In these turbulent times, I think it's important to have some solid navigation points in the market, and this is definitely long-term technology trends we see. So our position in the market is quite stable. What we see is that all the trends we are targeting with our technologies are nicely supported mid and long term. So everything about information, communication, connectivity everywhere, well connected smart devices, high data rates, data transmission, data computing and processing, I think, this is very solid trends which we are targeting and which we are supporting. So means in terms of strategic positioning of AT&S, we are in a very nice spot despite we are now running through quite some turbulent times. But you can also see from the first quarter's results that our position, our situation is quite stable and solid. We see still a continuous increase in growth for data. And data -- they definitely need to be processed, transmitted, stored and all these kind of things to be handled and managed. This is heavily addressing our market for the microprocessors and subsequently also the IC substrate business. We expect still a very nice development there. Significant growth rates are expected to come at least on midterm. And this is our sweet spot where we do all our investment in and also a lot of our technology development. Still, we have an up and down in the area of trade frictions. I think everybody is aware of that. There's a lot of escalation, de-escalation. But really, at least until November, nobody knows where it goes. Later on, needs to be seen how will be the outcome there. From the market point of view, especially in the mobile device area, with the new product generations coming to the market end of the quarter we need to see how the consumer sentiments are, how the new products will be accepted in the market. So visibility is still quite low there, despite we have seen a very nice development in the first quarter. Automotive business, I think it's not really a secret. The entire industry is struggling. We see a lot of news from the OEMs, from the Tier 1s. And for sure, also the entire supply chain is challenged with the situation. And also, we have seen quite some turbulences within the last 3 months. And it's not to be expected that this will move away, will be resolved within a few quarters. Our expectation is that, probably, there is a certain improvement, is a certain recovery. But coming back to the levels of 2018 and '19, I think, this will take us at least 1 or 2 years. In the industrial electronics business, the investment activity in terms of equipment investment and so on is still quite low. On the other hand side, we see also nice applications coming to the market, which supported our business in the first quarter. I think it was a mixed picture. Volumes not that great, but from the technology point of view some nice applications which were supporting our business. Medical markets on the annual view should be quite stable. There was a little bit of a downturn in the first hype of the COVID crisis because all the capacities were mainly focused on solving the most urgent emergency topics in the health systems. But now the entire system is getting back to normal operations, and we expect also that the business in electronics will take up and recover soon. So this means in terms of AT&S development in the first quarter, I think, we have done and especially our teams in the locations and also on the sales side have done a very great job to handle the situation, which was not easy to do. But you can see it later on from the figures from the business development, from the revenue development, but also from the basic numbers, what we see from profitability level, it was quite good development for the first quarter. IC substrate continued to show very strong demand. Mobile devices was nicely supported by customer and application diversification, also showed very nice development. As said in the beginning already, we have experienced a certain drop in the automotive segment following the drop in the vehicle sales globally. Needs to be seen how recovery can be done there. Industrial was more or less stable, a little bit better than last year, but I think this is -- I would say, it's flat development, but this is in this kind is already a good message. And medical/health care, as I said before, the first quarter was temporary impacted by unfavorable product mix, but we expect in the quarters to come that the recovery will kick in. Coming to the revenue and EBITDA development. As you can see here, if you compare Q1 last fiscal year with Q1 this fiscal year, we have an improvement in revenues, a growth from EUR 222 million to EUR 247.9 million. EBITDA margin stayed on a similar level. In absolute numbers, it increased to a level of EUR 39.5 million. We had some impact from FX changes. Basically on the revenue level, the FX impact was around EUR 3.8 million; on the EBITDA level it was EUR 7.1 million. Yes. And also what we can see, we have some increase in R&D spending. What we already communicated during the last calls. We are preparing for the next generations of products, especially associated also with the new investment in the IC substrate area, where new technologies are under preparation, but also in other areas like the module business and module integration services business to be prepared for that. On the EBIT level, for sure, we have seen higher depreciation coming from the investment phase we are in. But I think this is not -- should not be any kind of surprise. The net profit come in a little bit lower than last year, but this is also mainly driven, finally, from the investment activities. The main impact came in from the higher financing cost and some negative interest impact, which is both mainly driven from the financing activities we are driving forward for the investments we are doing. Operating free cash flow, for sure, with higher investment, with higher CapEx spend, was more negative. But also, this should not be any kind of surprise to anybody. So preparation, on the other hand side, with the projects is well on track. And we are moving according to our announcements and according to our plans. The next slide, you can see the development of the revenue, revenue split by segment. We have 76% now in the mobile device and substrate business and 24% in the automotive business. With growing IC substrate and a little bit lower automotive, this also should not be a surprise to anybody. By region, 70% U.S.-based business or business with U.S.-based customers; 13% Germany/Austria; 12% Asia; and 5% Other European countries. Also that should not be a big surprise. This is following all the announcement and strategies we have communicated so far. Having a little bit more detailed information about the segments. In mobile devices and substrates, the main driver definitely came from the IC substrate revenues, which was significantly higher than last year. And also, the product mix improved again. So finally, we could see a nice increase in revenues and also in EBITDA margin. We had also a nice development in the broadened customer and application portfolio in the mobile device area, where we were able to keep the good business level of the past. But sure, as I said in the beginning, the FX effects mainly are coming from the mobile device and substrate business. And as I said before, FX effect also here in the segment, on revenue level, EUR 3.6 million; and on the EBITDA side EUR 6.9 million. So finally, we ended up with a nice growth in revenues, but also with an improved EBITDA margin of 18.1%. On the other hand side, we see on the next slide the development of the segment business -- business segment, Automotive, Industrial and Medical. Here, you can now clearly see the impact mainly coming from the automotive business. What is also the slide showing is that in this industry we have seen quite some negative trend in terms of profitability since quite some quarters. This is driven by the decrease in the business of industrial business last year, but also the continuous decrease of the automotive business which shows, again, the negative trend was increased with the COVID impact this year. Our expectation is once the COVID crisis starts recovering, we will see the turnaround. So far, we expect that there will be no further decline. Our expectation for the next quarters to come, to be at least on a stable situation. And as I said in the beginning, already, we need to wait a little bit more to understand when real recovery will kick in. On the CapEx side, you see now the main impact from the investment in Chongqing for the IC substrate business and the third factory. The Q1 came in with almost EUR 82 million compared to EUR 50 million last year. But as we have guided, there will be more significant investment to come in the coming quarters. On the balance sheet side, where also the main impact on the numbers is coming from our investing activities. The total asset increased by 6.8%. Equity went down by 4.5% following all the impacting factors I already mentioned. We have added some assets to our -- the fixed asset base. We had some negative impact from the quarterly results on the equity side, but also very significant FX effects on the equity, which is a level of almost EUR 26 million. So this is like we have seen it in the past always. Sometimes we experience very heavy FX effects on the equity. One time, it's positive. The next time, it's negative. But this is just following our international exposure. Yes. And also, the net debt increased by 21%, again, following our investment and financing activities. Talking a little bit about the market outlook, at least on midterm. Here, you can see that still the trends are nicely intact and stable. Like I have said already in the beginning, we see still significant growth opportunities in all of the most important markets we are addressing. Either it's the IC substrate business, it's the mid-term development to be expected in the automotive area, but also the communications area with the introduction of 5G will cause some significant growth for the years to come. Talking a little bit about our investment in the IC substrate business, where we are actually. So basically, we still see the 11% growth rate until 2025 in the IC substrate market. We have defined IC substrates to be one of our strategic focus areas, and we also allocated a lot of investments to that business. There's a very strong trend also in the IC substrate and semicon microprocessor business for heterogenous module integration, which will increase the performance of the processing modules and also improve the power consumption. Heterogeneous integration will be also an important part to create for some of the OEMs competitive packages because the performance of a processing module is not only defined by the density of the structures. We all hear and read and know about 10, 7, 5 nanometers on the processor chip. But with heterogenous integration, there will be a completely new architecture entering the market and, in some areas, at least subsidizing the disadvantages or advantages of the pure structure of the microprocessor chip. So there is a lot of things in preparation, a lot of things to come. Just some buzzwords from there. You have all most likely read about EMIB technologies. You have read about chiplet technologies. All this will support the future performance and should not be only defined by the density of the processor architecture. So we are continuously investing. And also the progress in our Chongqing III factory, like you see it on the right-hand side, the below picture, you can already see the first 2, 3 and 4 levels of the new building. In the background, you see the existing building. And on the right-hand side, this is the existing office building. But from the pure dimension, you can somehow imagine what kind of investment that is. And despite all the COVID impact, we are progressing on time, on schedule and on budget. This 65,000 square meters of manufacturing floors are now under preparation. Our expectation, roof closing will be somewhere in fall time, September, end of September, beginning of October. So this is moving on and progressing quite well according to our expectations. The result, once this factory is on stream, you can see on the next slide. The first part is already solved. This is reflecting the existing capacities we have in our Chongqing I factory. The dark blue one is now the ramp of the expansion of Chongqing I with the line -- with the third -- second phase, sorry. This is under ramp situation, and we are adding continuously additional capacities and output. I was -- I'm always asked what will be the revenue impact for the running fiscal year. Our expectation is that we will add around about 50% of annual additional output to the full -- to this fiscal year. And with the next fiscal year, we will see the full impact from the expansion already. Then with the lighter blue one part in '22, '23, the new factory will already come on stream and show first impact. The ramp is still a very steep one as it is planned and prepared. And you can see that this huge factory will ramp within just 2 years to full capacity. We have also, in the past, but also with a little bit more intense, communicated the supporting role of the factory in Hinterberg, where we produce a certain component, preproduced component for our Chongqing factory, the so-called IC cores. This is the core of an substrate, and the build-up layers will be then added in Chongqing later on to finish the product. This was always the one part of the project. By expanding the capacities in Chongqing, we also need additional capacities to support the core supply. This is, to a certain extent, done internally, but also done externally by suppliers, depends on the technologies needed. The investment we have communicated is about EUR 120 million for the factory in Austria. There's some technology development contained, but also some equipment and ramp activities. This will come on stream a little bit earlier than the factory III because it's somehow the preproduced components, but it will mainly be in calendar year '23, where we will also have 200 additional employees in Austria. You can also see here the ramp for the full expansion. Definitely, it's lower than the expansion for IC substrates. This is following the strategy that we are not doing everything in-house. We have also some supporting suppliers which do -- or which also support the core supply. But as we decided certain technology, we will keep in-house; and others, we will allocate to the supplier. We also have communicated a partnership with a company called IMST. IMST is a design house, specialized and high-frequency modules and wireless modules. This is one important step in our strategy towards module integration services. As communicated in the past, there is additional capacities -- capabilities needed from our side, starting with simulation and design activities to support our customers in the design phase of the products, but also do some technical numerical simulations during design phase. IMST will help us, especially in the area of wireless modules, communication systems in certain areas, antennas. This is very nicely developing. We are collaborating on a project-to-project base to combine both companies' strengths and support customers to develop new technologies, new solutions. So there, we are in the first cooperation projects, and we will see over time what will be the impact to our business. But definitely one very important step towards the level 2, like it is shown on the picture bottom left. A brief update about the financing structure. We still see it as a very sound structure. As you see, we have a very high level of existing liquid funds. Cash level is almost EUR 390 million; financial assets, EUR 225 million; and additional unused but guaranteed credit lines, EUR 420 million. Sure, we need also to ensure that our future cash flow will remain on a stable base. But as you already can see from our 2 quarters in the COVID situation, fourth quarter last fiscal year, first quarter this fiscal year, also in very volatile, very challenging environment. So far, we have been able to maintain our cash generation and a good EBITDA level. The outlook for the fiscal year 2021. We are still not in the position that we can do a full year guidance. I think you can imagine that still the volatility and the visibility in the market is a challenge. From the customer side, as I said before, there's very, very different situation in different market segments. In the mobile device area, the new products are now coming to the market. The pipeline is to be filled up. But later on, needs to be seen how the consumer sentiment will take it up. Automotive, no quick recovery to be expected. Industrial, we are observing very closely. So far, we are running on a flat level like we have been running last fiscal year. In medical applications, we expect some recovery in the next 2 to 3 quarters. And IC substrate demand, recording our expectation, remains to be strong and also continuously growing. So the Q2 is expected that we will run on a similar level in terms of EBITDA and revenues like last year and within the target range of 20% to 25%. When -- as I said in the beginning, we are closely observing the market. And until we cannot see better visibility and lower volatility, we will not be able to provide a full year's outlook and stay on the quarterly reports. But if there is any significant change, for sure, we will give you an update immediately. In terms of investment. The IC substrate and module business is -- we will continue, as I said already. We're also observing the latest market developments and decide for any kind of maintenance or tech upgrade investment. So far, we expect that this will come in EUR 80 million. The CapEx for strategic projects, based on the EUR 410 million. We have one additional EUR 30 million topic, which is a timing variance, mainly driven by the COVID impact at the end of the fiscal year. Simply, some of the projects could not be finalized and the invoices were not there. So this is a purely time variance from last year to this year. No increase of investment at all. Midterm guidance, we can do it easy. It stays what we have communicated so far. Basically, the EUR 2 billion revenue target within the next 4, 5 years is still valid. And also the midterm EBITDA margin target stays valid on a level of 25% to 30%. Okay. I think this was mainly it for the first quarter. It's a little bit about the market environment, our development. I think, summarizing the situation of AT&S, we are quite optimistic with the position we have achieved. With the business we have on hand as far as we can see it, I think we can already show that we are operating on a very solid, sound base. But I have to make always one caveat. We never know what is really happening within the next quarters. Our expectations are positive, but with these challenges around us, with the volatility in the ecosystem, in the trade situation between the nations, I think surprises can come in any time. But so far, our expectation is a positive nice one. Thank you very much.

Thank you, Andreas Gerstenmayer for the report about the first quarter. Now we can start the Q&A session. May I ask our operator, Lena, to introduce you to the Q&A session? Thank you.

[Operator Instructions] The first question comes from Mr. Daniel Lion from Erste Group.

Questions, there's plenty, so I will have to pick a few. Maybe to start with the IC substrate business. I believe this is really developing well. But could you maybe give us a little bit more insight in terms of the products that you serve with the IC substrates, maybe kind of a relative breakdown so it's easier for us to follow the market development related to your development? So meaning, which products that -- it's definitely servers and notebooks, but maybe there's other product as well, like memory that you supply. Just a very broad split would definitely help just to understand what's driving the business here from the market side.

On the one hand side, it's not that complicated. We are talking about CPU, GPU business, no memory business because memories would need to be completely different, much more low-end substrate, which is not in the technology range we are supporting. In the CPU, GPU area, the main applications are the servers, data center applications. We also see increasing demand from 5G base station. We see all kinds of computing modules, also some first project in the area of ADAS, of the automotive business, advanced driver assistance systems. And in future, also, we expect some edge computing applications to come in.

Okay. Perfect. And to stay with the substrates, would you give us a split for your expectations for the capacity developments for the coming years? Would you be able to break this down for the current fiscal year? What would be the capacity expansion steps for the coming quarters?

We are not publishing the quarterly development because it's quite fluent. But as I said before, you can expect for this fiscal year, this 50% of the additional capacities we have been showing for the expansion.

Okay. For the full year, of course. Yes. And then one last one to the substrates. We've seen now Intel delaying at least the 7 nanometers. On the other hand, there's a stronger focus on the 10, which should help you in the short term, I guess, in the product mix. But looking a little bit ahead towards Chongqing III, how would you see further delays of product developments in the processor business? Or at least from Intel's side, what kind of risks would you see towards the ramp-up of the new plant in order to meet your expectations of revenues and profitability?

So far, we do not expect any significant impact to that for sure over time, and we're talking about the time span of 2 to 3 years. There will be constant changes in the mix we really need to prepare ourselves for, but there should not be a big surprise. The technologies we are preparing there, the capacities we are preparing there, they can cater the entire product mix to be expected. And like it is in this industry, if certain technologies are not visible today, they will not be available in 1 or 2 years' time frame. So they easily need 3 years' time frame to prepare a new technology. So this is all already adjusted. This is already considered in the equipment. And as I said, also, at one point in the presentation, there's not only to be discussed the 7-nanometer, 5-nanometer, whatever you have. There's a lot of changes to be expected and under preparation in terms of architecture of microprocessors, packages, there's a lot of changes in there which could easily compensate at least for one generation of the density of the increased or decreased structure, however you take it. So like we see it already today, if you go to the performance benchmarks, Intel with its 10-nanometer structures are still very competitive against the TSMC, AMD 7-nanometer processors. So I think this is important that we look at this from different angles, summarizing for us. For sure, we have close discussions. We are well prepared for quite some mix changes because the portfolio we considered when we designed the factory is quite wide. And also, we expect quite some new technologies to enter the business in the next coming years.

Okay. Maybe one last one. On the notebook and server business, that was a strong driver generally on the market. It's also for you. To what extent is this -- does this also play a role in the PCB demand for you? How big is this?

Server business is, for us, not the focus so far because server business traditionally is a very high layer count standard technology business in the PCB area. But also there, we see some new architectures under preparation in future. And potentially, that could make these applications more interest to us.

And notebooks? Is this a big part of the business?

Notebook is the same. It's -- traditionally, it's multilayer standard business, very, very, very specialized business with dedicated lines at the PCB industry. So not what we typically do. But with the increasing miniaturization in the notebook area with these 2 in 1 applications, catch up, and also the still ongoing move from pure notebook solutions towards tablets or combined tablet with keypads, I think this could be also of interest. But it's just a selective business for us.

And the next question comes from Mr. Joerg-Andre Finke from HSBC.

The first one is a follow-up to your comments on the diversification of technologies and the potential delay of the Intel 7-nanometer technology. Could you also maybe elaborate a bit on the diversification of customers in that substrate space? So are you actively going out to win new customers in that segment? Maybe you can shed some light on that.

For sure, we are quite in contact with a couple of potential other customers. So far, our challenge is to provide enough capacities there. So as you can see, we are a little bit not running behind, but we are heavily pushing for additional capacities to satisfy the market demand. The good situation in the market today is that we have a capacity shortage. Some of those who follow us some years now have seen 2016 where we had the other situation at significant overcapacities for the aged technologies. Where in the market, this completely changed now. And a lot of potential customers are searching for additional capacities. I think so far, this is our limiting factor. We are working on that and then trying to solve this situation.

Okay. And the contract situation with your existing customers does not prevent you from adding new customers. Is that fair assumption?

Also, that is basically not. It's always a question how we do the setup and how we do the arrangements and how we can provide additional capacities.

Okay. Very clear. And my second question relates to mobile devices. And you mentioned the risk of delays in product launches. Maybe you can elaborate a little bit of that. What kind of impact that could have? And also what kind of visibility you have into the launch plans of your mobile devices customers?

This is tricky to comment at because it's very much related to specific customers, and we cannot really comment on that. Let me answer this question from the other style. As we have communicated the guidance for the second quarter on a similar level like last year, so potentially, the impact should not be that great.

Okay. And my last question relates to the financial result with regard to interest expenses, which I think were higher than I would have expected in the quarter. Just maybe you can just confirm that there has been no changes to the underlying interest rates, but this is sort of due to higher gross debt and currency effect?

No, there are no changes. This is stable. It's just the impact of the investing and financing activities.

Next question comes from Mr. Florian Treisch from Commerzbank AG.

Yes. Also several questions on my side. The first is unfortunately coming back around to the discussion around Intel and IC substrate. As you have just elaborated, there is at least, in theory, no reason why you should not add a second client to your IC substrate business. The question is a bit from more like a technical perspective. How fast can you really do this? Do we talk about 1, 2-year or more like a 3, 4-year time frame to really add a new client, demand, all the certification, qualification and all the stuff around that? And as there are also some discussion that Intel might shift to TSMC, would it mean that you cannot deliver any IC substrate to TSMC if TSMC will produce it for Intel? Or do you have any view on that? The second angle would be -- well, maybe just answer this one first. Sorry.

Okay. So starting with the last topic. I think if Intel is producing its processors in its own facilities or it's using TSMC, I think they always will need substrates. Substrate is not a component that they can purchase in a catalog. So this is custom-made for an application for -- on specific customers. So you can only use the one substrate for this one processor for this one customer. So whatever Intel is doing there, and if -- what we expect the demand stays on a high level, they will need the substrates and they cannot easily add additional suppliers to their suppliers base. As I said before, there is already a capacity shortage in the market. All of the semicon players are struggling with this situation. So I do not expect any changes equally if it's produced by Intel or by TSMC because they simply will need the components. Adding new customers in the field of IC substrate is always a challenge because, as you rightly said, the qualification phase, the certification of technologies and so on and so on takes quite a while. And following that and following our experience, I would say it's more about 3 years-plus time frame than a 2 to 3 years time frame.